Getting spending under control and straightening out fiscal policies will be key

Although Ghana’s economic fundamentals have improved immensely in recent years, benefitting from the discovery of oil as well as reforms in everything from revenue collection to subsidy structures, the public sector balance sheet has for decades been a stubbornly challenging issue. In the first half of 2014, the budget shortfall totalled 4.2% of GDP, above the official forecast of 4.1%, though down from 10.9% in 2013 and 11.8% in 2012. The chief causes of the deficit are a higher wages bill, higher interest payments, a drop in grant funds, fuel subsidies and a fall in revenues – this last largely the result of falling commodity prices.

Ghana has tried to close this gap in many ways. It introduced computer-based accounting for the budget, including a public financial management system. It did away with fuel subsidies in early 2013 (then reintroduced and partially removed them again in 2014) and raised water and power rates later in the year. It also hiked the value-added tax (VAT) rate by 2.5 percentage points to 17.5% in 2014, set new tax rates and initiated wage reform. Last, the state has reformed its tax administration, combining three disparate agencies under the Ghana Revenue Authority.

Fiscal Deficit

Despite these reforms, shortfalls persist. The fiscal deficit, which grew to 24.2% of GDP in 2008, fell below 5% by 2011 but then returned to double digits by 2012 and remains there. Many of the causes of current fiscal challenges are outside state control, such as the fall in commodity prices and a drop-off in funding from foreign donors as the country graduated to lower-middle-income status – both of which made it hard to balance the budget in 2013 and 2014. Presenting a supplementary budget to Parliament in July 2014, Seth Terkper, the minister of finance, said, “The economy has experienced a number of pressures, which continue to pose challenges to the attainment of our 2014 economic targets.”

But domestic issues also have an impact. One example is pre-election spending, which has played a role for the past two decades. In its 2013 Article IV Consultation, the IMF noted a sharp increase in net credit from the Bank of Ghana to the government during the elections in 2008 and 2012. “While real GDP growth in Ghana has been steady and robust in recent years, the fiscal surge in 2012 in the run-up to elections creates risks for economic and financial stability,” the fund said. A 2014 World Bank paper, too, noted that in every election year since 1996 – except 2004 – budget laws have not been fully followed, and expenditures were often more than planned.

The IMF’s Article IV Consultation for 2014 identified further challenges. “Short-term vulnerabilities have risen significantly amid high fiscal and current account deficits,” and the government had missed its target for fiscal consolidation. The resulting vulnerabilities, the fund said, put the development agenda at risk: “High twin deficits and large interest payments on rising public debt are crowding out priority expenditure and private sector activity.” On the upside, the financial sector was adequately capitalised, and stress tests suggested that most of the banking system has sufficient buffers in place, although the “macroeconomic outlook and currency depreciation expose the financial sector to credit and foreign exchange risks,” the report said.

Arrears

One area the government has sought to simplify has been arrears. Over the past 15 years, for reasons ranging from subsidy distortions to cash flow problems, the public sector has built up a sizable volume of debt to the private sector, especially to utility providers. With some success, the government has thus been working to clear these debts, and to put up safeguards to prevent such a build-up in future.

From 2009 to 2012 the state accrued GHS3.55bn ($1.35bn) in arrears, selling almost GHS1bn ($318.2m) in bonds to the Ghana Commercial Bank and the Social Security and National Insurance Trust to cover some of the payments on these. At the end of 2012, with the stock of arrears still at GHS2.35bn ($895.82m), the Ministry of Finance and Economic Planning produced a scheme to take care of the GHS420.99m ($160.48m) that is owed to utility providers. According to the plan, GHS100m ($38.12m) would be paid off in 2013 and the rest either paid off or securitised in 2014. All government ministries, departments and agencies, moreover, would prioritise more efficient power usage by switching to pre-paid meters for their electricity needs.

While Ghana’s stable democracy and strong past growth make its prospects among the brightest on the continent, a confluence of factors has hampered steady growth. Problems in securing gas supplies from neighbouring Nigeria have led to a greater reliance on costlier diesel imports to fire power plants, and oil production has lagged greatly at around 100,000 barrels per day. Although gold, the country’s other major export, has kept pace – exports in 2012 were worth almost as much as oil and cocoa sales combined – a drop in global prices for the metal has taken an economic toll.

Dealing With Debt

The country is well placed to bring its budget closer into balance. Its new lower-middle-income status, for example, may make it harder to raise funds but will link Ghana more directly to foreign markets and allow for immediate feedback in the form of prices and demand on capital markets. “Ghana is not disadvantaged by its developing country status,” Prince William Attipe, CEO of New Max Group, told OBG. “It has the advantage of not having to experiment or reinvent the wheel.” In its 2013 Article IV report, the IMF was optimistic that the deficit would fall to 6.2% of GDP in 2015, remain there until 2017 and then fall to 6.1%, while net government debt would peak at 52.5% of GDP in 2017, up from 48% in 2012, before falling to 52% in 2018. The fund also recommended a series of measures to improve the budget, some of which are already under way. These include mobilising revenue, largely accomplished by the recent expansion of VAT to more activities; controlling the wages bill through an improved payroll database, audits and an electronic payment voucher system; and prioritising capital spending by implementing a moratorium on new contracts, avoiding duplication in investment programmes and setting up a new infrastructure fund.

On The Horizon

Ultimately, the current challenges are likely to be temporary. The government has been serious about addressing the deficit, and it will take some time for policy changes to fully materialise. Other signs suggest the outlook may improve in the long term. Ghana, the world’s second-largest producer of cocoa, hopes that rising spending power in Asia will boost chocolate consumption in the longer term, raising global prices. Plans to reinforce output by distributing new hybrid seedlings and improving logistics chains should strengthen production. As the long-term picture brightens – cocoa prices may well rise and oil production is expanding – the current troubles may do nothing more than delay plans for new infrastructure. When this resumes in earnest, diversification can then pick up steam, strengthening the industries that can provide a buffer when commodity prices take a downward turn.