Ghana's budget benefits from discipline and transparency

The finalisation of a $918m borrowing programme through the IMF in April 2015 means Ghana’s economic trends over the short and medium terms will be predictable and structured, featuring a series of just-published targets and objectives. The government and the IMF have agreed to a three-year plan to address challenges. The process is called the Ghana Shared Growth and Development Agenda and features a mix of policy changes, expenditure rules and legal reforms. Many of these moves are ones the country had already intended to adopt, through a package of interventions announced in April 2014 called the Homegrown Policies.

A First Step

The final announcement of the IMF plan came on April 3, 2015, with the first tranche of the loan, $114.8m, received shortly after. It will also see spending reined in from the start. These austerity measures will likely moderate non-oil growth in the economy in 2015 – the IMF projects expansion at 2.3% on the year, before speeding up later. However, the impact of the package has thus far been more moderated than expected – the cedi has continued its fall, indicating that the IMF package alone will not be enough to boost investors’ confidence.

“The exchange rate is clearly telling us that things are not right,” Peter Quartey, professor and head of the economics department at the University of Ghana, told OBG. “Borrowing has hit a high threshold, so the credibility problem is still there.”

Risks

One of the major challenges to executing the plan and regaining credibility will be the 2016 election. Typically government spending in Ghana is at its most disciplined in the two years after a vote, but less so in the months leading up to elections. That cycle was broken in 2012, as wage increases prevented a contraction in spending and adherence to budgeted targets. According to the IMF’s programme description, “risks to the programme include delayed or partial implementation of policies, including next year in the run-up to elections, a slower growth recovery if the electricity crisis is not addressed quickly, and additional negative commodity price shocks.”

Expenditure Policies

Cutting expenditure comprises a major component of the IMF programme, as well as the preceding Homegrown Policies, but will be difficult because of salary commitments to government employees, who have been given significant raises in recent years thanks to the Single Spine Salary Structure, which unified wage scales across government bodies. It was implemented on an agency-by-agency basis starting in 2010. The average annual salary increase was between 15% and 20% until 2013, and as a result the wages-to-tax revenue ratio rose to as high as 73%, according to the Ministry of Finance and Economic Planning (MFEP).

However, the ratio has since fallen and was at 57% in April 2015. The IMF package commits Ghana to a further reduction to 35% by 2017. Reaching that level would also meet one of the convergence criteria for joining an eventual currency union of countries in ECOWAS. Achieving it will be done through a hiring freeze in all areas of government, save for health care and education, and limiting salary increases to cost-of-living adjustments.

Another way to reduce expenditure will be to allow consumer fuels to be priced by market forces. Until recently prices for oil and gas were regulated in the country, set at levels that reflected the costs to producers and importers and allowed them a sustainable profit. That sometimes meant subsidising prices to make up for importers’ currency losses, with prices set every two weeks. However, with the cedi in flux, a regulated pricing system is has become difficult, and in June 2015 the MFEP deregulated prices.

“The foreign-exchange dynamics are not stable and the fluctuations are such that it adds on to the subsidy build-up,” Willie Shamo, director of petroleum at the Ministry of Energy and Petroleum, told Bloomberg. The change should further improve Ghana’s chances at meeting its IMF programme targets as it rids the government of the need to pay importers for currency losses.

More Transparency

To better manage budget implementation the state will expand the use of the Ghana Integrated Financial Management Information System (GIFMIS), a customised resource-planning software. GIFMIS was developed with the World Bank and three other development agencies. It was first deployed in 2009 by the Controller and Accountant General’s Department of the MFEP. As part of the IMF plan, the government will only recognise purchases formally budgeted for and registered through GIFMIS software, with the hope of eliminating off-budget expenditures, graft and other breaches of spending discipline. These expenditure-aimed measures are just a start. The government is expected to further research strategies for public financial management and to submit a reform strategy to Parliament, according to the plan that was agreed on with the IMF. Draft laws for parliamentary deliberation are set to be available by the end of 2015 in order to address weaknesses under the country’s current approach.

Revenue

Ghana has been working for years to increase tax revenue, which was 15.7% of GDP in 2014, according to the IMF, and the government already has accomplishments under its belt that will help it to implement the IMF programme. Taxes have been boosted and accountancy rules tightened for the mining sector. For example, a new 17.5% rate for value-added tax was implemented in January 2014, after a previous hike from 12.5% to 15% in 2013.

“The Ghanaian tax system is fundamentally sound and is based on the essential pillars of a modern tax system,” according to the IMF’s programme-description document. However, one of the problems is the practice of making exceptions, such as tax holidays, exemptions and special regimes for free zones and state enterprises. The IMF considers these a hindrance to economic efficiency and fair competition, and stated the government may be foregoing as much as 6% of GDP through them. Ghana has pledged to review these practices as part of its Memorandum of Economic and Financial Policies sent to the IMF in March 2015, before the loan package was finalised.

The country is also likely to amend its laws for petroleum revenues. Oil-sector income is currently directed into three places: the national budget, which takes 70% of the total; the Stabilisation Fund; and the Heritage Fund. The Stabilisation Fund gets 21% of income and can be drawn down when oil prices dip, while the Heritage Fund receives 9% of revenue and is intended for investment and the use of future generations. The rules of the Petroleum Revenue Management Act (PRMA) of 2011 have meant that despite running budget deficits for the past three years the government was bound to transfers to the two funds, without the possibility of adjustments to account for externalities such as oil price declines. In July 2015 parliament passed the PRMA Bill to allow the minister of finance more discretion to keep revenues out of the funds and to make them available for use when circumstances arise, as well as to allow more funds to be allocated to the Ghana Infrastructure Investment Fund, among other things. The amendment also requires the minister of finance to present parliament with reports detailing implementation of spending programmes to improve transparency. All together these reforms should ensure a more stable economy.