OBG talks to Kwabena Duffuor, Minister of Finance and Economic Planning

Interview: Kwabena Duffuor

What obstacles have you faced with the implementation of the single-spine salary system?

KWABENA DUFFUOR: The new wage policy was implemented to eliminate inequities in public sector pay, improve pay administration and enhance productivity. As of June 2012, about 99% of all public servants have been migrated onto the new salary structure. This has caused the government’s wage bill to increase significantly, from GHS2.9bn ($1.72bn) in 2009 to an estimated GHS5.1bn ($3.02bn) in 2012. It poses a huge risk to fiscal sustainability. This represents an increase in the government’s wage bill of 75.9% within a period of three years. The cost of the pay raise will be partially met by savings from the on-going pension and payroll audit.

The initial obstacle with implementation of the new wage policy was in establishing the number of actual government employees and pensioners using biometric registration systems. This affected migration onto the new structure, causing considerable payment arrears. Determining public entities that should remain on government support has also been a priority, as it has made it possible for us to liquidate some companies or spin them off to be commercialised. This has allowed us to reduce government payroll. Another challenge was to negotiate with organised labour and various associations on the schedule of payment for the new salaries and associated arrears.

How concerned are you about inflation over the short and medium term?

DUFFUOR: Our monetary policy in the medium term aims to maintain low inflation while responding to volatility in the foreign exchange market. The Bank of Ghana will continue to deploy its instruments within the inflation targeting framework to preserve macroeconomic stability. In particular, the bank aims to keep inflation broadly stable, with the central point of the target band moderately reduced to 8.7% in 2012. The bank thus stands ready to adjust its policy rate in support of this target, depending on the risks to inflation.

It is important to note that inflation has been in the single digits for more than 24 consecutive months. Food inflation was brought down from 4.8% in January 2011 to 4.3% by the end of the year through government policy interventions. Non-food inflation remained high, driven by strong demand for non-tradable goods and services. The headline inflation, however, increased from 8.7% in January 2012 to 9.4% in June 2012 due to the 15.1% cumulative depreciation of the domestic currency. Our aim is to keep inflation stable, with an end-year target in the range of 5.7-11.7%.

The economy is exposed to upside risks underscored by the recent domestic currency depreciation and high domestic demand, rising fuel subsidies, as well as a deeper global slowdown with potential adverse effects on commodity prices and investment. Nevertheless, risks can be moderated and the rate kept stable.

What sort of taxation reforms might help spur production in the private sector?

DUFFUOR: This must be achieved through striking a balance between enhancing the business environment and understanding that tax collection is essential for government investment. We have granted various tax reliefs to reduce the overall tax burden on private sector companies in the country.

We have also granted tax exemptions to real estate developers who partner with the government to provide affordable houses to low- and middle-income earners, aiming to encourage more development in that area and to make it financially viable for companies to build lower-income housing. We are also promoting the development of our financial sector by exempting mutual and unit trust funds that invest on the Ghana Stock Exchange from VAT payment on financial services. We have also reduced the excise duty rate on alcoholic and non-alcoholic beverages. The lower rate paid by industries using local raw materials as substitutes in the production of excisable goods is aimed mainly at the development of the hospitality industry.