Budgetary spending: Government expenditure focuses on improving infrastructure

The key theme of the 2012 budget – the first to be prepared following the beginning of Ghana’s commercial oil production – is infrastructure spending, with a particular focus on transport and energy. It encompasses agricultural, water, health and education facilities as well. While the government initially made efforts to ensure that spending remained in line with its initial deficit target, cognisant of concerns about expenditure running out of control in an election year and the risk of over-leveraging oil production – 60% of which is allowed to be collateralised – it later launched a supplementary budget raising spending and deficit targets. However, the government is also taking measures to increase revenues, which have been rising substantially in the past few years, and to improve its knowledge and awareness of the exact state of its finances.

HEADLINE FIGURES: The original 2012 budget projected total government revenue and grants of GHS15.61bn ($9.26bn) for the year, including some GHS5.66bn ($3.36bn) of direct tax revenue, GHS3.46bn ($2.05bn) of indirect tax revenue (the bulk of it VAT) and GHS1.16bn ($687.76m) worth of grants. The budget foresaw total oil receipts of GHS1.24bn ($735.2m), based on an anticipated average oil price of $90 a barrel and average output of 90,000 barrels per day (bpd).

On the outlay side, the document envisaged GHS17.52bn ($10.39bn) of expenditure, comprising GHS11.82bn ($7.01bn) of recurrent expenditure, of which GHS5.05bn ($2.99bn), or 42% of recurrent expenditure, would go on civil service salaries, and GHS5.7bn ($3.38bn) to capital expenditure.

INFRASTRUCTURE SPENDING: With the theme of the 2012 budget being “Infrastructural Development for Accelerated Growth and Job Creation”, a large part of budgetary spending goes towards addressing the need to improve the foundations of the Ghanaian economy. Inadequate supply of infrastructure was rated the fifth most problematic factor for doing business in Ghana in the World Economic Forum’s 2011-13 Global Competitiveness Report, and the IMF has described infrastructure investment as “crucial” to the country’s growth. In its February review, the IMF said it supported a raise in the non-concessional borrowing limit in order to fund related development plans, though it also stressed the need for the financing and execution of infrastructure projects to “be planned and monitored carefully” to “preserve fiscal and debt sustainability”.

The Ministry of Roads and Highways and the Ministry of Transport together lead the way in terms of allocations under the 2012 budget, which assigns them GHS908m ($538.35m) and GHS99m ($58.69m), respectively, in addition to a separate GHS250m ($148.23m) for the completion of six major highways.

Another major transport initiative to take place in 2012 will be the launch of the Eastern Corridor Roads Project, for which GHS100m ($59.29m) has been allocated for 2012 (the project as a whole is expected to cost $1.5bn). Other transport projects to be carried out under the auspices of the 2012 budget will include the rehabilitation of two railway lines and the reconstruction of another (funded by the China Development Bank), as well as the expansion of the Takoradi Port and maintenance works on 54,000 km of roads.

FURTHERING ENERGY CAPACITY: Spending under the budget also includes GHS657m ($389.53m) for the Ministry of Energy, some of which will go to commissioning the first unit of the Bui Hydroelectricity Project, which will add an additional 133 MW of capacity to the national grid (out of a total of 400 MW when the project is completed), and also the Takoradi 3 Thermal Electricity Project, which will boost installed capacity by a further 133 MW. These projects form part of the government’s plans to raise the country’s installed capacity by 2000 MW over the mid-term. Addressing energy issues is crucial for enhancing the country’s economic potential. “If problems in the power sector could be solved, the outlook for the development of the manufacturing sector would improve,” said John Gorlorwulu, an economist at the US Agency for International Development. “Losses in the power system have been reported to be significant, exceeding 20% in some instances, due primarily to infrastructural and institutional problems. Such losses are unsustainable as they undermine the commercial viability of the system.”

Other infrastructure-focused departments are also getting significant allocations. The budget has assigned the Ministry of Water Resources, Works and Housing GHS283m ($167.79m) to be spent on projects, which include drilling 4000 boreholes in 2012 and completing 4720 affordable housing projects. The Ministry of Food and Agriculture was provided GHS262m ($155.34m), with planned projects including the rehabilitation of 50 breached dams and the construction of the first phase of the Accra Plains Irrigation Project, which will provide irrigation to 10,000 ha of land.

SUPPLEMENTARY BUDGET: The original budget targeted a fiscal deficit of 5.1% of GDP in 2012. In April the minister of finance, Kwabena Duffuor, said the government was taking measures to prevent any unbudgeted spending by government departments, which he warned would be severely punished for this, amid concerns that spending could get out of control ahead of the elections in December, as occurred in 2008 (see overview). However, despite repeated admonishments by the IMF that the government should try to stick to its original deficit target, in mid-July Duffuor announced a supplementary budget and asked permission from parliament to raise the deficit to 6.7% of GDP. Duffuor cited factors such as the cost of holding elections – the bill for which the government is footing alone this time – as well as liabilities as part of the Single Spine Salary Structure civil service wage reform initiative, as the reasons for the need to raise the deficit target.

REFORMS: At the same time as spending is rising, the government is also working on a range of reforms that are aimed at increasing revenues; the administration has plans to raise tax intake by a further 0.8% of GDP. Efforts recently made to reach this target include the establishment of a Large Taxpayers Office, as well as moves to replace value-added tax (VAT) zero-rating with exemptions and simultaneously restrict the ability to grant tax exemptions. In addition, the government is working to modernise customs administration and tackle tariff avoidance, and plans to amend VAT legislation to extend the application of VAT to fee-based financial services, which should bring in an additional GHS100m ($59.29m) in VAT revenues. Another tax initiative currently under way is a small taxpayer scheme, which is aimed at bringing in more of the informal sector into the tax-paying economy.

The government is also working to increase revenues from natural resources. In 2010 it raised mining royalties from 3% to 5%. Then in his annual budget statement in November 2011, Duffuor pledged to put up the corporate tax rate for mining firms from 25% to 35% and to reduce capital allowances. The government also plans to introduce a 10% windfall tax, though what qualifies for the tax has yet to be defined. It also intends to ring-fence mining projects for tax purposes.

INCREASING TRANSPARENCY: A significant problem for the government when it comes to managing its finances has been the difficulty of obtaining up-to-date information on the actual situation regarding revenue and government spending. To address this issue and facilitate the payment process and financial reporting, the government is implementing a new system called the Ghana Integrated Financial Management Information System, known until 2009 as the Budget and Public Expenditure Management System. One of the initiative’s main goals is to “provide a single source of data for the overall control of the fiscal assets”.