Government measures to help meet three goals of Ghana's consolidation programme

As part of the three-year fiscal consolidation programme with the IMF that began in 2015, Ghana is looking to accomplish three overarching goals: ensure macroeconomic stability and debt sustainability; promote growth, development and job creation; and maintain social spending to protect the vulnerable. To meet these goals, the Ministry of Finance and Economic Planning (MoFEP) and the Bank of Ghana (BoG) are leading efforts to reduce spending, increase revenues and initiate structural reforms that will encourage inclusive growth.

As of the middle of 2016, the government had made significant progress in achieving its fiscal goals. The challenge for the second half of the year will be to further reduce spending and increase revenue, while avoiding lasting negative effects on growth and investment.

Reducing Spending

Large budget deficits have been weighing on the economy in recent years. The implementation of a generous public sector wage system in 2012 – which was designed to harmonise pay systems between government agencies and improve transparency – contributed to large public outlays.

Nelly Mireku, principal economic officer at the MoFEP, told OBG, “The wage bill accounted for over 50% of the fiscal slippage the country had in 2012.” The budget deficit soared from 5% of GDP in 2011 to 11.8% in 2012. It remained high in the years that immediately followed, then narrowed to 6.7% in 2015 and is expected to continue to fall as fiscal consolidation takes hold. The MoFEP projects a deficit of less than 3.5% of GDP by 2018.

However, compensation for public sector employees is still a problem, accounting for 32.4% of total government expenditure and 40.3% of its revenue in 2015. The government has taken a number of steps to mitigate this. Mireku told OBG, “One major policy measure that has been implemented in the past two years is the freeze on recruitment in the public sector, with the exception of the education and health sectors, which have been exempted to help us achieve the Sustainable Development Goals.”

Additional wage-specific initiatives put in place since 2013 include slowing the rate of cost of living adjustments, weeding out ghost workers on the payroll, and incorporating technologies designed to better track work and pay.

Subsidies Removal

Taking advantage of falling oil prices, Ghana began phasing out fuel subsidies in July 2014, leading to the complete removal of the subsidy in late 2015.

As part of its consumer fuel liberalisation, the government instituted a price stabilisation and recovery levy of GHS0.12 ($0.03) per litre. In the event that global oil prices rise above the threshold of $80 per barrel, the funds from this levy will be used to reinstitute a fuel subsidy so that increased energy costs do not act as an obstacle to growth. Details on how any future fuel subsidy would be structured, and whether the fuel levy will be sufficient to cover the costs of the subsidy, have yet to be released.

Management

The MoFEP is also strengthening its monitoring of expenditures to ensure that each ministry and agency stays in line with its budget targets. “Every quarter, every ministry is assigned a specific amount of their budget, its quarterly budget allotment,” Mireku told OBG. “The expenditure allotments are loaded into the Ghana Integrated Financial Management Information System, and ministries are required to operate within that. Ministries are not allowed to initiate any expenditure that exceed the allotment.”

Increasing Government Revenue

On the flip side of the coin, the government is seeking new ways to boost revenues and broaden the tax base. A series of new tax measures have been implemented since 2013, including a new levy on imports, an increase in the rate of value-added tax (VAT) from 15% to 17.5%, new taxes on fee-based financial services and real estate, and revised handling of capital gains taxes, which resulted in a higher tax burden for corporations. As a result, Ghana’s tax revenue-to-GDP ratio increased from around 12% in 2012 to 16.5% in 2015.

While increasing revenue is the primary goal of the new tax regime, Alhassan Iddrisu, director and chief economics officer at the MoFEP, told OBG, “Our tax policy measures are not only geared towards optimising revenue mobilisation, but also towards ensuring that we have equitable distribution of income. For example, the extension of VAT to fee-based financial services and the real estate sector was done based more on equity considerations than for purposes of raising more revenue.”

Testing Limits

Ghana faces two primary challenges in increasing revenue beyond current levels. The first is the burden that taxes can place on the economy. “You can’t stifle your economy through taxation if growth is weak and the economy is not overheated,” Sampson Akligoh, managing director of InvestCorp, told OBG. “At this stage we need to cut public expenditure wisely and broadly support growth through lower inflation and interest rates.”

In light of the overhang of public debt, the government has prioritised revenue generation over investment in the short term. “Though the fiscal consolidation measures we are implementing may result in more taxes, the macroeconomic stability that comes with these measures will benefit businesses in particular and the economy at large in the medium to long term,” Iddrisu told OBG.

Once the country has improved its fiscal situation, finding the right mix of revenue and investment will be the key to sustainable growth. In recognition of this reality, some of the tax increases put in place in recent years are scheduled to sunset at the end of 2017, allowing enough time for fiscal consolidation to bear fruit.

Informal Impact

Another significant impediment to further increasing revenues is Ghana’s large informal sector (see analysis). This segment of the economy – which employs 41.9% of the overall labour force and 77.7% of labour outside of the agriculture sector – largely operates beyond the reach of the tax net.

“There is potential revenue in the informal sector, but you must have the right approach so that these companies do not avoid tax,” Joe Tackie, CEO of the Private Sector Development Strategy II at the Ministry of Trade and Industry, told OBG. “We must ease business registration to capture more businesses at the bottom of the pyramid, so that they can be taxed at comfortable levels. This will help bring in more revenue than breaking the backs of fewer industries and overtaxing income.” Broadening the tax base to reach those operating outside of the formal sector is seen as key to success, but there are, as of yet, no concrete strategies in place to address this issue.

Reforms

To build a foundation for growth in the economy, the government is embarking on structural reforms. One such reform is curtailing the government’s debt profile in the domestic market. As of 2016 the BoG can no longer finance government deficits, which will strengthen central bank independence and address a major contributing factor to inflationary pressure.

The BoG and the National Insurance Commission are also looking to strengthen the financial sector by boosting intermediation, lending, coverage and private sector activity. The measures they are taking include instituting stronger capital requirements, tightening supervision of the microfinance industry and establishing the Ghana Deposit Insurance Corporation to limit the fallout from any future bank failure. These and other reforms will help bring more capital, which can be mobilised to accelerate growth, into the system, and prepare the financial sector to support the larger, more complex projects needed for a growing economy.

The various arteries of government appear to be working together to fulfil the commitments of the IMF programme. In a relatively short space of time the government has made considerable progress in instilling fiscal discipline and laying the groundwork for future growth.

However, concerns over the fiscal consolidation process remain. Chief among these is the potential effect that an expanding tax burden and delayed infrastructure investments will have on the country’s long-term growth. Investors were watching the 2016 presidential election and its aftermath to help gauge whether Ghana has the determination to stay the course. They will also be keeping a close eye on the IMF’s reporting, in order to determine whether the agency has the flexibility to shift course if events do not unfold exactly as planned.