Economic growth helps Ghana's debt situation but fiscal performance remains in the spotlight

As a presidential and parliamentary election year, 2020 represents a key test of the government’s commitment to fiscal responsibility. The current government came to power on a platform of economic competence, promising to break the cycle of spending and debt crises that has challenged the nation’s economic progress for decades. In this regard it has already achieved a measure of success. In 2019 the government received praise from some of its most prominent national development partners for its fiscal performance over the previous year. The IMF, reviewing Ghana’s fiscal reform efforts at the conclusion of its most recent programme in the country, noted that the 2018 fiscal targets had been met, and welcomed the government’s numerous initiatives aimed at improving fiscal discipline. These included the establishment of the Fiscal Council, as well as plans to improve public financial management and the supervision of state-owned enterprises (SOEs).

Debt Levels

An improving fiscal scenario has also made it easier for Ghana to control the expansion of its national debt. This issue has been an economic concern since the 1990s, when the nation’s debt-toGDP ratio began to grow rapidly, exceeding the 110% level by 2000. A programme of debt relief led by the IMF and the World Bank brought the nation’s external debt to under 30% of GDP by 2006, but the government’s improved finances also allowed it to return to the global markets in search of funding, resulting in another era of borrowing. By 2015 Ghana’s debtto-GDP ratio had surpassed the 70% mark, a level it had not reached since the early 2000s.

More recently, Ghana’s rising debt has been held in check by a government that has made fiscal reform a central pillar of the nation’s development strategy. With fiscal deficit ceilings enshrined in law and a successful lengthening of the average tenor of government obligations, the authorities were able to point to concrete progress regarding debt levels in 2019. According to Ministry of Finance figures, the debt-to-GDP ratio sat at 60.55% as of September 2019. Excluding the financial sector bailout, however, the ratio stood at 57.44%, which was below the government’s target of 60% of GDP. The country’s successful reversal of the rising debt-to-GDP ratio also drew approval from the IMF, which acknowledged the administration’s efforts to meet fiscal targets and manage the debt burden.

Ongoing Challenge

The level of government debt, however, remains a concern for many observers. In its recent April 2019 reviews of the three-year extended credit facility, the IMF warned of the risks of excessive debt accumulation, recommending that planned infrastructure projects should be transparently managed and consistent with a strategy of debt sustainability. “The financial instruments that are required to ensure infrastructure development are difficult to mobilise,” Richard Yeboah, country director of GML Green Energy Ghana, told OBG. “Even with the development agency guarantees that cover 70% of the funding of major projects, domestic investors are unlikely to participate, as they remain very hesitant to take on any risk.”

Local organisations have also highlighted the downside risk of the government’s outstanding obligations: in 2019 Ghana’s Institute for Fiscal Studies (IFS), a politically independent, non-profit think tank, called upon the government to take “urgent steps” to limit its borrowing, describing the nation’s current fiscal policy path as unsustainable. Critics of the government’s debt policy also question the appropriateness of using the nation’s debt-to-GDP ratio as a measure of the current scenario.

Ghana rebased its economy in 2018, an exercise the government deemed necessary in order to take into account important emerging sectors such as communications, certain oil industry activities and segments within the services sector. As with the previous recalibration of national accounts in 2010, the 2018 rebasing had the effect of boosting GDP, in turn reducing the national debt level as a percentage of it. For this reason, many economic commentators think that Ghana’s debt-to-GDP ratio gives a misleading sense of security, arguing that a more accurate assessment of the sustainability of the debt position could be made by comparing the proportion of the revenue that Ghana is compelled to direct to the servicing of its debts each year. According to Ministry of Finance data, Ghana’s total debt service expenditure absorbed around 26.8% of total revenue and grants in 2013. By 2018, however, Ghana was spending 44.3% of its revenue servicing its debt obligations.

Fiscal Developments

Ghana’s debt question has placed its fiscal performance in the spotlight in 2019. The government’s budget statement and economic policy for 2020 revealed that its initial revenue estimates for 2019 had been overly optimistic: the provisional total revenue and grants for the first three quarters of the year amounted to GHS36.2bn ($7bn), against a target of GHS42bn ($8.1bn). A number of factors played into the shortfall, including lower-than-expected receipts from the gas sector and the non-realisation of some programmed dividends from SOEs. The government’s efforts to provide tax relief to some economic activities also had the effect of lowering revenue, most notably its reduction of benchmark import values in April 2019, which resulted in a decline in Customs receipts in the first half of the year. Efforts to mitigate these revenue giveaways by raising tax in other areas, such as an increase in the communication service tax and a road fund levy, have only had a modest impact on the overall revenue picture: in its mid-year review the IFS estimated that these revenue-raising measures would yield less than GHS400m ($77.5m) in 2019. The government budget expects this figure to be much higher, however, provisionally recording revenues of GHS1.1bn ($213.1m) from the road levy and approximately GHS291.7m ($56.5m) from the communications services tax over the first three quarters of 2019.

On the expenditure side, in its mid-year budget review the government proposed an increase in spending of GHS1.2bn ($232.4m) for the remainder of the year, bringing the total to GHS74.6bn ($14.5bn), or 21.6% of GDP. However, by the time that the budget statement for 2020 was released, in November 2019, it was expected that expenditure for the year would total GHS70.2bn ($13.6bn). The government outlined an expenditure budget of GHS84.5bn ($16.4bn) in 2020, and projects revenue and grants to amount to roughly GHS67.1bn ($13bn).

Historically, successive administrations have found the capital expenditure component of the budget the easiest area in which to make spending cuts, and this was once again the case. Capital spending for 2019 was reduced by GHS819.9m ($158.8m) from the initial budget to GHS6bn ($1.16bn). The cuts in capital spending, however, did little to alter the overall fiscal dynamic in 2019. Lower-than-expected revenue and an increase in spending caused the government to seek a GHS6.4bn ($1.24bn) supplementary payment from Parliament, which was duly granted. This figure was funded by debt, expanding the government’s total debt stock and increasing its servicing costs.

Looking Ahead

Ghana’s debt challenge remains central to any discussion regarding the nation’s fiscal policy. Given the crystallised nature of its spending obligations, the government’s most obvious route to a more sustainable debt burden is through boosting revenues. Over the longer term its ability to increase its revenue base is contingent on the nation’s economic development. However, there are also a number of revenue-strengthening options available to the government in the short term, most notably a tax exemptions bill that was first put before Parliament in early 2019. A wide range of tax exemptions in areas such as import duties and domestic value-added tax are estimated to have cost the government an equivalent of 1.6% of GDP in 2018, according to the Ghana Revenue Authority (GRA), up from 0.6% of GDP in 2010. In the GRA’s view, the problem has come about due to a range of bad practices, including failing to establish a clear exemptions policy, including exemption clauses in donor-funded projects, granting exemptions to government entities and public institutions, and neglecting to include sunset arrangements where exemptions are agreed.

The GRA has proposed a number of solutions to the exemptions challenge, namely implementing the proposed Exemptions Act in order to provide policy clarity, requiring businesses seeking exemptions to give the state an equity share equivalent to the tax and duty waivers, and compelling public sector bodies to purchase supplies from the private sector at market prices, on the condition that the supplier pay all chargeable taxes and import duties. As these solutions are considered, the question of tax exemptions will remain a key discussion point heading into 2020.