By Patrick Stephenson | Center for Economic Governance and Political Affairs

Introduction

For the first time in the political history of Ghana’s last decade, the citizens, analysts, civil society organisations, and government officials debated publicly the position of the government’s fiscal policy for the 2016 fiscal period, in the hope of predicting its direction; an ‘austere’ budget vs a ‘lax’ budget. Such debates have usually been the preserve of the affluent and more sophisticated section, including development partners (multilaterals and bilaterals alike). This epitomizes the sense of desperation and the search for economic recovery and prosperity by all players and stakeholders in the Ghanaian economy. This objective of the governed appears to have been missed if not ignored by the very construct of the budget as an economic management tool, and more crucially as a ‘strategy’ for bringing the economy back to winning ways.

“Budgeting 101” will admonish that a finance ministry and indeed the government of any state to provide concrete reasons and explanations for which previous budgetary estimates and projections have been met or otherwise, with a detailed opinion, on the recovery strategies for the forthcoming budget cycle. Well, this has not been the case of the Republic of Ghana, at least in the fourth republic. Crucially, the country has even moved further away from this principle in the last five years.

Themed, ‘consolidating progress towards a brighter medium term’, the 2016 government budget intends to run an estimated deficit of GHS8.4billion approximately 5.3 % of GDP (including the oil sector). Granted, this is just a projection, it makes every economic sense for the government through the finance ministry to justify this projection. The estimates for productivity of the economy (GDP) precedes, all other activities in the budgeting process. Should this projection be missed, there is every reason for all other indicators to be missed. It only takes a comparative analysis of the 2015 and 2016 assumptions to expose the ‘flaw’ in the outlook of 2016.

With a projected 3.9 % GDP (including the oil sector), and a corresponding inflation within 11.5 percent, the budget deficit barring all else, was estimated at 6.5 percent in 2015. These estimates were based on a purported recovery in commodity prices, imposition of ‘ridiculous’ taxes in a bid to raise domestic revenue, increased output of Cocoa and other essential traditional exports, and together with a supposed policy credibility which the economy will receive following the implementation of the extended credit facility (which will unlock capital from the global markets), among others. The contrary of these predictions occurred (commodity prices are still sticky at all-time lows, with some analysts projecting further declines in 2016, Eurobond issued at the highest yield in the country’s history – 10.75 percent – which begs the question of policy credibility promised under the ECF, cocoa output significantly reduced by more than a third of the projected output[1]). Below is a summary of some of the macro targets for the 2016 fiscal period

[Table 1: Selected macroeconomic targets for 2016]

[Source: 2016 budget statement, ministry of finance and economic planning]

As ridiculous as it may sound, the government envisages working with a balance of payment surplus in excess of US$1billion, to be driven by a net capital and financial account inflows of US$3.9billion, which they envisage will more than cover the current account deficit of US$2.9billion (7.4 % of GDP), and to further build up gross foreign assets to US$6, 985 million (4.1 months import cover). The most recent records of the country’s economic history will suggest that such a surplus occurred in the third and fourth quarters of 2014. There is a context to this however! This was happening during a period when the external economic balances were spiraling downwards. For these two quarters, balance of payment reduced from US$935million to about US$397.1 million (see figure 1 below). A recovery of this position based on a net capital and financial inflows, is quite impossible, talk less of building a US$1billion surplus.

The essence of this review is to critically examine the macro-economic targets for 2016, situating them within the realistic current and forecast economic conditions for 2016, to determine their suitability and the extent to which they can be achieved or otherwise.

Output / Productivity

Over the medium term (now till 2018), the government anticipates the contribution of the oil sector to the productivity of the economy to increase to pre-2011 levels by 2018. However, growth is estimated to decline from 2017, ostensibly to be driven by a decline in productivity from the oil sector, and projected trends in the services sector. The current structure of the economy appears not to support such a projection. The agriculture sector will not recover to levels projected as budgetary allocations to the sector appears to have reduced in 2016. Thus the 3.5 percent expected growth for the sector in 2016 and 2017, cannot be attained with such fiscal policy directives. This will create some dependencies on the import which could drive trade related activities (service). With the solutions to the energy crises not in sight albeit some stability is anticipated in 2016 as elections beckon, recovery of productivity in construction and manufacturing will not recover to the projected levels in the medium term, even if it does recover. Productivity from the oil sector appears to have been overestimated. Global prices on crude oil are not recovering to pre-crises levels in the next 12 to 15 months, as they continue to decline (Brent hovering around US$43 as at 2^nd December, 2015). To anticipate the sector’s contribution of about 0.2 percent in 2016 could be somehow representative of the economic conditions expected within the global economy in 2016. However, to project a 2.2 percent addition to growth in 2017, could only imply increased productivity (gas included) and a recovery of prices. This is unlikely within the anticipated time period, which makes one wonder the soundness of the projection. With OPEC keen on maintaining its grip on the global market share (supply) to the disadvantage, of shale gas production and fracking of deep oil reserves in the US, prices of crude oil are bound to oscillate a US$45/barrel, as they currently have hit 9 year lows at US$39/barrel.

[Table 2: Growth projections for 2016 – 2018]

[Source: 2016 budget statement, ministry of finance and economic planning]

Revenue

The estimated revenue for 2016, is GHS 38.03bn, the equivalent of 24% of GDP. In terms of contribution to GDP, the 2015 estimate was also 24% although the nominal value was GHS32.04bn.

[Table 3: Comparison of revenue projections for 2015 and 2016]

[Source: 2015 & 2016 budget statements, ministry of finance and economic planning]

The projected economic outturn for 2015 suggests total revenue of about GHS 22.69billion including grants by the close of the 3^rd quarter. It is practically impossible for the government to raise an additional GHS10billion or more in the last quarter of the year to meet this gap. Not having justified this, the best 2016 estimate would have been to operate at and aim to achieve the target set for 2015. However, a further GHS6bn is envisaged. With restrictions on the increments in taxes (in fact a further increase in the lower bandwidth for non-taxable salary), lower corporation output and by extension bottom lines, it is hard to imagine how this ambitious revenue target will be achieved. The outlook on revenue is rendered miserable when one factors the external pressures from the global commodity prices which are estimated to linger until mid-2017, or until some unexpected shock or turn of events between Russia, OPEC (recent OPEC meeting resulted in a supply expansion which instantaneously reduced prices to about US$39/barrel), Iran etc, which reduces the supply of oil, or growth aggressively rebounds in East Asia to exert some demand pressure.

The inability of the government to achieve this revenue target will exert further pressure on the borrowing requirements, and granted that the procedure for seeking external finance appears complex than domestic finance, further pressure could be evinced in the domestic debt market.  A similar development is evinced in the 2015 budget and fiscal year, where the first 3 quarters resulted in a deficit financing of GHS6.7billion as a result of revenue targets being missed, with GHS4.68billion being raised during the period from the domestic market, when the target for the period was about GHS 2.9billion. Traditionally, the government will be expected in the midst of such a revenue constraint to drastically reduce its expenditure. In the case of Ghana, expenditure reduction is generally a challenge for government for various reasons. Chiefly, the structure and composition of expenditure (higher concentration on recurrent expenditure (wages, salaries, and emoluments) and the pursuit of political gains/capital by necessarily pursuing politically motivated projects and investments in assets and infrastructure even when these investments yield no economic returns. The actual economic outturn for the first 3 quarters of 2015 will show this.

Interest rates and Inflation

The projected end of year inflation of 10.5% for 2016 appears to suggest a certain level of cluelessness, lack of intellectual dexterity, or plain misleading of the Ghanaian public. Without credibly explaining the inability to meet the 2015 target, the factors surrounding the Ghanaian economy do not suggest that inflation could be brought within 10.5% by close of the year. Indeed, the pressures from the domestic financial system, which will be caused by a seeming misleading revenue target and underlying assumptions, will further increase the hardship on Ghanaians. There is an attempt to anchor the current inflationary pressure hikes in monetary policy rate to about 26%. This hasn’t worked, and will not work! (see figure 2 and 3 below) In fact it has further exposed the ineffective space surrounding monetary and fiscal policy as the policy rate (a signal for other interest indicators) now exceeds the treasury-bill rates (averaging 24%), 3 year and 5 year bonds issued by the government (averaging 24% and 24.5%). It is either the monetary policy and fiscal policy authorities are deceiving themselves, or the public. Any which way there is a deception about the transmission mechanism from the monetary policy rate to inflation transient the other cost of credit indicators.

The only logical conclusion from the above and the projections the government has made in its macroeconomic policy for the 2016 fiscal year is as follows:

• Increases in policy rate is usually accompanied by increases in the 91-day bill rates. This has not happened. Rather 3 year and 5 year bonds have been issued at attractive rates. The financial industry generally will not invest in such long term instrument, so a disincentive is being created.
• It will appear that, credit allocation will now shift to the private sector during the coming fiscal year as short term securities look unattractive. This has not happened and will not happen in 2016. See below:

• With the current inflationary pressure being supply sided (hikes in the prices of factors of production, utility price hikes – increase of more than 120% before Jan 2016, etc) it is impossible for the authorities to reverse the inflationary pressure using just the policy rate.

The business community should just brace itself for further hardship, which of course isn’t as a result of their micro activities and strategies. Crucially the inflation target will not be met given the underlying factors, which should push further labour agitations. The effects of such miscalculated projections is just endless!

External economy and currency regime (exchange rate)

The recovery of the external economy also appears to be predicated on circumstances beyond the control of the government. This suggests that a moderate projection on the external economy will be the most appropriate. Again an ambitious recovery of the external economy is projected by the government which appears to suggest an overestimation of the gains from the implementation of the fiscal consolidation program under the extended credit facility. Merchandise exports drastically reduced by US$2.3billion dollar for the first three quarters of 2015 following the non-recovery of global commodity prices. More specifically, crude oil proceeds declined following a more than 2% decline in projected output, and a further decline in global prices. With the Africa Centre for Energy Policy for instance, indicating further reduction in supply in the short term, projections for this sector can only be conservative. This is not the case in the budget for 2015.

The proceeds from gold exports also declined following a reduction of about 21 % and a further downward trend in the global prices by about 8.2%. This trend isn’t improving in 2016, as further supply injections could result in price declines. The case of cocoa isn’t any different. Output of cocoa declined by about 21% and some analysts believe this could further decline due to unfavourable weather conditions. This could thwart government’s effort to prop the production up by increasing the Cocoa PPI by about 23% for the coming cocoa season. With possible supply expansions from Cote d’Ivoire, and possible litigation against some of the largest buyers globally for failing to adhere to regulations concerning wholesome practices in the industry, there is evidence to suggest a possible decline in prices in 2016.

It is possible to see that the high projections in revenue have been only to contain the expenditure and to perform ‘accounting’ balances on the budget for 2016. The evidence from 2014 through 2015, does not in suggest such high projections. Granted, the decline in expenditure by the government should have been more radical in pursuit of the fiscal consolidation rather than the mere GHS400million between 2015 and 2016. Throwing in the trends in imports further worsens the outlook. These developments will have significant impact on the external balances of the economy with an attending effect on the value of the Ghana Cedi, which has already declined by more than 23% cumulatively this year alone.

With a worsening balance of trade influenced by the trends discussed above, the government anticipates a recovery in balance of payment to be driven by positive net inflows from capital accounts. Further interrogation of the factors underlying this projection, shows some unanswered questions. Inflows from the donor community for instance will not be as high as predicted, due to the perceived fiscal ‘misbehaviour’ of the government during electioneering periods. This transcends some arrangements with the IMF. Foreign investors, are flying capital out of the country and this is likely to continue into late 2016. Granted that the general elections will be held a month earlier, expectations will be heightened and this capital outflow will be faster than anticipated. Without answering these questions the government has ‘arbitrarily’ estimates a US$1.01billion on its balance of payment account.

The above shortfalls in the macro-economic projections made by the government, could have serious implications for various sectoral performance in 2016. Crucially the overambitious projections in revenue makes room for government to not drastically reduce its expenditure as would have been expected if the projections have factors in the real underlying economic conditions. Conclusively, businesses and the private sector will not be seen to be aligning their strategies these projections, which could deepen the implications of economic performance in 2016. With these projections, economic agents (actual and prospective) can only ‘hope’ for a better financial and business year in 2016, because this budget based on the macro-economic projections, misses the target of recovery in 2016.

Patrick Stephenson is Associate Director of the Center for Economic Governance and Polical Affairs at IMANI.  

Reference  

 [1] http://www.ghanaweb.com/GhanaHomePage/NewsArchive/Ghana-cocoa-purchases-667-000-tonnes-by-July-2-down-yr-yr-369369