Ghana budget signals fiscal tightening

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While the headlines on Ghana’s 2015 budget focus on the short-term impacts of fiscal tightening, the proposed changes should have a positive bearing on the overall economy over time.

The budget deficit has grown rapidly in recent years, after reaching a low of 4.3% in 2011. Combined with a shortfall in the current account of 12% of GDP, the twin deficits have raised concerns over the country’s outlook. However, the 2015 budget is seen by many as a sign that longer-term solutions, in the form of structural reforms, are being sought as a means of tackling deficit and rising debt.

The budget, which was unveiled by Finance Minister Seth Terkper on November 19, aims to reduce Ghana’s fiscal deficit to 6.5% of GDP next year from a projected 9.6% in 2014. Growth, however, is forecast at a more modest 3.9% for 2015, down from 6.9% this year, according to government figures.

Underlying fundamentals

Ghana has seen some of Africa’s highest growth rates in recent years, including a heady 13.6% expansion in 2011, benefiting from the start of oil production and strong output from its agricultural and mining sectors. The low middle-income country has also seen improvements in infrastructure and service activity.

However, Ghana remains heavily reliant on commodity export revenues, particularly oil, gold and cocoa, which have slowed significantly on the back of large drops in oil prices and, to a lesser extent, cocoa and gold – which in turn has exacerbated the deficit.

The fiscal problems are expected to continue to weigh on its outlook, while lower commodity prices will act as a drag on growth. Terkper was cautious in his budget speech, warning that the economy was “not out of the woods”.

Addressing the issues

Measures aimed at bringing down the deficit and slowing debt growth include a 17.5% petroleum tax and the extension of a temporary freeze on the hiring of public sector workers outside the health and education sectors.

Although fiscal tightening could constrain GDP growth in the short term, the reforms will be crucial in helping avoid an increase in borrowing costs. Ghana sold a $1bn Eurobond in September that was nearly three times oversubscribed at a coupon rate of 8.125%, indicating a high appetite by investors but in October, ratings agency Standard & Poor’s lowered Ghana’s sovereign rating to B-, six notches below investment grade.

The moves will also likely prove central to the government’s ongoing discussions with the IMF for a potential $1bn loan. Ghana announced in August that it would begin consultation with the fund for possible assistance in improving the state’s balance sheet.

Other measures outlined by Terkper in the budget speech include building Ghana’s Export Development and Investment Fund into a fully-fledged Export and Import bank to support trade growth. The bank is expected to focus on boosting production of non-traditional exports with a view to raising their value from $2.3bn to $5bn in the medium term.

The government will also be looking to roll out its highly-anticipated Ghana Infrastructure Fund, which is earmarked to play a key role in financing infrastructure development. Improving transportation and utilities will be capital-intensive in the short-term, but should benefit long-term growth.

In a separate move, the minister proposed floating sector-specific bonds to fund the expansion of the energy and cocoa industries.

Positive response

The government’s aggressive measures to streamline the budget have been largely applauded. In a statement at the end of November, Joël Toujas-Bernaté, head of an IMF mission to Ghana, praised Ghana’s commitment to reducing the budget deficit to 3.5% of GDP by 2017. He added that other measures being implemented by the government, such as a move to cut energy subsidies, would also bring benefits.

“Taken together, these fiscal measures, combined with sound debt management and actions to further boost the effectiveness of the Bank of Ghana’s inflation targeting framework should help restore macroeconomic stability,” said Toujas-Bernaté.

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