In 2012 Ghana found itself in the spotlight for having among the highest GDP growth rates in the world in 2011, thanks to the impact of oil revenues and the rebasing of the economy. The GDP figures released for 2013 show that growth is continuing at a robust rate – at just under 8% – but headline expansion has not resolved the twin current account and budget deficits of 12%, which will necessitate a more stringent fiscal policy in the years to come.

ACHILLES HEEL: Fiscal governance has always been a problematic element of the country’s economy, dating back to the 1960s. Even in recent years the deficit has touched as high as 14% of GDP in 2008, though careful management nearly halved this figure to 7.7% in 2010. A combination of repayments of arrears, new capital inflows, a broader tax base, slower expenditure growth and improved account management helped bring revenues and spending closer into line. However, revenues and spending grew apart again in late 2012 and early 2013. In its annual report on Ghana, published in June 2013, the IMF drew attention to fiscal policy, citing energy subsidies and civil service salaries as two reasons why Ghana’s “policy mix deteriorated in 2012”. In its original budget for 2012 the government targeted a fiscal deficit of 5.1%, but in a supplementary budget published in April 2012 this was revised to 6.7% of GDP. A year later, in March 2013, the government announced its fiscal deficit was 12% of GDP and said its target for the next year was 9%. This difference came from a variety of shortfalls and larger-than-expected expenditures, including the roll-out of the Single Spine Salary Structure (SSSS), a shift that accounts for 2.7% of GDP, and lower-than-expected oil taxes. In 2011 the government budgeted for GHS603m ($310m) in corporate income tax from oil producers. However, the 2012 “Annual Report on Petroleum Revenue” noted that under the Internal Revenue Act, the companies could offset expenses against earning and, thus, were not required to pay any corporate tax. Nevertheless, in the 2012 budget another estimate for a further corporate income tax receipt of GHS403m ($207m) was made, and yet once again no tax was due. This represented just 57% of the total corporate tax shortfall in 2012.

SALARY OVERHAUL: The SSSS for public servants was put in place by the prior government in December 2008 with the aim of simplifying and streamlining public sector pay based on recommendations from donor institutions. Even after the expectedly expensive roll-out of the programme in 2011, the initial costs have proven to be significantly higher than anticipated. By its own reckoning, implementation of the new salary scheme accounts for 2.7% of GDP. The budget summary suggests the SSSS went over budget by GHS1.91bn ($981m).

“The [IMF] mission urged the government to gain control over the wage bill,” said the IMF’s Christina Daseking. “It recommended a thorough audit of the 2012 payroll and welcomes that the government has already started this process.”

A LARGER PICTURE: The government has not made any public statements about this ongoing audit, but the 2013 budget speech provided a picture of the financial implications of the scheme. The finance and economic planning minister, Seth Terkper, described the SSSS as “an obligation that was bequeathed by the previous administration on the very eve of its departure from power” in 2008. Terkper said the National Democratic Congress administration had pressed ahead with the legislation “in the interest of social and industrial harmony”, starting the roll-out of the scheme in January 2010.

However, Terkper revealed that by December 2012 99.7% of civil servants had migrated to the SSSS and the bill for public sector compensation to 600,000 workers and pensioners amounted to GHS7.2bn ($3.7bn), 72.3% of tax revenue including oil. The minister stressed that part of the motivation for moving to the new scheme was to increase the productivity of public sector workers and that this would remain a primary objective in 2013.

SUBSIDIES: Utility and fuel subsidies were also an issue. The government’s expected spend on fuel and energy subsidies was to have been GHS470m ($241m), but it actually spent GHS809m ($415m), an additional GHS339m ($174m) that represented an increase of 72% on its forecast. Petroleum subsidies accounted for GHS623m ($320m) and energy subsidies totalled GHS186m ($95.6m).

The March 2013 budget revealed a key measure to enable the government to meet fiscal targets would be “more regular adjustment of utility prices to complement the proposed adjustment in petroleum prices to recovery levels”. In its 2013 budget, the government, which is determined to cut its deficit from 12% of GDP to 9%, has budgeted to increase its spending on wages and salaries by 12% and its spending on subsidies for oil and energy by 23%. In February 2013 the state cut subsidies to fuel and was under pressure from the IMF to do the same with energy subsidies. However, in its 2103 budget the government had set aside GHS795m ($409m) for petroleum subsidies and GHS228m ($117m) for utility subsidies, for a total of GHS1.07bn ($550m) in subsidies.

Subsidies, as is the case in countries across the continent, continue to be a delicate issue, with governments facing a tricky balancing act between buffering the more vulnerable segments of the population from commodity volatility without undermining their own fiscal sustainability. Nigeria, for example, faced massive street protests when it moved to completely remove subsidies for petroleum products.

Previously Ghana had some success in pushing for full cost recovery in certain areas, including electricity tariffs, which were tweaked in summer 2010 to allow for financial viability. Petroleum product prices were also raised in early 2011 by 30% to cost-recovery levels – which helped alleviate an arrears problem experienced at Tema Oil Refinery – although the move was met with popular protest. Still, subsidy challenges remain. The IMF applauded the removal of fuel subsidies by the end of 2012, but repeated its view that electricity subsidies should additionally be removed and the money redirected to infrastructure projects that would benefit the wider economy. According to the IMF, these energy subsidies accounted for a 0.5% increase in the deficit in 2012.

When fuel subsidies were cut in February 2013, it was reported that the price of petrol at the pumps went up by 20%, while liquefied petroleum gas (LPG) increased by 50%. The National Petroleum Authority has announced periodic increases since then to reflect changes in oil prices. In February 2013 petrol was selling for GHS1.708 ($0.88) per litre, and by July 2013 it was GHS2.049 ($1.05), according to local media reports. The IMF called for “similar action” to be taken on energy subsidies, suggesting it would like to see them removed altogether.

ELECTRICITY: Given the steady increase in demand, supply and electrification, reform of the electricity subsidy programme is crucial. The government is investing in improving the energy supply and aims to increase power generation capacity to 5000 MW in the short term, roughly double current levels.

More importantly, Ghana has been moving from its traditional dependence on hydropower in recent years and has built generation plants capable of running on gas or crude oil. In the medium term the country should be able to satisfy its domestic demand by using the gas it produces from its oil fields. However, at the onset of 2012, Ghana’s state-owned Volta River Authority was relying on gas from Nigeria, transported along the coast of Nigeria, Benin and Togo through the West African Gas Pipeline to fuel its Takoradi Power Station at Aboadze. As a result, and as evident by the fall-out from the pipeline’s damage due to piracy in August 2012, this move also increases the government’s exposure to commodity volatility and unexpected jumps in subsidy spending.

The pipeline’s closure due to pirates raking it with an anchor disrupted Ghana’s supply of gas from Nigeria, leading to power rationing for over 10 months after the event. Ghana’s power generation companies were forced to switch fuel from gas to light crude oil, which has been costing the government $30m a month to import since then. As a result, the government has been buying fuel to generate power, but through subsidies, it has been selling the electricity it produces at less than cost prices.

“The main problem is government spending and a fiscal policy that is not aligned to the country’s resource envelope,” said Sampson Akligoh, the head of research at Databank Financial Services.

KEY STEPS: In the face of these challenges, Minister of Finance Seth Terkper said his department planned to achieve its 2013 budget deficit target by introducing new taxes, boosting public sector efficiency and productivity, and reviewing capital expenditure and financing methods. In the budget speech the finance minister announced the reintroduction of a 5% National Fiscal Stabilisation Levy on the profits of banks, non-bank financial institutions, insurance companies and other selected companies; the re-imposition of 10% import duty and 15% value-added tax on mobile phone handsets; and a 5% environmental levy on plastic goods. In addition, Terkper announced a public sector recruitment freeze for all posts except traineeships in health and education. The finance minister also declared that all government departments would face strict new ceilings on spending.

PROJECTIONS: In part, the problem in Ghana stems from overly optimistic projections. Oil revenues have made a significant impact on the country’s GDP, but technical issues hampered production in the first part of 2012. As a result, total oil production in 2012 was 26.4m barrels, an increase of just 9% over the 24.2m barrels produced in 2011. The Ghana National Petroleum Corporation lifted 4.9m barrels in 2012, which yielded $541m. Of the total oil receipts of $541m, royalties amounted to $150m and $390m represented the state’s carried and participating interest. Other sources of petroleum receipts amounted to $552m, comprising surface rentals of $48m and royalties from the Saltpond Offshore Producing Company of $104m.

In its 2012 “Annual Report on Petroleum Funds”, the government revealed that its original budget for oil revenue in 2011 was $834m. It actually received just 53% of that; its petroleum revenue for 2011 totalled only $444m, a shortfall of $390m.

In 2012 it budgeted for receipts of $774m, but in reality it received $541m, with a shortfall of $232m. For 2011 and 2012 the government budgeted a total of $1.6bn for oil revenues and received 61% of that, $0.99bn. Those oil revenues can actually magnify fiscal problems because the influx of wealth increases demands for government services and support.

EXPORTS: The total value of oil exports in 2011 was $2.78bn, which grew to $2.98bn in 2012. The projection for oil exports in 2013 is $4.64bn, an increase of 56%, which would see oil’s share of total export revenues rise from 22% to 32%, year-on-year. However, projections for revenues are very much dependent on the spot prices for the three commodities that make up 85% of all of Ghana’s exports: gold, cocoa and oil.

BONDS: The government’s decision to raise finances through Treasury bills has also been controversial. In 2012 the 91-day, 182-day, one-year, two-year and five-year notes all had rates of 23%. The three-year bond alone had a rate of 21%. However, some of these rates have dropped slightly in the first quarter of 2013, and the impact has already begun to be felt in the business community.

In his 2013 budget statement Terkper promised to identify “credible sources for financing infrastructure projects”. He said that by curtailing the over-reliance on short-term instruments such as Treasury bills to finance the capital budget conditions across the economy could be improved. “This will ease pressure on credit to the private sector and help reduce interest rates,” said Terkper.

Some economists feel this borrowing is having a negative impact on commerce and that businesses are indirectly suffering at the hands of the politicians. “They are looking for a lot of money, and once you have set the rate the banks take it as their benchmark for lending,” said Moses Agyeman, the senior economist at the Private Enterprise Federation.

In pursuit of more external sources of longer-term finance, the government announced plans to raise more funds through a $1bn Eurobond issue in late July 2013, and this move has been ratified by Parliament.