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ACCRA (Capital Markets in Africa) – Ghana’s 2017 budget statement outlined an ambitious first step towards transforming the structure of the economy. The budget, christened: “Sowing the Seeds for Growth and jobs” is grounded within the framework of the Ghana Shared Growth and Development Agenda II (GSGDA II) and within the context of the Extended Credit Facility (ECF) with the IMF. The budget targets accelerated and inclusive growth through a modernized agriculture sector, private sector-led industrialization with a focus on value addition and equitable distribution of social infrastructure within the confines of the Sustainable Development Goals (SDGs).
In keeping up with his campaign promises, the president cut a raft of taxes and extended budgetary allocations to fund some flagship programmes including the “Free SHS”, “one-village one-dam”, and a million dollars per constituency among others. Low revenue mobilisation, expenditure overruns & corruption, high wage bill, high debt service cost and rigidities in the fiscal structure remain a threat to the fiscal targets. However, the government hopes to resort to fiscal discipline, accountability, transparency and an improved tax administration in overcoming these limitations.
We present our views on the 2017 budget statement and economic policies of the government of Ghana as follows:
Growth in Crude Oil Production Underpin 6.3% Projected GDP Growth in 2017
Ghana’s projected growth for 2017 could be undermined if any of the three oil fields experience prolonged production interruptions. The growth target is mainly driven by an expected increase in oil and gas production from the new oil fields, despite the country’s history of persistent shortfalls in production targets since the onset of oil production.
Average daily crude oil production slumped to 88,400 bopd (target: 106,115 bopd) due to a technical fault on the Jubilee FPSO in Q2-2016 (amidst lower crude oil prices). As a result, the petroleum sector contracted by 13.5% in 2016, which underpinned the 11% and 1.2% y/y contraction in the mining and quarrying sub-sector and the industrial sector respectively.
In 2017 however, the government expects higher crude oil output [Crude oil: 120,208 bopd (+36%); Natural gas; 30,672.17 mmscf] as production ramps up at the TEN and the SGN fields. Though realistic, this expectation may be missed as unanticipated halts in production at the oil fields are well documented.
Meanwhile, the onset of oil production has concealed fundamental weaknesses in the industrial sector. Despite rising above the agriculture sector as the second largest contributor to GDP since 2011, the industry’s growth has tapered off in recent years as the base effect of oil production eases out (see the chart below).
To this end, the industrial sector is expected to be the main driver of growth (2017 projection: +11.2%), underpinned by the expected increase in crude oil production from the TEN and SGN fields.
While the impact of the local industrialization drive such as the tax incentives and the agriculture sector initiatives, could anchor sustainable economic growth, their impact would be most evident in medium-to-long term. In the near-term however, the projected growth prospects appear highly susceptible to shocks in hydrocarbon production. Any unanticipated shock to crude oil production will have far reaching consequence for the economy.
Revenue Performance Hinges on Increased Tax Compliance and Efficient Tax administration
Provisionally, total revenue for 2016 (GH¢33.7bn) was 11.1% below target (GH¢ 37.9bn). This underperformance stemmed from low productivity due to irregular power supply, shortfalls in petroleum revenues due to lower-than-projected benchmark crude oil price & output and lower-than-projected tax revenue.
Tax revenue was about 11.7% below target (GHs 29.13 billion) with income and property tax together with trade tax nearly accounting for the entire shortfall. On a y/y basis, total revenue grew by 5.12%, a far cry from the average annual growth rate of 28% between 2013 and 2015.
In spite of this revenue underperformance, the government abolished eight (8) taxes in all and reduced four (4) others but projected a 33.3% growth in total revenue in 2017 (tax revenue: GH¢34.8bn; +33.6% y/y). To achieve these revenue targets, however, the government needs to stringently push through its revenue administration strategy by curbing corruption and tightening the various channels of revenue leakages. In the immediate term, the government must strengthen the tax administration, reduce tax exemptions, plug the revenue loopholes and combat tax evasion.
To this end, the re-launch of the national identification and property listing projects are a necessary preliminary step towards roping in the informal sector and other undocumented members of the working class. The merits of this project are however in the medium-to-long term. To make up revenue losses though, the government would have to swiftly stabilize the macro economy to attract private investments, expand the tax net and strictly enforce tax compliance in order to compensate for revenue losses from the tax cuts.
Anti-Graft Campaign, Fiscal Prudence as Tools to Achieve Fiscal Stability
The budget expresses government’s commitment to the full implementation of the IMF program. The fiscal deficit is expected to fall to 6.5% of GDP in 2017 and further down to 3% in the medium term. Key approaches to achieving these targets include:
- Strict implementation of the National Anti-Corruption plan
- Strict implementation of the Public Financial Management (PFMA) and the Public Procurement (PPA) Acts
- Revising portions of the Criminal Offenses Act,1960 (Act 29) to make corruption a felony instead of a misdemeanour
- The establishment of a fiscal council which will adopt and implement rules to anchor fiscal policy implementation
- Streamlining the public sector wage bill through a biometric validation of public sector workers
- The establishment of the office of a special prosecutor who shall scrutinize and prosecute public officials culpable of financial malfeasance
- Prudent public financial management strategies
A full implementation of the PFMA and the other anti-graft measures bodes well with the investor community. Government’s commitment to rolling out key social intervention programmes, however, pose a threat to the fiscal consolidation process.
At 73% debt-to-GDP ratio, there is limited fiscal space to roll-out most of the flagship programs. Effective compliance with the cap on transfers to earmarked funds and avoiding unbudgeted expenditures are therefore critical for a successful attainment of the fiscal targets. An extension of the current IMF programme to Dec-2018 will boost government’s efforts to contain prevailing fiscal risks, improve investor confidence and restore macroeconomic stability.
Recurrent Expenditure Accounts for 68% of Total Expenditure in 2017
The government proposed to spend GH¢ 58bn (including arrears and clearances) in 2017, which is 13.7% above the provisional outturn in 2016. This will result in an overall budget deficit of GH¢ 13.18 billion (6.5% of GDP), to be financed from domestic and foreign sources.
Recurrent expenditure, however, weighs heavily on the budget, limiting budgetary allocation to capital expenditure (-7.2% y/y). While the decrease in capital expenditure is a source of concern for a nation lacking basic infrastructure, it falls in line with government’s overall strategy to partner with the private sector to build critical infrastructure. Besides, most state-sponsored capital projects outlined in the budget are ongoing and have already been fully funded, providing the government room to substitute public funds away from capital spending to finance flagship social intervention programmes.
The high level of recurrent expenditure, however, leaves the government constrained in its efforts to slow the public debt growth (2016 debt/GDP: 73%; 2017 target: 70.9%). The government, therefore, needs to expedite programmes that stabilise the macro economy, as this will reduce fiscal risks, attract off-shore investors and steady the growth in interest obligations in the medium-term.
In conclusion, Ghana’s best option towards sustainable development is to reduce reliance on the extractive industry. The agriculture sector offers great potential for growth, given the right investment. Commodity exports are mostly in their crude form because industrial capacity remains woefully inadequate. Against this backdrop, the 2017 budget represent the best commitment towards industrialising the economy in the 4th republic. The emphasis on agriculture and rural industrialisation represents Ghana’s best options for diversifying the economy and the proposed shift from taxation to production resonates well with the overall strategy of a private sector-led growth.
That notwithstanding, evidence from Ghana’s recent economic history suggests that most of the transformational blueprints in previous budgets have not been executed to expectation. The prevailing doubt about the government’s ability to execute the 2017 budget is therefore justifiable.
This article is featured in the April 2017 edition of INTO AFRICA Magazine, Powering Africa’s Energy Projects.
Contributor’s Profile: Courage Kwesi Boti, Economic Analyst, Databank Group, Ghana