Last week, this year’s edition of the annual mid-year budget review presentation by Finance Minister Ken Ofori Atta to Parliament for its consideration and subsequent approval, was met with widespread disapproval, but for the wrong reasons. Basically the disappointment came from the fact that government has opted to stick fundamentally to its original fiscal plan for 2021, rather than propose sweeping changes as it did last year. Consequently the presentation, although as belabored in length as last year’s edition, did not contain much new content; rather it basically documented Ghana’s current situation and the ongoing efforts to improve it, thus coming off more as an economy-biased version of a state of the nation address than a mid year budget review of sweeping proportions which Ghanaians had expected in the wake of last year’s version.
However, the facts are that last year’s major mid-year budgetary changes were the result of unprecedentedly unusual circumstances, with the arrival of COVID 19 and the consequent public policy responses to curb its spread, which required what essentially was an entirely new budgetary framework for the second half of the year, the original one having been rendered redundant; and the fact that so far, at least with regards to macroeconomic performance, the 2021 budget is achieving its objectives.
By the end of the first half of the year, the inflation, at 7.8 percent, was below government’s end year target of 8.0 percent, and barely higher than the median of the Bank of Ghana’s own target band of between 6.0 percent and 10.0 percent.; the cedi had only depreciated by a marginal 0.6 percent against the dollar, this fall only having occurred in June after having actually appreciated against the dollar over the previous five months; the fiscal deficit at 5.1 percent was actually lower than the 5.2 percent targeted for the first half of the year; and crucially, there are clear indicators that economic growth has accelerated to faster than the 5.0 percent full year target of the 2021 budget. Indeed giving government enough confidence to increase the target marginally to 5.1 percent.
Indeed the slight upward revision of the growth target is one of the very few changes to the key economic performance targets set in the 2021 budget as announced in March.
The other key change – also very marginal – is a reduction in the overall fiscal deficit, measured on a cash basis, to 9.4 percent (GHc41,273 million in absolute terms) from 9.5 percent (GHc41,298 million) originally planned. Instructively however the primary balance target has conversely been raised from a 1.3 percent of GDP deficit ( GHc5,434 million) to 2.0 percent (GHc8,745 million). This shows that even after accounting for debt servicing costs, government is spending more than it gets, continuing the upward trajectory of the public debt which is now simply alarming.
The targeted narrowing of the fiscal deficit is to be derived from a marginal increase in projected revenues to GHc72,477 million, up from the original target of GHc72,452 million. This would be an increase of 0.03 percent of GDP and would be an increase of 31.5 percent over the outcome of GHc55,128 million achieved in 2020.
This is ambitious considering that during the first half of this year, total revues, at GHc28,304 million were 12.5 percent less than the target for the period.
However the commencement of new taxes and levies have been turning the situation around. Indeed following the approval of the 2021 Budget, the implementation of the new revenue measures, namely Pollution and Sanitation Levy, Delta Fund Levy, Covid-19 Health Levy, and Financial sector clean-up levy commenced in May 2021. So far, a total yield of GH¢249.7 million has been realised compared to the target of GH¢358.1 million.
Also tax administration is being strengthened significantly.
The Revenue Assurance, Compliance and Enforcement (RACE) function has been established within the Ministry of Finance to support the move towards improved taxpayer compliance and adherence to set procedures and processes. The Ghana Revenue Authority will fully activate the Prosecution Unit to bring in line recalcitrant taxpayers and other persons who will infringe the revenue laws in order to drive compliance and reduce tax evasion and tax fraud.
Furthermore, the establishment of the tax courts this year will ensure the speedy trial of tax cases and the necessary punitive measures handed out where necessary.
As part of Government’s digitalisation agenda, technology will be applied at all levels to monitor and identify revenue sources (both tax and nontax); safeguard revenue collections by eliminating the collection of physical cash and tracking non-compliant tax payers. It will also enable tax officials widen the tax net by bringing in potential taxpayers in the informal sector
To support the implementation of the relevant enactments on taxation of the digital economy (including online gambling) and the voluntary compliance programme, the Ghana Revenue Authority prepared practice notes, administrative manuals, and developed an e-commerce platform to register individuals and businesses in the e-commerce sector. The platform will be launched in the third quarter of 2021. The National Identification Number was adopted as the Taxpayer Identification Number (TIN) for individuals, effective April, 2021. This important initiative is targeted at achieving a key Government objective of widening the tax net. The old numbers will be phased out by the end of December 2021. The integration of the GRA, NIA and Registrar-General’s Department (RGD) systems to support the initiative has been completed. This has increased the registered individual taxpayer population from 4 million to over 12 million. An exercise to validate and register those liable to pay the various tax types is underway
Government is counting on all these measures to further accelerate revenue growth which began in May with the commencement of the new taxes and levies, and thus turn the revenue target shortfall of the first half of 2021 into the achievement of the upwardly revised full year target.
Public expenditure on the other hand, is expected to be GHc113,750 million, the same as the original 2021 budget projection, which is 13.7 percent higher than last year’s actual public spending of GHc100.026 million. However while the overall public expenditure projections remain the same the structure of that spending has been adjusted.
Spending on wages and compensation for public workers has been recalibrated upwards by GHc1,177 million to GHc31,491 million to reflect the 4.0 percent increase in their base pay. Furthermore savings of GHc3,336 million are expected from a lowering of interest rates, which is expected to lower government’s debt servicing costs to GHc32,588 million, which is 9.5 percent less than the GHc35,864 million originally anticipated in the 2021 budget.
Added to these are adjustments in expenditures on goods and services as well as domestic capital expenditure to reflect “priority interventions” as the Finance Minister has put it.
Meeting this year’s revenue and expenditure targets will have crucial implications for the public debt which rose from 76.1 percent at the turn of the year, to 77.1 percent by the end of June.
The provisional nominal debt stock as at end-June 2021 stood at GHȼ334,560.43 million (US$58,041.1 million), representing 77.1 percent of GDP. This was up from GHȼ291.6 billion (US$50.8 billion) at the end of December 2020. This stock included the financial and energy sector bailouts.
The increase in the debt stock was mainly because of the Eurobond issuance in April 2021, COVID-19 pandemic effect, contingent liabilities, and frontloading of financing to meet cash flow forecasted trend in the first half of the year. The composition of the total debt stock was made up of a provisional amount of GHȼ161,813.48 million (US$28,072.15 million) and GHȼ172,746.95 million (US$29,968.94 million) for external and domestic debt, respectively, which correspondingly accounted for 48.37 percent and 51.63 percent of the total debt.
The public debt is likely to rise significantly further during the second half of the year as government considers a return to the international capital market, to issue a further US$1.5 billion in bonds. This is to close the gap created by its only accepting investors bids for US$3.0 billion during its March Eurobonds issuance rather than the US$5.0 billion it had originally planned for, because it considered the coupon rates on some of the bids to be too high.
Curiously, while government claims most of the new debt would be used to refinance old debt, thus not adding to the total debt stock, it however intends to raise the money through issuance of green bonds, an instrument used to finance environmentally friendly projects and this implies financing for new projects rather than refinancing of existing debt.
Instructively, while Ghana uses the public debt to GDP ratio to measure its debt sustainability, this method has no practical relevance; much more practical is the debt servicing cost to total revenue ratio, which for 2021 is 49.5 percent, implying that half of the country’s total revenues goes into debt servicing, a totally inordinate situation which is getting worse by the year. It is instructive that if Ghana was a salaried worker, its bankers would not approve any further lending to it since the usual cap on salary loans is 40 percent of the borrower’s salary.
While the ongoing sharp growth in the public debt is largely attributed to the public spending exigencies of COVID 19, this does not in itself ameliorate the effects of being grossly over-indebted. More damning is the fact that a significant portion of the supposed COVID 19 instigated massive increase in borrowing last year was in actual fact politically motivated towards winning the December 2020 polls – COVID 19 was a convenient excuse to make social interventions that were in truth aimed simply at winning votes. Aware of this the International Monetary Fund has demanded that Ghana do an audit of last year’s COVID 19 emergency spending; if done properly this could prove to be a major source of embarrassment to the government.
Meanwhile Ghana is in a race to expand its economy and the revenues it generates faster than its debt is growing, both to improve living standards and to improve its dwindling credit worthiness. To be sure, the incumbent President Nana Akufo Addo administration came to power in 2017 on the back of a promise to move from demand management as insisted on by the IMF and embraced by the then Mahama administration to supply side expansionary economics and until COVID 19 struck this was working out very well.
To ensure an economic rebound after COVID 19M forced the economy into a recession during the second and third quarters of 2020, government, supported prudently by the Bank of Ghana, is leveraging its supply side expansionary economic management philosophy.
While they have succeeded in lowering inflation and consequent interest rates to long term lows, economic expansion is being constrained by faltering bank credit to the private sector. This is due to a combination of higher credit risk imposed by the effects of COVID 19; the bitter memory of the banks of massive bad loan write offs and consequent new capital requirements which saw many of their counterparts actually have their licenses revoked for reasons of insolvency and undercapitalization; and the attractive option to invest in risk free high yield government securities – which are available in abundance to finance a near double digit fiscal deficit – rather than lend to customers.
To solve the problem government is engaging on an array of growth oriented initiatives, primarily aimed at providing finance for business and jobs for the country’s teeming unemployed youth who are at the centre of the ongoing #fix the country campaign. These are under the general auspices of its ambitious GHc100 billion Ghana COVID 19 Alleviation and Recovery of Enterprises (Ghana CARES) initiative, due to run over three years with the private sector tasked to provide GHc70 billion of the requisite financing.
For instance government has decided to create the Ghana CARES Enclave. This enclave will accommodate Industrial Parks, Tech/Digital Hubs, Commercial farms operated by the youth as well as suitable housing as a secondary city.
Further to the implementation of the Ghana CARES initiative, nine Implementation Compacts with comprehensive result frameworks have been developed with the participating institutions. The Compacts are partnership agreements between the Ministry of Finance and participating Institutions to ensure effective and timely delivery of targets under Ghana CARES for the 2021 fiscal year. It ensures predictability of and the flow of catalytic resources to the agreed interventions. Through the Compacts, government is also strengthening sustainable alliances and collaboration with private sector players and development partners for economic transformation in a post-COVID 19 era.
Asserted Ken Ofori Atta in his presentation to Parliament last week: “Government’s focus on returning to a more sustainable fiscal path in the medium term is underpinned by our current deliberate efforts to ease constraints in agriculture, agri-business and industry. The transformative interventions under the Ghana CARES programme are also to foster structural reforms in the business value chain to support diversification and job creation for our youth. Since the turn of this year, we have been purposefully pursuing the Phase II of the Ghana CARES programme to revitalise the economy and set it on track for transformation.
“I am happy to report that we have made considerable progress towards our pledge to create a well-lubricated financial ecosystem to anchor wealth-building for our youth under the Ghana CARES programme. With adequate capitalisation this year, we are ready to operationalise the Development Bank of Ghana (DBG) which will address critical constraints to businesses. As a post COVID recovery institution, the Development Bank of Ghana (DBG) would mobilise funds from both the domestic and international markets to support the private sector to invest on a medium to long term basis. The DBG will thus unlock long term financing for actors in the manufacturing, agriculture, agro-processing, mortgage, and housing sub-sectors to propel economic growth, create jobs and improve domestic revenue mobilization.
“To ensure that businesses have access to investment financing at a lower interest rate, we are strengthening GIRSAL to collaborate with banks in order to mitigate the challenges within the agricultural value-chain. We have made available additional funding to support the operationalisation of the Guarantee Scheme which will allow Medium and Large Scale Enterprises to access investment funding from financial institutions at a lower interest rate, improve productivity, financial performance and sustain employment for our people.
“Under Ghana CARES, we are catalysing the Ghana Commodity Exchange (GCX) this year to be more nimble. This support will strengthen the GCX to play its critical role in reducing post-harvest losses, providing better access to agricultural and financial markets, creating jobs and improving livelihoods for all actors along the agricultural value chain.
“To provide financial resources for the development and promotion of venture capital financing for Small and Medium Enterprises (SMEs) in priority sectors under Ghana CARES, we are supporting the Venture Capital Trust Fund (VCTF) this year. The support will enable the VCTF to tremendously impact financing for venture capitalists, especially the youth, in Ghana. “We are delighted to have completed the institutional rationalization and subsequently launched the Ghana Enterprises Agency (GEA), as a dedicated robust institution to promote the development of Ghanaian MSMEs. The GEA is now better positioned to respond to the growing needs of MSMEs and play a lead role to strengthen the capacity as well as the competitiveness of the enterprises in Ghana. With additional funding and strategic partnership of reputable international organisations, GEA is ready to expand the frontiers of MSMEs in Ghana.”
Along with increasing access to business financing made inordinately scarce by the reticence of the banks themselves, government is focusing on easing the constraints in the Business Regulatory Process this year through the Ghana Economic Transformation project. Here the ultimate target is to improve Ghana’s “Doing Business” global ranking to be in top-100 in the medium term.
To enable the Ghana Investment Promotion Centre mobilise the GH¢70 billion investment from the private sector for financing the Ghana CARES initiative, government is aggressively supporting the GIPC to be aggressive and more targeted in seeking investment into the prioritised sectors. The intentional and dedicated effort to attract global and regional brands in the likes of Twitter, Google will be re-invigorated and leveraged to grow local enterprises.
Enthuses Ofori-Atta: “together, the DBG, GCX, GEA, GIRSAL, VCTF, NHMF, GIPC and the accompanying reforms of the business regulatory environment, forms a nucleus that anchors a new age of entrepreneurship, job creation and wealth building for our post-COVID transformation. The prospects of business and entrepreneurship have been given the needed boost through this ecosystem.”
Another pillar in government’s game plan is to prioritize the modernization of the agricultural sector under Ghana CARES. The aim is the accelerate rapid competitive import substitution for targeted food crops, support commercial farming (particularly by the youth), increase food security, and, most crucially, ensure adequate supply of raw materials to the country’s agro-processing industries, which are growing dramatically through the One District One Factory initiative, for value-addition, job creation, exports, and industrialization.
To this end, CARES is investing in initiatives that will improve production and productivity in the rice, poultry, soybean, and tomato subsectors this year.
Says the Finance Minister: “Government’s recent successful engagement with all the value-chain actors in these sub-sectors has helped to sharpen the focus of investments and brought a more holistic view to the issues we are confronting in these sectors. We are therefore providing interest rate subsidies, facilitating equipment acquisition, linking markets and promoting relevant research for these sectors. The youth are being supported this year to become out-growers for anchor farmers to boost their participation in commercial farming.
“Ghana CARES is also investing in data and digital technology for the agricultural sector. These technologies are meant to revolutionise the targeting of interventions such as fertilizers, seed inputs, extension services and acquisition of land for commercial farming. This will drive efficiency and improve output in the sector.”
The next pillar is the accelerated expansion of Ghana’s light manufacturing under Ghana CARES. Here, government has identified the need to provide dedicated support to expand the processing capacity of actors in the Pharmaceutical, Cassava, Garments and Textiles industries to increase exports and create additional jobs. The specific interventions identified at last week’s mid year budget review include support for the establishment of a cassava processing plant, provision of technical assistance to the Garment and Textile as well as the pharmaceutical industries. Key Pharmaceutical Manufacturing companies will be supported to upgrade their operations to reach Good Manufacturing Practice Standards.
Crucially, rapid acquisition of capabilities to manufacture machine tools to support industrialization is a major priority under Ghana CARES. Government has therefore established the Foundry to assist with the fabrication of tools and the process to identify a suitable private sector operator to manage the Foundry is ongoing. It is also providing incentives to the private sector to manufacture key agricultural implements and prototype industrial research on a commercial basis.
Yet another area of concerted attention by government is the Tourism, Arts and Culture sector which has been perhaps the most adversely affected by this pandemic.
“Government is cognizant of the enormous potential of this sector in creating jobs, earning foreign exchange and projecting Ghana for investment” affirmed Ofori-Atta at last week’s mid year budget review presentation. “We are also aggressively promoting international and domestic tourism through Ghana CARES by supporting the modernization and development of identified tourist sites. We are therefore revitalizing the skill sets of sector operators, working to reduce the cost of doing business in the sector to make actors more competitive and transforming targeted tourist beaches to increase patronage.”
To be sure, most of all this is the continuation of ongoing initiatives, or at least, projects and programmes already on the drawing board; which is largely why last week’s presentation to Parliament is being criticized as not containing enough new ideas and initiatives.
However, government’s supporters correctly point out that it has put enough on its plate already to keep it busy and these things are enough to dramatically improve both the performance of the economy and its underlying structure which would make the improved performance sustainable mover the long term.
Whether or not they will be enough remains to be seen. In the mean time though, the mid year budget review for 2021 has involved minimal tinkering with the fiscal framework established for the year. Considering how well this is working out for the macro-economy this is not a bad thing.
Credit: goldstreetbusiness
Ghana Financial Market 