Analysis – why Ghana is no longer the poster child for African economic reform

Despite being one of the fastest-growing economies on the continent and offering a vast number of investment opportunities, Ghana unfortunately has one big hurdle standing in its way: fiscal finances.

Ghana can boast about its successes, but troubling government finances have been the norm, with fiscal slippages regularly occurring in election years.

The current Covid-19 pandemic is set to compound the problems for the country as government needs to support the economy through a fiscal stimulus injection.

Ghana. Shutterstock

The Ghanaian government’s fiscal account is set for a marked deterioration this year.

The minister of finance, Ken Ofori-Atta, in his revised budget in July said that at that point 19 out of 28 state-owned organisations (SOEs) were projecting losses for this year.

When Mr Ofori-Atta addressed Parliament in March this year, he said that the total fiscal impact of Covid-19 is estimated at GH¢9.5bn (2.5% of GDP).

The overall fiscal deficit, considering the expected shortfall in revenues and extra expenditure, is now projected to rise by GH¢25.3bn (6.6% of GDP) to GH¢44.1bn (11.4% of GDP) in 2020, from a previous projection of GH¢18.9bn (4.7% of GDP).

Recently, the Monetary Policy Committee press release noted that for the first seven months of the year, local authorities recorded an overall budget deficit of 7.4% of GDP, which is wider than the target of 7.2% of GDP.

While revenues have come in slightly over target, it was significantly higher expenditures compared to target that resulted in the wider fiscal deficit.

As a result of the ongoing fiscal battle, S&P Global Ratings (S&P) lowered Ghana’s long-term foreign and local currency sovereign credit ratings to B- in mid-September, while the outlook is stable.

In April, the ratings agency warned that the Covid-19 pandemic is hurting medium-term fiscal consolidation plans.

S&P says that the problems originally envisaged for the country have now materialised.

The slowdown in local economic activity has led to weaker tax revenue, while government spending rose sharply due to Covid-19-related support measures.

This has resulted in a much wider fiscal deficit than initially expected.

The ratings agency now forecasts the fiscal deficit to widen to 13.5% of GDP, which is in line with our own deficit forecast of 13.2% of GDP.

According to S&P, the “scope for a sizeable fiscal adjustment post pandemic is likely to be limited”.

Furthermore, the medium-term targets published by local authorities point towards a much slower fiscal consolidation path.

The Fiscal Responsibility Act, which requires government to maintain the fiscal deficit below 5%, is also suspended for the time being.

According to the S&P’s calculations, government debt will remain above 70% until 2023, while interest payments will likely cover half of fiscal revenue.

Although the fiscal shortfall has been fairly covered this year, it might be more difficult to access finance if the deficit remains at elevated levels next year.

The rating action by S&P followed an announcement by Fitch Ratings in August that “the country’s slow fiscal consolidation may add to rating strains”.

The revised budget tabled by the minister of finance incorporated a much wider fiscal deficit than our initial forecast and, for that matter, the consensus forecast.

As a result, we adjusted our fiscal deficit forecast to 13.2% of GDP.

Our projection for fiscal expenditure has been brought in line with that of the revised budget; however, recent statistics point towards even higher overall expenditures for the year.

Despite revenues rising slightly over the first seven months compared to target, we still expect overall revenues to decline by year-end.

We are much more pessimistic on the government debt component, as we expect the debt-to-GDP ratio to remain above 80% over the medium term.

This is mostly a result of a more pessimistic view on economic growth and subsequently a lower nominal GDP base.

Pieter du Preez – Senior Economist

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