IFS reviews 2017 budget statement

At a press conference this morning in Accra, the Institute for Fiscal Studies (IFS) gave its studied opinion on the just released 2017 budget statement of Ghana.

Prof. Newman Kusi, Executive Director, IFS

 

According to IFS, who’s earlier proposals on the albatross Fund Earmarking was seemingly adhered to by the government, the 2017 Budget’s intentions and targets are laudable. However, there appears not to have been appropriate plans and adequate foundations laid for the successful achievement of the intents. The Institute highlighted the need for the government to seek more conducive fiscal and macroeconomic environment in 2017 before the government rolls out its ambitious growth policies in later years.

 

Below is the full text of the Institute’s press statement released to the media after the briefing.

  1. The 2017 Budget Statement has been prepared at a time the economy of Ghana is undergoing a great deal of fiscal and macroeconomic difficulties. The fiscal deficit, which declined to 6.3 percent of GDP in 2015 from 10.2 percent of GDP in 2014, increased to 8.7 percent in 2016 despite the Extended Credit Facility-supported program Ghana is implementing under the auspices of the IMF. For this reason, the total debt to GDP ratio, which had been targeted to decrease, further increased to 73 percent by the end of 2016. In 2016, the government borrowed an amount of GHȻ18.82 billion, domestically and internationally. Thus, the fiscal consolidation process, which seemed to be on course in 2015 following the adoption of the IMF program, has derailed. While one cannot discount overspending induced by the 2016 general elections at a time government revenue was underperforming, generally, the excessive degree of rigidity in the Ghanaian budget is the fundamental cause of the country’s inability to achieve sustained fiscal consolidation.
  1. Due to the derailment of the fiscal consolidation process, the macroeconomic environment that showed signs of improvement last year following 3 years of high instability, has begun to deteriorate again. For instance, in less than 3 months, the Ghanaian cedi has cumulatively lost 8.6 percent of its value to the US dollar to stand at GHȻ4.603 to US$1 on Friday March 10, 2017 from GHȻ4.2077 to US$1 at the beginning of January, 2017. As a consequence of the fast rate of cedi depreciation, there is a high risk that inflation rate, which has recently seen downwards movement after staying high for quite a long period of time, will reverse its course thereby creating the environment for the other macroeconomic variables to also deteriorate.
  1. Also, because of the poor fiscal outcomes and the unstable macroeconomic environment prevailing for the most part in the past four years, real GDP growth rate, which averaged 9.0 percent from 2008 to 2012, has seen a sharp declining trend since 2013. Growth rate of real GDP decreased to 7.3 percent in 2013 from 9.3 percent in 2012. In 2014 and 2015, real GDP growth rate declined sharply to 4.0 percent and 3.9 percent respectively. Provisional data from the Ghana Statistical Service (GSS) put real GDP growth rate for 2016 at 3.6 percent, the lowest since 1994.

The response of the 2017 Budget Statement to the fiscal and macroeconomic difficulties

  1. It is important to point out that the 2017 Budget Statement has recognized the excessive degree of fiscal rigidity as a major cause of the country’s fiscal difficulties and has thus proposed measures to address it. Specifically, the government has proposed to reduce the degree of rigidity in the budget by cupping earmarked transfers (one of the 3 major rigid expenditures in the budget) at 25 percent of tax revenue. This is in line with the recommendations we offered at IFS’ 2017 Pre-budget Forum organized on 13th February, 2017.
  1. The fiscal deficit is projected to reduce to 6.5 percent of GDP in 2017 by sharply increasing total revenue and grants by 33.5 percent, and by reducing the rate of growth in total expenditure (including arrears payment) to 13.7 percent in 2017 from the 22.6 percent growth rate recorded in 2016.
  1. The budget is quite ambitious with regards to economic growth. For this reason, fiscal policy has largely been directed towards accelerating real GDP growth rate. Real GDP growth rate is projected to increase sharply to 6.3 percent in 2017 from the provisional rate of 3.6 percent in 2016. The government plans to achieve this by creating the enabling environment for the private sector, which includes the provision of a number of tax cuts. Also, the government has proposed to direct funding towards special initiatives to help achieve the accelerated economic growth. The special initiatives include One District One Factory, One Village One Dam, Free SHS, One Constituency One Million Dollar, Zongo and Inner City Development, etc.

IFS’ Views on the Government’s policy choices

  1. We at IFS believe that there should be different sequencing of policies. While we agree that accelerated growth of the economy is critically needed, we believe that accelerated growth cannot be achieved in adverse fiscal and macroeconomic environments. Therefore, more conducive fiscal and macroeconomic environment should be sought in 2017 before the government rolls out the ambitious growth policies in later years.
  1. Because macroeconomic stability largely depends on fiscal outcomes in Ghana, stronger fiscal consolidation strategy should be pursued in 2017. Thus, while the projected fiscal deficit of 6.5 percent of GDP for 2017 represents 2.2 percentage points reduction over the 2016 outturn, we believe that the government could have targeted lower deficit ratio to minimize borrowing, which has been budgeted to amount to GHȻ16.75 billion in 2017 (GHȻ12.09 billion in domestic borrowing and GHȻ4.66 billion in international borrowing).
  1. Lower fiscal deficit (stronger fiscal consolidation) could be targeted by directing the earmarked funds above the proposed cup to fund some of the existing or traditional expenditure items, instead of directing them to fund new expenditure items brought onboard by the new initiatives.
  1. Again, substantially reducing the fiscal deficit in 2017 would significantly reduce the rate of borrowing and thus the rate of debt build-ups and help stabilize the economy to create the enabling environment for ambitious growth policies to succeed later.

GB&F

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