Ghanaians should prepare to face further wrangling in 2015 as symptoms of financial distress are quite imminent. Government in the beginning of 2014 promised to apply austere fiscal discipline to reduce fiscal deficit and achieve greater economic targets within the 2014 fiscal year and beyond: unfortunately, it failed.
Despite an improvement in public financial management, consistent negative fiscal surprises have eroded investors’ faith in Ghana. As the country awaits the IMF programme to support policy credibility and bring sanity into our structure, it is important for government now to show commitment in cutting down expenditure. It has become mandatory that public sector salaries will be made a key target in 2015 after government expressed worry over spending 70% of domestic revenue on public-sector salaries.
Ghana’s public debt stock as a percentage of GDP has been rising over the years. Currently, Ghana runs double-digit deficits as a percentage of GDP.
Implementation of an ambitious multi-year public-sector salary reform that had a particularly pronounced impact on the wage bill since 2012, subsidies on utilities and petroleum, huge accumulated arrears, and the over-60% debt placed Ghana in very tight situation. Unfortunately, efforts to stopper the gap by using short-term financing escalated the problems.
Following this, the pace of fiscal reform in 2014 was also disappointing. In 2014, debt service payments were approximately 66.6% higher than budgeted. Given the extent of overruns in debt service payments, market confidence was rapidly receding.
Considering the poor fiscal reform implementation by government it was estimated that pressure was likely to build further in 2015, with debt service costs becoming even more problematic. It increased from 36.3 percent in 2009 to 48.03 percent in 2012 and further to 55.53 percent in 2013.
As at end-September 2014 the debt stock stood at 60.8 percent, largely on account of an increase in external net disbursements for infrastructure projects and net domestic issuance, and the depreciation of the cedi.
Provisional public debt stock as at end September, 2014 stood at GH¢69,705.90million (US$21,733.51million). This was made up of GH¢40,644.15million (US$12,678.62million) and GH¢29,041.75million (US$9,054.89million) for external and domestic debt respectively.
Ghana in 2014 was reported as highly risky after downgrades by rating institutions. Ghana won the accolade as one of the leading countries with higher yields on its local- and foreign-currency debt. The 5Y local currency bond yield reportedly reached 27% in March in the secondary market, but dropped to end the year at 26%.
The high level of yields and the negative ratings from Moody and Fitch prompted authorities to cancel a planned primary auction. In December, the yield on the 91-day T-bill reached 25.81%. Investors have demanded higher premium to take on Ghana’s high risk. The yield on the Ghana 2023 Eurobond, issued last year, has spiked to over 9%. The 182-day is likely to end the year at 26.41%.
Unfortunately, Ghana recorded the highest inflation of 16.3 in the month of October since March 2010 and it’s estimated that end of year inflation will be 17.5%. Inflation kept rising throughout the year. CPI inflation accelerated to 14% y/y in February, well above the BoG’s target of 9.5% +/- 2ppt. This high rate could affect the ability of consumers and business to spend, thereby reducing government tax revenues.
Unfortunately, the debt owed the Bulk Distributors Company (BDC) has forced government to increase petroleum product prices in the country — raising lots of agitation by consumers. Expectations were for government to apply the automatic adjustment formula as the price of crude oil on the international market was falling. This has contributed to higher prices.
Unfortunately, a 200bps rate hike by BoG in November — taking the prime rate to 21% — was largely ineffectual in attracting new capital inflows to Ghana. This was largely due to negative investor sentiments due to cedi depreciation and the country’s fiscal outlook. Since cedi depreciation was one of the main drivers of a spiralling inflation rate, with the current stabilisation end of year inflation might be 17.2 +/-2.
The Ghanaian cedi (GHS) depreciated rapidly, touching 3.9 as at the end of October from 2.30 to the US dollar at the beginning of 2014. Much of the problems were blamed on the Bank of Ghana (BoG) measures aimed at restricting the demand of FX, and a clampdown on dollarisation. This led the FX market shortage to rather plummet with a market shortage estimated at US$2.2bn.
Clearly, when the Euro bond and the cocoa syndication loan were successful it brought back the level of consumer and business confidence to positive — but that was just a short-term measure. The trend of high demand for FX preceding the first quarter of every year is quite enough a learning curve for BoG. Currently, it is estimated that the FX market will be cleared by 1Q 2015; the effect thereof is the GHS will likely come under even greater pressure.
Although there seems to be little Ghana can do at the moment, government economic policy seems to proffer some solutions — unfortunately its dependence on the IMF intervention could be a disturbing factor.
The medium-term outlook still has significant positives. Ghana’s share of oil revenue will increase. New oil discoveries should boost output in the coming years. Production from the TEN oilfields is due to begin by 2016. The completion of the Atuabo gas infrastructure is significant to promising eventual cheaper power supply. But how Ghana will get out of these near-term challenges is what matters now.
Growth momentum appears to be slowing, potentially worsening public debt ratios.
The Ghana Statistical Service (GSS) has revised the GDP data based on improved data and methodology, among others. This notwithstanding, in October 2014, the GSS released provisional GDP data for the year based on available information as at the end of June 2014.
According to the release, the economy is estimated to expand by 6.9 percent, down from a revised target of 7.1% and the 2013 growth of 7.6%. The slowdown was blamed on declining gold output and a maintenance shutdown of the Jubilee Oilfield.
Momentum in other parts of the economy was insufficient to compensate for this slowdown. If Ghana continues to experience power shortages, this will dampen growth for 2015. Room for capital expenditure is likely to be squeezed.
However, there seems to be a recovery in the medium-term, reflecting new oil and gas production — but this will be from a weaker base. Given its worsening debt profile, Ghana’s revenue-generating efforts will receive less investor attention. In this regard, the 2014 Budget targetted a reduction in fiscal deficit from 10.1 percent of GDP in 2013 to 8.5 percent of GDP in 2014.
However, due to both domestic and global economic developments, the deficit target for 2014 was revised to 8.8 percent of GDP in the 2014 Mid-Year Review document.
Ghana, in its effort to achieve the fiscal objectives while addressing the nation’s fiscal challenges, introduced a number of revenue and expenditure measures to complement the fiscal measures introduced in 2013. Government increased the VAT rate, increased withholding tax on rent for commercial properties, and increased the withholding tax on management and technical services, and ensured more effective application of the communication service tax.
Its expenditure control using payroll management measures such as payroll audits, Electronic Salary Payment Voucher (E-SPV) system to reduce the incidence of ‘ghost’ workers on government payroll, deepening of the GIFMIS to control commitment, deployment of the HRMIS on pilot basis, and a regular adjustment of utility and petroleum prices — though supported by exposing further misappropriation in government expenditure patterns — was not significant enough.
Both revenue and expenditure were below their respective targets, the shortfall in revenue was lower than the shortfall in expenditure, and this resulted in a fiscal deficit of 5.9 percent of GDP (cash basis), against a target of 6.4 percent. This compares to a deficit equivalent to 8.1 percent of GDP for the same period in 2013.
This is unfortunate, as the rise in Ghana’s revenue-to-GDP ratio since the 2010 GDP rebasing has been impressive. Revenue collection was an estimated 18% of GDP in 2013, up from only 13% in 2009. But spending increased much faster, clouding the improvement.
Moving into 2015, government along with the BoG should plan adequately to deal with the FX market pressures that might erupt in the first quarter of the year. The BoG should find ways to eliminate the market shortage of FX during the first months knowing that demand is likely to move up, which could spur investors’ participation in the local markets. The best advice we can offer is to allow the market forces to find their own clearing levels.
One negative impact on the economy is the continuous increase in yields on short-term debt, which not only threatens Ghana’s debt sustainability but is also collapsing the private sector. Ghana should allow foreign investors to buy short-dated debt instruments and should not restrict foreign investors to longer-dated maturities. If debt service costs rise faster than nominal GDP, Ghana could find itself in a debt-trap.
It should also persist with efforts to lengthen its yield curve, even if this means issuing smaller amounts of longer-dated debt and reopening the same maturities at a later stage. Over-dependence on very short-term financing was a key contributor to current problems.
The power problem should be curtailed in the 1Q 2015 to halt the lower business confidence emerging within the business community. It is important to engage the IPP and ensure the Electricity Company of Ghana improves performance by employing better systems of operations. Immediately, the Atuabo gas plant should be used at full capacity to help sustain generation capacity from VRA and the Bui Dam.
By Samuel Kofi Ampah
The writer is the Head Research Groupe Nduom