Seth E. Terkper’s thoughts … Will the COVID-19 costs be another budget “footnote”

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A critical question is whether the exceptional expenditures relating to COVID-19 or Corona Virus will be recorded as mere (a) “footnote”; (b) Budget Appendix item; (c) “below-the-line” item; and (d) isolated from so-called “headline” budget deficit and public debt in Ghana’s fiscal records. If this continues, it will be the fourth year of departing from the all-inclusive approach that Ghana has used since it started streamlining its fiscal records from the late 1980s and 1990s—when consistent fiscal records are available for verification.

 

It will rekindle the debate over whether the Government of Ghana (GOG) has been presenting parallel number to its citizens and others. This significant departure from Ghana’s “all-inclusive” approach to adding all “exceptional” expenditures to the substantive fiscal record. A January 2020 article [Reading IMF Between the Lines] and earlier ones argue that this results in using parallel figures to show impressive and accelerated, yet complacent, pace of fiscal consolidation to citizens while endorsing worse performances to the international community.

 

GOG does not follow recent IMF lead in adding all “exceptional” expenses to arrears, payments, budget deficit, borrowing and public debt. For example, the Statements to Parliament in March and April 2020 to seek approval for the COVID-19 RCF loan gave the fiscal deficit as 4.7 percent. This consistently excludes the financial and energy sector bailout costs or arrears that are footnotes and appendix memoranda in the Budgets. However, GOG endorsed the IMF Board’s disclosure of provisional actual and estimated 7 to 9 percent fiscal deficit, with “of which [o/w]” bylines, in both IMF RCF and Article IV statements.

 

  1. Fiscal accounting under an IMF Program

 

The GOG logic means it will treat the recent IMF’s US$1 billion Rapid Credit Facility (RCF) for “exceptional” COVID-19 expenditures as footnote, appendix, or memo items. The precedents are in 2017 Budget, which did not have an estimate for energy and financial sector arrears or bailout costs. In 2018 and 2019, GOG showed the bank bailout costs as memos and footnotes, not as substantive items, in the Budgets and Public Debt Report, with virtually no links to the dedicated ESLA flows. In the 2019 Supplementary Budget, GOG showed the energy sector cost as amortization (i.e., potential debt service) without increasing arrears.

 

The change from “all-inclusive” fiscal rule, used since the 1980s, occurred under the recent 2014 ECF Program under two (2) governments. The implications for the consistency rule or standard in fiscal and financial accounting include an appearance of treating similar exceptional items under the same Program differently: (a) wage overruns relating to the Single-Spine Salary Scheme (SSSS); (b) Ebola virus costs; (c) impact of two Global (Financial) Crises (i.e., 2008 and 2014) without relief or loan; and (d) two-and-half years of power crisis caused by damage to the West Africa Gas Pipeline—over which GOG did not have any controls.

  1. Contrived deficit, debt, and fiscal consolidation

 

As Table 1 shows, the impressive budget outcomes from 2017 to date are based on a narrow definition of budget deficit or fiscal balances, which shows the exceptional financial bailout costs as an Appendix item.

 Table 1: Fiscal deficit (excluding exceptional expenditures)

 

The narrow deficit and debt basis, and other factors, give impressive pre-COVID fiscal situation but it did not hide a worse performance by showing the true deficit in the Budget.

 

  • Fiscal balances: the narrow and broad fiscal balances in the Budget show substantial differences: 4.8 percent (2017: no bailout provision); 3.9 versus 7.1 percent (2018); 4.7 versus 5.2 percent (2019); and projected 4.7 percent.
  • No bailout costs in 2017 even though ESLA generated about Ghc3 billion in 2017 and, by end-2016, NDC used Ghc250 million to inject cash and restructure Ghc2.2 billion of banking sector costs without loss of jobs and depositors’ funds or extra debt burden.
  • Energy sector arrears as amortization: The 2019 Mid-Year Review and 2020 Budget have two major anomalies: no provision for bailout costs and energy sector arrears added to amortization (debt service) without increasing arrears, borrowing, public debt.

The practice since the 1980s is to add all exceptional costs (e.g., wage overruns due to Single Spine; HIPC and Divestiture flows, etc) to cash or accrued expenditures in calculating the fiscal deficit. The current government has not followed this practice from 2017 to date.

 

  1. Financing the Budget: a problem before COVID-19

 Despite a boost from two (2) more oil fields, the current administration has not shown a better revenue generation or expenditure management record than its predecessor. While oil revenues have quadrupled since 2017, the effect of a sluggish performance of non-oil revenues leaves the peak revenue performance still at end-2015 and 2016 at 17.8 and 15.7 percent of GDP. Similarly, the Minister for Finance has corrected the fiscal “offset” of 2.3 percent. Therefore, as Tables 2 and 3show, the end-2016 expenditure levels will be lower and, therefore, expenditures, deficits, and debt show worse fiscal outcomes from 2017 to date.

Table 2: Revenue and expenditure performance

 

  1. IMF shows worse fiscal balances than GOG

Table 3 shows that the IMF differs from GOG in recent analysis (Article IV and RCF-COVID-19) by including the exceptional costs in fiscal balances and public debt. It shows an elevated deficit position with the energy and bank bailout costs and higher COVID-19 current and projected expenditures—besides 2017 but without provision for exceptional costs.

Table 3: Elevated fiscal deficit or balance position

 

  1. Public debt has not improved since end-2016

 Table 4 shows that the borrowing to finance an expanded expenditure program is taking a toll—ahead of increased borrowing in 2020 to cover COVID-19 and election costs. The risks confronting the country includes committed loans, contingent liabilities and, as noted, off-budget treatment of some expenditures and debt. GOG has not officially revised its estimate of public debt for end-2020 and beyond but IMF RCF shows them as 69 percent (2020) and 67.2 percent (2021)—an upward revision from its December 2019 Article IV estimates of 63.3 and 63.1 percent respectively.

Table 4: Elevated Debt situation

The rising debt and less declining revenue will make it difficult for GOG to meet its debt service commitments promptly. As Table 5 shows, in 2019, the country used over 98 percent of tax revenues to meet two (2) statutory and discretionary commitments: interest and personal emoluments (i.e., wages, salaries, and allowances).

 

Table 5: Total Tax revenue and spending constraints

Sources: Budgets and MOF Website; 2016

 

It is important to note that the use of “broad” and “narrow” expenditures distorts a smooth comparison. On public debt, the Fund notes in its Debt Sustainability Analysis (DSA) on Ghana, in the 2019 Article IV report:

“The financial sector clean -up costs and the materialization [i.e., crystallization] of contingent liabilities in the energy sector in 2018-19 highlight the risk from off-balance sheet liabilities” (emphasis added).

As the Fund notes, these could increase costs, including: bank bailout [4.6 percent of GDP in 2018-19; energy sector [1 percent annually to 2025, in Table 3] costs, after ESLA absorption; guaranteed SOE debt; and 35 percent of PPP costs.

 

  1. Underlying fiscal challenges make COVID-19 a hurdle

The question on proper fiscal treatment is important since, at the request of GOG, the US$1 billion RCF loan is classified as budget support—not conventional Balance of Payment (BOP) support that the IMF provides to central banks (i.e., BOG) to beef up reserves and support the local currency. The Staff Appraisal part of the IMF Board Statement notes (par. 25 page 12):

 

25.    Staff support the authorities’ request for a disbursement under the Rapid Credit Facility [RCF] in the amount of SDR 738 million (100 percent of {Ghana’s} quota]. Given the large fiscal financing gap, staff also supports the request that the disbursement be made directly in theform of budget support.” (some emphasis added).

It continues to emphasize the importance of approving the facility to fill the fiscal gap, of which does not appear to be related to the COVID-19 crisis.

“The disbursement under the RCF would allow to close the fiscal financing gap together with other expected exceptional financing from other multilateral institutions, savings from government expenditure switching and cuts, withdrawals from the oil fund, and additional domestic debt issuances.” (emphasis added).

The toll COVID-19 toll on human and budget or fiscal costs is exceptional, including travel bans, border closures, quarantines, lockdowns, and loss of jobs. The narrative suggests that it cannot be a trivial footnote in history—a fact that includes the loans (e.g., World Bank and IMF), donations, taxes (including petroleum revenues) and debt that we will throw at it.

 

  1. Conclusion

Question is if Ghana’s Budget will also refrain from recent practice and not classify the US$1 billion IMF facility and other loans, drawdown of the Stabilization Fund, and donations as “fiscal footnotes”. The related expenses include personnel protection equipment (PPEs), frontline and other costs in community health facilities, subsidies for utilities, security expenses, and feeding costs. The departure from the “all-inclusive” approach will not serve the narrative well for history.

The term “one-time” cost is meaningless since these substantive expenses have become normal in year, since 2017 and earlier.  Further, the Tables show that estimates of the energy and financial sector costs alone average 1-3 percent annually to 2025. Hence, it is ridiculous to base the national fiscal data on a narrow definition of deficits, financing, and public debt. It leads to the type of complacency that makes a country, with the promise of more petroleum flows in the future, spend those resources and even borrow huge amounts to satisfy unsustainable consumption expenditure programs—often as untargeted social intervention policies.

The writer is the former Minister of Finance

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