ANALYSIS: Economic Expectations for 2018

The 2018 Budget and Policy Statement is the second of the NPP government since taking over the reins of government in January 2017.  The 2017 Asempa budget sought to re-establish hope in the Ghanaian economy and give a clear indication of the NPP Government’s economic policy direction.  It set in motion key policy priorities and established key flagship projects aimed at restoring and maintaining macroeconomic stability, boosting overall revenue, promoting private sector-led jobs and wealth creation, boosting agricultural production and productivity, providing quality education, developing leadership, job and creative skills for entrepreneurship.

By the end of the year the Government reported progress on all key macroeconomic indicators: Inflation fell from 15.4% to 11.7%, budget deficit dropped from 8.7% to 4.6%, debt to GDP ratio improved from 73% to 68.8%, import cover of Gross International Reserves rose from 3.5 months to 4.1 months, the value of the Ghana Cedi improved against the major trading currencies and investor confidence increased with a record of more than $4 billion in direct foreign investments in a single year.  On the downside non-oil growth declined from 5.0% in 2016 to 4.8% in 2017 due largely to the subdued private sector credit growth, which led to a significant cut in capital expenditure.

The 2018 budget themed “stabilization to growth: putting Ghana back to work” builds on the achievements of 2017 and is anchored on the medium-term development programme aimed at providing opportunities for growth and job creation. Macroeconomic stability, private sector development and infrastructure development remain key goals of the Government in addition to key programmes such the Akufo – Addo Programme for Economic Transformation, Planting for Food and Jobs, One District One Factory, Electricity Tariff Reform among others. The overall GDP growth is projected at 6.2% in 2018 due to the expected increase in oil production and the deferred FPSO turret remediation project in 2018. To achieve the macroeconomic target for 2018-2021, successful implementation of short to medium term strategic policy initiatives and programs will be executed. These are:

  • Transformation of agriculture and industry
  • Revamp of economic and social infrastructure
  • Strengthening of social protection and inclusion
  • Reformation of public service delivery institution

In our opinion, the GDP growth of 6.2% in 2018, (including oil) is achievable and could be improved particularly through aggressive infrastructure development. It would be important for Government to leverage on the huge investor confidence and appetite for Ghana and partner the private sector through Public Private Partnerships (PPP) to finance projects such as the Gas Master Plan, roads, housing and sanitation projects. The huge investor confidence is coming on the back of an enhanced economic profile of the country following the publicized economic stability, improvements in the macroeconomic indicators and new prospects in oil and gas. We expect the top-tier banks to nurture their interest in the power and infrastructure sectors, more so when some of these banks purposefully sourced capital for this. The multiplier effect of any such capital deployment should boost economic activities. We also note that the Government’s investment and focus on agriculture could provide an impetus for growth, considering that agriculture still accounts for a substantial portion of GDP.

One of the Government’s major challenges in 2017 was revenue mobilization. We believe that the revenue estimate for 2018 remains very aggressive but will require further intensification of tax compliance measures. In addition to intensifying its revenue mobilization efforts, government must consider finding efficient and innovative ways to include the private sector in the provision of these social programmes. To achieve the revenue target for 2018, Government will need to be proactive in implementing additional short-term measures that will ensure tax compliance and revenue collection from the current taxpayer pool, particularly from the informal sector. Government should also leverage mobile payment technology to efficiently boost revenue collection in the informal sector.  The implementation of the National Identification Scheme, the National Digital Addressing System, Tax Identification Number System, and the Presumptive Tax System, among others, as enumerated by Government could contribute towards the revenue mobilization strategy, if implemented effectively. Government should also introduce innovative revenue enhancement mechanisms such as property rates and municipal taxes.  These would require reforms such as changing the cap on borrowing by municipal authorities and a review of the law that gives exclusive mandate to the Lands Commission to value all properties for property tax assessments. We suggest for example that the reforms should allow private property valuers to support the Lands Commission in the valuation of properties for rating purposes to enable up-to-date valuations of all properties in Ghana.  The collection of property rates should also be outsourced to the private sector, which has the resources and motivation to make the needed investments in technology to boost tax collection

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On the expenditure side, we suggest a phased approach to the implementation of flagship projects to avoid the creation of another set of inflexibilities on Government expenditure.  As we have observed, the Government is already smarting under the weight of the huge expenditures associated with the implementation of the Free SHS going into the second year, and the restoration of teacher training allowances.  We believe that well-planned, organized and sequenced implementation is the only way to make these programmes sustainable over time.

However, in the year 2018, certain key decisions and regulations by Government may impact the economy in diverse ways. The central bank’s decision to raise the minimum capital for banks from GHS120 million to GHS 400 million by the end of December 2018 is set to strengthen the banking sector by reducing the probability of financial distress, improving investment efficiency and boost economic growth in the medium to long-term. However, we expect a huge storm prior to the expected “showers of blessings” arising from the recapitalization exercise as banks scramble within the coming months for capital and new alliances that can help them to meet the new minimum capital in a bid to survive beyond the December 2018 deadline.

Efforts on the part of Government to reduce the energy sector debt have been laudable considering that the debt has been reduced to GHC 5 billion from GHC 10 billion using the Energy Sector Levy and the Energy Bond. However, careful consideration must also be given to the impetus towards reduction in electricity tariffs. Considering the fact that the energy sector levy is built into the electricity tariffs, any reductions in tariff will affect the energy debt recovery levy, and may potentially upset debt restructuring efforts.

Government policy under the educational sector seems to focus more on the Free Senior High School (SHS) Programme aimed at ensuring accessibility of education throughout the nation. In this regard we urge Government to pay equal attention to other areas such as primary as well as technical and vocational education, which also contribute to industrialization. Further, while the progress under education is commendable, we urge the Government to support the private sector to tap into the enormous potential of the private sector to impact the economy.  Granting of tax reliefs to privately-owned universities and privately owned senior High Schools is encouraging and should be sustained to help build human capital that the country needs in light of industrialization drive being pursed.

Public-Private Partnership (PPPs) have been identified as one of the alternate options to raise the investments required in bridging the country’s infrastructure deficit. Several PPPs are being considered for various infrastructure projects stated in the budget. However, lack of a PPP legal framework to facilitate private investment is a major drawback. A PPP framework provides a clear legal framework for developing, procuring, and revaluating PPP projects. We urge the Government to make the passage of the PPP bill into law a priority in 2018 to create jobs and advance efficiency.

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The ruling of the special chamber of the International Tribunal on the Law of the Sea (ITLOS) in favour of Ghana in the three-year-long maritime dispute with Cote d’Ivoire will boost the country’s economic fortunes. We believe that the uncertainty associated with the Special Chamber’s moratorium on exploration in the disputed area, which prevented giant oil companies from investing in Ghana’s upstream petroleum sector has been cleared by the ruling, restoring investor confidence, putting upstream petroleum sector back on stream. With this ruling we expect that Ghana’s petroleum sector will experience a boom. We believe that Ghana is going to see a return of the investments suspended by the decision and a lot of interest from major players in the upstream oil and gas sectors.

Over the last decade, mobile phone penetration has grown tremendously. As at April 2016, there were about 36.4million mobile voice subscribers in Ghana, according to the June 2016 Telecom subscriptions report by the National Communication Authority (NCA). While we acknowledge that the penetration rate does not translate into unique phone subscriptions, it still provides a strong indication of extensive use of mobile phones in the country.  The deep penetration of mobile technology in Ghana has made it a great medium for innovation around service delivery. The banking industry is one which has experienced significant impact from innovation around mobile phone technology with the introduction of mobile money as an alternative that complements services provided by established financial institutions.  Since the introduction of mobile money to the Ghanaian market in 2009, it has played a key role in the push for financial inclusion. According to data from the World Bank in 2010, a relatively large segment of the Ghanaian population (44.0%) was excluded from the financial services sector altogether. During this time, access to formal banking services hovered around 34%, with banks creating innovative channels to penetrate the market further. A lot has changed since then.

It is clear that the mobile money industry has come to stay, giving customers more options to choose from, with internet and mobile phone technology driving innovation around the way customers receive and consume various kinds of services. We are of the view that, we are in the middle of a mobile revolution in the financial service industry just as mobile technology is transforming other service industries. The high penetration rate of mobile technology in Ghana, coupled with a large ecosystem of innovators in this area making it a strong medium for innovation for all services, banking included. It is therefore imperative for banks to take a critical look at the many opportunities that mobile technology presents

In conclusion, C-NERGY has faith in the economic programme of the Government to deliver growth and development.  It is our view that the Government is on track towards achieving macroeconomic stability as evidenced by the movement and direction of the macro-indicators since January 2017. However, sustainability of the gains so far and the implementation of various initiatives remain a challenge worth confronting.  We urge the Government to remain focused on revenue mobilization through intensified tax compliance, broadening the tax base, increasing support to the private sector, ensuring sustainable debt management and increased investment in agriculture and agribusiness.

The author is the Director: C-NERGY Ghana Limited

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