The need to guard against Political Business Cycle in 2020 – a critical look at 2019 revised budget

Contrary to the revised budget, total revenue and grants is not projected to fall but rather increase by GHC 90 million in nominal terms if the double entry of retention is taken out. The retention of internally generated funds is projected to fall by some GHC 100 million, which could mean that the GoG is planning to keep GHC 100 million of IGFs or total IGFs is expected to fall by GHC100 million.

Most of the shortfall in total revenue and grants can be attributed to the underperformance of trade taxes – import duties and Levies, Import VAT and NHIL – of some GHC 1,061 million. Partly a reflection of the initial impact of the reduction in Benchmark import values which form the base for the assessment of customs duties, tariffs, fees and levies.

Other or non-tax revenue (lodgement) together with ESLA proceeds, is expected to fall short by some GHC 286 million. This is even despite an expected increase in ESLA proceeds of GHC 163 million. The expected underperformance of lodgement is as a result of expected low collections from almost all its components. For instance, the Government of Ghana (GoG) is projecting not to collect the GHC 150 million of property tax it had earlier budgeted for. The Luxury vehicle tax is expected to underperform with a collection of GHC 52 million out of a GHC598 million earlier budgeted for. The tax has been repealed after it only generated GHC 52 million in the first half of the year compared to a projection of GHC 243 million.

This could be the main reason for its repeal contrary to the excuse of listening to the plight of Ghanaians. It is worth noting that our revenue performance have consistently been below the Sub-Saharan Africa (SSA) average. Though the gap is being narrowed it is more on the back of a substantial fall in the SSA average rather than a substantial increase in revenue performance in Ghana (see Figure 1).

Prior to the completion of the Fund program, GoG painted a more optimistic picture of a higher revenue collection compared to what it presented to parliament in the revised budget. It appears the GoG did not communicate its intended retreat in the implementation of the luxury tax, property tax and the reduction in the benchmark import values to the IMF at the completion of the Fund program. In fact, GoG had indicated to the Fund at the time that the full impact of 2018 mid-year budget review measures along with enhanced tax compliance and revenue administration reforms augmented by an exemption bill – which will remove some existing exemptions and tighten the exemption granting process – were going to lead to revenue increasing by some GHcC1,525 million compared to the GHC 90 million reported in the revised budget (IMF, 2019, box 4, page 16). It is worth noting that there has however been an article IV review since the completion of the Fund program by the IMF.

Mobilizing more revenue has to be a priority for most developing countries like Ghana. Raising revenue is not an end in itself but is a way to create fiscal space, increase priority spending, and reduce dependence on budget support, which is not without limits. A key component of any tax system is the manner in which it is administered, which affects its yield, its incidence, and its efficiency. “No tax is better than its administration, so tax administration matters a lot” (Bahl and Bird, 2008, p. 1).

The Fund in its latest report points to weaknesses in GRA and its history of delaying in implementing revenue administration measures.

As at 2018 the IMF reports that records at the GRA show that registered individual taxpayers number less than one million five hundred thousand although the economically active population in the formal sector is estimated at more than six million. In addition, a significant number of taxpayers fail to file returns, with average filing rates falling below fifty percent. The problem with tax revenues is more of tax administration than tax increases.

Total expenditure increased by some GHC 1,270 million mainly due to increase in expense (GHC 2,090 million) with capital expenditure projected to fall by some GHC 820 million owing to a GHC1,215 million fall in foreign financed capital even though domestic capital is projected to increase by some GHC 395 million. Wages and salaries are expected to increase by GHC 330 million but social contributions are expected to be reduced by the same amount leading to compensation of employees remaining unchanged from the earlier budget projection. The reason for this increase has not been explained as its treatment will suggest they are exempted from the payment of SSNIT. The GoG attributes the increased expenditure to upward adjustments to interest payments reflecting partly the effect of a higher exchange rate than programmed, as well as higher net domestic borrowing to meet some emergency security and energy expenses in the first half of the year. Additionally, upward adjustment in Goods and Services in the second half of the year are to meet critical expenses on security among others.

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Since the signing of the IMF programme, any shortfall in revenue is dealt with by more than a proportional cut in expenditure in other to meet deficit target. The usual culprits as CEPA chooses to refer to these expenditures were the goods and services, grants to other government units and domestically financed capital expenditure. For the first time since 2015, CEPA’s usual culprits for revenue cuts did not experience expenditure cuts. This may be due to the small increase in revenue. The difference this time is that expenditures are not expected to increase in the same proportion as the increase in revenue. Rather they were increased by some thirteen folds of the expected increase in revenue.  In my view the expenditure envelope increases also reflects the full implementation of the government’s flagship programs.

GoG plans to clear GHC 730 million of arrears in 2019. Over the years, GoG has been using the accumulation of arrears as a financing option – by deliberately not honouring domestic payment obligations. As these arrears begun to have spill over effects on the financial sector, GoG is being forced to reconsider its use as a financing option – bearing in mind recent happenings in the banking sector. It started with SOEs in the energy sector facing significant challenges then an audit was conducted by Ernst and Young (EY) in 2017 which estimated the sector’s debt at 13 per cent of GDP as at end- June 2016 (over 50 percent SOEs’ debt to banks, 30 percent arrears to suppliers, and 17 percent inter- sectoral debt). GoG at the time admitted to poor quality of financial data and missing data undermining debt validation (IMF, 2017, Sep). This led to the AG commissioning an audit of unpaid claims incurred till 2016. At the time total unpaid claims from 2016 were worth GHC5 billion. GoG in 2017 intended to clear only those approved in the GIFMIS (GHC 1.6 billion) and not repaid in Q1 2017 – those regarded as arrears under the Fund program. The validity of the remaining GHC3.4 billion were assumed to be uncertain as they bypassed the GIFMIS. At the end of the audit, the estimated stock of outstanding arrears was GHC 3.9 billion at end-2017 (factoring in the audit results and arrears repayment in 2017). The government adopted a new three-year arrears clearance strategy, starting with the payment of GHC 858 million in 2018 and the remaining GHS 3 billion over three years (2019-2021). According to the GoG, claims of the private sector was going to be prioritized (IMF, 2018).

The GHC 730 million projected to be cleared in 2019 is below what was expected in GoG’s arrears clearance plan – GHC 1,000 million. In fact, the pace of arrears clearance would have to be stepped up considering the problem of non-performing loans in the banking sector. Especially when some of the insolvent banks have insisted that they are owed funds by the GoG through contractors who have sourced loans from their facilities. Also, if GoG expects banks to reduce lending rate in line with the historical fall in the policy rate and also to aid GoG’s intended development process, then the current pace of arrears clearance is not encouraging.

The deficit (without the cost of cleaning the financial sector) is projected to increase by some GHC 1,178 million (0.3 per cent of GDP) in relation to the budget projection. It is also GHC 1,788 million higher than the projections by IMF at the time of completing the program. This points to the fear of GoG blowing the budget due to the lack of an agency of restraint or the political business cycle. A higher deficit will mean that GoG will have to borrow to finance the deficit.

Therefore, a higher deficit going into the future will mean a higher propensity to borrow either externally or domestically. In my view, the cost of cleaning the banking sector should be added to fiscal table as GoG bonds are being issued to cater for the excesses – just like the energy bonds in 2017. This will bring more transparency to fiscal reporting and also serve as a source of restrain in ensuring we don’t pile up more debt. The cost of the clean-up including potential recoveries is estimated at GHC 15, 302 million – GHC9,802 million for 2018 and GHC 5,500 million projected for 2019 (IMF, 2019).

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The tendency of GoG not to be transparent with the debt and fiscal position is well documented. In the just recent past, the MOFEP itself and some MDAs have flouted the PFM law and transacted operations outside the GIFMIS. Under the PFM law, only expenditures in the GIFMIS are recognized as commitments of government and hence in the then IMF program. By transacting government operations outside GIFMIS, the government claims a capacity to achieve any deficit target it desires. When revenue projections prove over-optimistic and unrealizable the government simply lowers expenditure limits in the GIFMIS, and thus achieves (even overachieves) the deficit targets and without the accumulation of new payment arrears. It took a change in government for such arrears to be discovered and subsequently investigated and verified by the Auditor General in 2017. This is after CEPA’s analyses over the period found no such government capacity and questioned the credibility of such ‘favourable’ reviews by even the IMF.

Government’s financing needs remain sizable and reliance on non-resident investors is high. The deficit is expected to be financed mainly from domestic sources with a withdrawal from the oil fund. With the exception of the BoG, all domestic sources are expected to contribute more to financing the deficit with most of the funding coming from the non-banking sector. The expected shortfall in foreign financing is mainly due to an expected increase in amortisation and a scale back in project loans. This is despite huge receipts from Eurobond issuances than earlier expected – GHC 4,027 million. This does not include portions of the Eurobond used for debt management. As global financial conditions are becoming tighter, reduced external financing would erode foreign exchange buffers, and possibly put pressure on the exchange rate, and inflation. This could result in higher debt service and refinancing risks – with un-hedged dollar exposures.

Figure 3 shows the evolution of GoG debt – the analysis Includes the energy bond in 2017 and the cost of cleaning the banking sector for 2018. The debt ratio has benefited from the minimising effect of both the GDP (rebasing) and the effective interest with most of our debt being concessional in nature and also debt forgiveness (HIPC). It is worth noting that with the exception of 2010, the interest rate has started having an increasing effect on the debt ratio in 2018. The increase in the change in debt in 2018 can be attributed to the cost of cleaning the banking sector which is estimated to be approximately 3.3 per cent of GDP. The exchange rate on the other hand have always been an increasing source of the increase in the change in gross debt. Though the increasing effect of the deficit (primary balance) has somehow been tamed, it still shows signs of re-exerting its increasing effect.

The primary balance is expected to be positive (1.1 per cent of GDP) if financial sector costs are not included. This notwithstanding the expected primary balance is some GHc 226 million lower than earlier budgeted. Oil revenue is some GHC 246 million higher than earlier budgeted but GHC 386 million lower than projected by the IMF at the end of the last review of the program.

As CEPA has warned in the past, GoG must demonstrate enough resolve not to blow the budget as we approach the election year. As we have exited the IMF program there is no agency of restraints and any attempt to signal fiscal indiscipline will be accompanied by the immediate withdrawal of financial support by DPs and weaken investor confidence leading to significance exchange rate pressure and a higher risk of debt distress. A possible downgrade by rating agency cannot also be overlooked. From the revised budget figures, it is evident that spending pressures could escalate and undermine recent progress. Political pressures to spend more and tax less are evident. Considering a tightening financing sources due in part to reforms in the banking sector, excess spending may result in further arrears accumulation (and increasing NPLs) and strained public service provision.

The writer is with the University of Szeged, Hungary

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