Was FY2018 budget deficit higher at 4.4%, not 3.7%?

Paragraph 25 of the FY2019 Budget notes that the government was on course to meet its “fiscal deficit target of 4.5 percent for the year (3.7 percent in the rebased series)” and that “this will be the second consecutive year this Government has achieved its fiscal deficit target”. We have been disputing this claim and remain skeptical—as in two previous articles where we disputed the use of “offsets” to neutralize part of Ghc7 billion arrears in the 2017 Budget.

Exceptional treatment of arrears

As shown in Table 1, MOF uses an unusual approach to project the deficit of 3.7 percent for FY2018, by adding Ghc2.2 billion “banking sector (bailout) costs” to “footnotes”. Given progress with the public financial management (PFM) reforms, these should be passed through the Accounts Payable module in GIFMIS, our electronic “book of record”. The footnote treatment has a similar effect as the “offset” of Ghc7 billion arrears in FY2016/2017.

Table 1: FY2019 Budget Extracts (Ghc million)

Budget Items (Ghc million) 2018 Budget Original 2018 Revised Budget (Mid-Yr) 2018 Projected Outturn 2018 Program Q1-Q3 2018      Prov        Q1-Q3
I. ABOVE THE LINE  
Total Revenue & Grants 49,401 49,059 46,808 35,599 32,201
Total Expenditure 59,514 59,172 56,965 42,714 41,493
Overall Balance (Commitment) (10,113) (10,113) (10,157) (7,115) (9,292)
 
II. BELOW THE LINE  
Overall Balance (Commitment) (10,113) (10,113) (10,157) (7,115) (9,292)
Net change in arrears  i/ (858) (858) (858) (670) (856)
Overall Balance (Cash) (10,971) (10,971) (11,015) (7,784) (10,148)
Discrepancy   ii/ (0) (0) 1,098
Overall balance (incl. Divestiture & Discrepancy)   iii/ (10,971) (10,971) (11,015) (7,784) (9,050)

Note (i) is arrears brought forward (b/f) plus accumulation less payments; (ii) is discrepancy while (iii) adds both.

Source: Appendix 2A: SUMMARY OF CENTRAL GOVT OPERATIONS (2018)

Since the discrepancy at end-Q3 of FY2018 is positive and unusual it makes the Overall Balance (cash basis) lower than the Overall balance (commitment basis), eliminates it the end-December 2018 provisional outturn, and increases the fiscal deficit.

Table 2: Budget 2019 Memorandum [Footnote] Items (Appendix 2A)

III] Nominal Budget Items (Ghc mill.) 2018 Orig 2018 Rev 2018 Prov 2018 Prog 2018 Prov
Budget Budget Outturn Q1-Q3 Q1-Q3
Overall Balance (cash, discrepancy) (10,971) (10,971) (11,015) (7,784) (9,050)
Balancing item: Financial sector cost  iv/ (2,201) (2,201) (2,201)
Overall Balance (cash, discrepancy, and financial sector cost) (13,172) (13,217) (9,985) (9,050)
GDP Nominal (GDP)  
Overall GDP 298,699 298,699 298,699 298,699 298,699
Non-oil GDP 285,921 285,921 285,921 285,921 285,921

 

Table 2 (note iv) is a significant footnote since it shows it omits tje Ghc2.2 million from total arrears “below-the-line” in Table 1. This is exceptional since it should increase “net change” in arrears to Ghc3,060 million, overall balance (cash, discrepancy, and financial sector costs) to Ghc13,217 and the fiscal deficit of 3.7 percent to 4.4 percent of GDP.

Table 3: Budget or fiscal deficit (percent of GDP)

IV. BUDGET DEFICIT (% of GDP) 2018 Original 2018 Rev 2018 Prov 2018 Prog 2018 Prov 2018 Prov
a) Above the line (cash basis) Budget Budget Outturn Q1-Q3 Q1-Q3 Non-oil
Overall balance (commitment) (3.4) (3.4) (3.4) (2.4) (3.1) (3.6)
b) Below the line (cash plus arrears)    
Overall balance (cash) (3.7) (3.7) (3.7) (2.6) (3.4) (3.9)
Overall balance (cash + discrepancy) (3.7) (3.7) (3.7) (2.6) (3.0) (3.9)
c) Footnote (overall plus financial cost)    
Discrepancy 0.0 (0.0) 0.0 (0.0) 0.4 0.0
Overall balance (cash + discrepancy + financial cost) 0.0 (4.4) (4.4) (3.3) (3.0) (4.6)
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Treatment of past exceptional arrears

The Gh2.2 billion is large bit its exceptional treatment offends the consistency rule or convention in financial and fiscal accounting. Some past examples buttress the point:

  1. Single-spine salary scheme (SSSS) arrears: Between 2011 and 2014, the Mahama and Mills governments were saddled with huge SSSS arrears. After the Ho Forum, about Ghc4 billion, over 70 percent of tax revenues, were disclosed and paid over several years under the current IMF ECF Program.
  2. Subsidy arrears: A recurring utility, petroleum and other subsidy arrears that resulted in liberalizing prices in 2015 were huge but added routinely to commitments by successive PNDC, NDC and NPP administrations. The alternative to budgetary allocation was passage of the Energy Sector Levy Act (ESLA) to clear the huge VRA and energy sector debt that weighed heavily on our banks.
  3. Financial sector costs: Similarly, past arrears of foreign exchange losses and bailouts were added to arrears or public debt. Hence, the current “bailout” costs are fiscal and monetary policy choices that should not dilute our fiscal rules on arrears or public debt.

The inclusion of “bailout costs” in Appendix Tables (2019 Budget) to make material and unusual changes to our fiscal rules is new, from fiscal records available since FY2000. The unusual approaches started in the FY2017 Budget, presumably on the blind side of domestic and foreign fiscal oversight institutions.

Recap of FY 2016 “Offset” of Ghc 7 billion Arrears

The other breach of fiscal rules uses “offsets” to neutralize part of the Ghc7 billion “arrears” that the 2017 Budget (par. 7/8) stated as unpaid in FY2016. As Table 4 shows, this offset—and change in end-period “cut-off” rules discussed later—increased the deficit to 10.3 percent of GDP—about 5.6 percent (new basis).

Table 4: Cash Accounting Portion of Fiscal Table

Budget Items (Ghc mill.) FY2016 BUDGET FY 2016 (2017 BUDGET) Prov 2016 Budget 2017
Budget [Original] Budget [Supplmt] Budget Revised Budget Prov. Outturn Fiscal Tables [W-site]
1 2 3 4 5 6 7 8
Total Revenue & Grants     38,038     37,889 38,038   37,889  33,678    33,678 44,962
 Less Total Expenditures  i/      43,505     43,985    44,131   43,983   51,126     51,884 54,395
 o/w Other current expenses       9,776      10,615   10,403   11,242   10,255     10,255     10,255
 o/w Other outs’ding claims  ii/ Na Na Na Aa 5,036 5,036
Refunds 627    
Deficit (5,467) (6,096) (6,093) (6,094) (17,448) (18,206) (9,434)

 

The 2018 and 2019 Budgets exclude further end-2016 data but we use the Fiscal Tables from MoF’s website to augment the information in making the following observations:

  • the first partial “offset” (not payment) of Ghc5.04 billion of “arrears” instantly lowers the deficit from 10.3 percent to 7 percent in the same 2017 Budget;
  • the “accrual” item of Ghc5 billion in the “cash” section of a fiscal table instantly (a) reduces the Ghc7 billion “arrears” to Ghc 2 billion; and (b) increases the deficit to Ghc17 billion—for both FY 2016 and FY2017 in the same 2017 Budget.

Table 5 shows the “accrual” or arrears portion of the fiscal tables where the fiscal authorities make the second “offset” entries, including the following observations:

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Table 5: Arrears shown as positive

Budget Items (Ghc mill.) FY2016 BUDGET FY 2016 (2017 BUDGET) Prov 2016 FY2017
Budget [Original] Budget [Supplmt] Budget Revised Budget Prov. Outturn Fiscal Tables [W-site] Original Budget
1 2 3 4 5 6 7 8
Overall bal. (commitment) (5,467) (6,096) (6,093) (6,094) (17,448) (18,206) (9,434)
Non-Road/Cl’rce (net change) (2,313) (2,313) (2,313) (2,313) 2,715 2,598 (3,743)
o/w Offset (positive) item  iii/ 5,035 5,035
    Clearance of Outs. Cmtm (2313) (2940) (2313) (2313) (2320) (2437) (3743)
Overall bal. (cash) (8,407) (8,409) (8,406) (8,407) (14,733) (15,608) (13,176.5)
Discrepancy 1,587 1,686
Overall bal (incl. Dvst&Discrp) (8,407) (8,409) (8,406) (8,407) (13,146) (13,922) (13,177)

Note (iii): Total of umpaid commitments (Ghc4272 m) plus Outstanding payments (Ghc743 m)

  • the administration chose to ignore our point that the purpose of the Ghc7 billion is to move our fiscal regime further to “semi-accrual” accounting rules under the GIFMIS project (ref: FY2017 Budget Guidelines);
  • MOF did not “carry forward” the Ghc5 billion to FY2017—as is the convention in the accrual section of the fiscal tables; and
  • “financing” remains at “post-offset” level of Ghc13,922 billion for FY2017 and lower provisional outturn of Ghc12.887 billion (against a budget of Ghc13,175) for FY2018 (ref. Appendices 3A and 2A of FY2017 & 2018 Budgets).

These are significant changes from the past, especially, the Mahama administration’s 3-year plan to clear the single-spine wage and subsidy arrears under the 2014 IMF ECF Program—also a condition for budget support by the World Bank, AfDB and Development Partners (DPs).

Conclusion

As a result of these discretionary changes, the government noted that it had paid off the arrears and reduced the deficit from 10.3 percent in 2017 (revised in the 2018 Budget to 9.3 percent) to 5.6 percent. Yet, there are announcements of major plans to clear these same arrears, including the possible of “factoring” to discount the amount paid to contractors and suppliers. It is important that these payments are passed through the GIFMIS Accounts Payable module to regularize all past offsets and footnote entries in our fiscal data.

 

Besides the “footnote” and “offset” approaches, there is the departure from the end-period “cut-off” rules for weekends and holidays to reverse the payment of interest from FY 2017 to FY2016. The inconsistency is clear because both FY2017 and FY2018 fell on weekends and there was no mention in the FY2018 or FY2019 Budgets that the government had applied the rules to itself.

In an era of Fiscal Responsibility laws and rules, we must respect the consistency rule in fiscal and financial accounting in recording fiscal data. We must defend or stop changing time-tested fiscal rules—cash accounting, as complemented by given methods for calculating and adding arrears or commitments. We must use the impending Regulations for the Public Financial Management Act (PFMA), 2016 (Act 921) to remove the power to make discretionary changes to our fiscal rules.

The writer was the immediate former Finance Minister

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