MID-YEAR BUDGET REVIEW : Stability, debt, E-levy, IMF, prudent spending

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Finance Minister Ofori-Atta
File photo: Finance Minister Ken Ofori-Atta going to present a budget in parliament

It is yet another important occasion everyone looks forward to. It is a time government accounts for how it has managed the economy for the first half of the year, and tells citizens what to expect for the rest of the year. Yes, it is the mid-year budget review.

This time, what has made it so topical is the country going back for an IMF programme, just three years after ending one – the Extended Credit Facility. So all eyes and ears are ready to see and hear what programmes and projects will be included in the budget, to ascertain whether the interests of citizens are being sacrificed in favour of IMF conditionalities, although government’s Enhanced Domestic Programme with the Fund has not yet started.

In this article, the B&FT, as expected, brings you some concerns and comments experts have, and the solutions they have proffered.

To begin, let’s start with the Association of Ghana Industries (AGI). Its Chief Executive Officer, Seth Twum-Akwaboah, says government must use the mid-year budget review to bring about some level of stability and clarity to the microeconomic environment.

“We all know the challenges we have; high inflation rate, high policy rate leading to high cost of capital, rising energy prices, rising cost of freight and so many things that are destabilising the macroeconomic environment; and because of this, prediction and planning becomes very difficult for industry.

“Therefore, for the 2022 mid-year budget review – which is looking at the rest of this year and perhaps a bit of next year – what we want to see is indication of stability; what is government planning to do in bringing stability. It is very critical that we have stability so that we can plan and predict as manufacturers,” Mr. Twum-Akwaboah told the B&FT.

He spoke in Accra on the sidelines of an AGI event dubbed Captains of Industry Meet Parliamentarians, and said all these indicators need to fall within a reasonable and predictable range if industries are to recover from the current economic downturn caused, in part, by the COVID-19 pandemic and Russia-Ukraine conflict.

Equally important are the plans government intends to implement to boost industrialisation beyond the One District, One Factory initiative.

“We are in this current situation because we import too much; we are a net importing country. So when there are economic shocks outside the boarders of Ghana, because we are importing too much, we import inflation into the country. This is part of the reasons inflation is growing rapidly.

“If we were consuming locally made products, we will not bring that element of inflation into the economy. So, in the budget review we are asking, what are government’s plans for industrialisation as part of the recovery process?” he said.

Apart from wanting key indicators to be brought within a reasonable range, Mr. Twum-Akwaboah believes that a mid-year review should direct more government spending into productive sectors of the economy.

On taxes, he said the AGI through its engagements with government is not expecting new ones. Rather, he believes that some taxes which are not favourable to manufacturers – like the current VAT regime and benchmark values policy that makes imported products cheaper than domestically made alternatives – should be revised.

Since beginning of this year, inflation has been rising at a rapid rate – hitting 30 percent last month, while the cedi lost about 30 percent of its value within the same period. With government not showing any hesitation in borrowing to meet rising public expenditure against falling revenues, Ghana’s public debt is projected to end this year above 85 percent.

Prof. Quartey calls for E-levy review, measures to reduce debt

While the AGI wants practical steps to arrest high inflation, high cost of capital and a fluctuating exchange rate among others, so as to bring about predictability, Prof. Peter Quartey-University of Ghana is looking forward to measures government intends taking to reduce ballooning public debt, as he is convinced this is critical in restoring public and investor confidence.

The professor said the mid-year review must outline practical steps to curb public debt from getting out of hand, in addition to reviewing the controversial Electronic Tax (E-levy) from 1.5 percent to 0.5 percent.

“I expect to see strategies to reduce our debt levels. Not within the year but within the short- to medium-term. In the next four to five years, how do we gradually reduce our debt to sustainable levels?

“The E-levy should be reduced to 0.5 percent, and then we can embark on education to get more Ghanaians to pay so we can shore-up our revenue and plug the holes. For me, those are the two critical decisions I want to see in the mid-year budget review,” he said.

On why the E-levy should be cut down to 0.5 percent, he said at the current rate it is too expensive and Ghanaians are turning to other alternatives. He said this explains why government has so far failed to achieve its projected revenue from it.

“At the rate of 1.5 percent, people are not using it; it is too expensive.  If you make it 0.5 percent, it will make it cheaper and more people will patronise it.

“When you are pricing a product that has substitutes, you price it low so that consumers will not feel the pinch too much. But when you are pricing a product that has substitutes – whose demand is elastic – and you are pricing it so high, I will reduce my consumption.

“I will use the substitutes; I will walk to the bank to pay. I will use my cheque and other means to pay. This explains why we are not raking in the expected revenue. If we had done the right thing; if we had listened to good counsel and pegged it at 0.5 or a maximum 0.75 percent, we would have made a lot of headway,” he said.

Gov’t must signal strict spending control

Senior Economist, Courage Kingsley Martey, says government must signal some commitment to strict enforcement of public financial management (PFM) law in the mid-year budget, as it engages the International Monetary Fund (IMF).

The nation lost in excess of GH¢13.9billion to financial irregularities by its Ministries, Departments and Agencies (MDAs) between 2015 and 2020, according to the latest Fiscal Recklessness Index report by Imani Africa.

The index revealed that despite the implementation of numerous purportedly improving public financial management (PFM) strategies and programmes in the country (the most recent being the Public Financial Management Reform Project 2015 – 2020) – financial mismanagement had worsened progressively.

Commenting on what policies government should focus on in the mid-year budget, the senior economist intimated that under an IMF programme the public financial management law will be the main anchor for expenditure control.

“First of all, cut out wasteful spending. I know this sounds like a cliché, but when we continue to see laxity in the enforcement of the public financial management law (PFM), we can only continue to emphasise the need to enforce our spending control laws,” Mr. Martey said.

“So, it is important for government to commence and get used to the spending constraints imposed by the PFM law,” he emphasised.

Going into a Fund programme, the senior economist suggested, is one way to also create the needed fiscal space, make savings by ensuring value for money, and deploy these fiscal savings to tackle the prevailing economic challenges.

“There are no two ways about that. If you want an IMF programme, you need to show them you’re serious about the fiscal adjustment programme that you present to the Fund for support; and the Fund must see some initial commitment from you even before the programme commences,” he said.

“I want to believe that the IMF may have suggested some policy priorities in the next budget, which would be like an ‘IMF-lite’ programme. This commitment is necessary to prepare the macroeconomic policy framework for starting the actual programme.”

Fiscal Recklessness Report

Compared to the GH¢1.42billion combined irregularities of MDAs between 2010 and 2014, the financial cost of MDAs’ fiscal indiscipline increased more than thirteen times between 2015 and 2020.

Cumulatively, the total financial discrepancies amounted to approximately 3.64 percent of the Gross Domestic Product (GDP) for 2020 and an average of 0.52 percent of yearly GDP over the analysis period, the report noted – with the highest incidence (GH¢5.2billion) recorded in 2018.

The figure translates to about GH¢2.4billion annually over the period; almost double the approximately GH¢1.45billion spent on the flagship Free Senior High School (SHS) annually, and about 35 percent of government’s initially projected receipts from the E-levy for 2022.

Tax and cash mismanagement were the most-often cited factors, accounting for 65.49 percent (GH¢9.13billion) and 21.4 percent (GH¢2.9billion) respectively of the fiscal profligacy in the period under review.

Given these horrific revelations, Mr. Martey thinks enforcement of the PFM law and restoration of using the Ghana Integrated Financial Management System (GIFMIS) can never be overstated.

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