- DDEP’s success sets positive tone for fiscal landscape
- Threats of shocks loom
There is no room for the impending 2024 budget to fail in firming-up efforts toward consolidating macroeconomic gains and ensuring fiscal responsibility, market analysts have warned.
Although macroeconomic conditions have improved, there is general agreement that the economy is still at risk of further decline due to both external and internal shocks.
“We maintain that the macroeconomic gains are fragile and highly susceptible to renewed domestic and external shocks. Thus, we expect the 2024 budget to reinforce strategies to sustain these gains toward entrenching fiscal discipline, restoring debt sustainability and, ultimately, regaining market access,” GCB Capital highlighted in a note on the subject.
This comes as other market observers are anticipating a significant enhancement of the country’s fiscal landscape on the back of a successfully concluded Domestic Debt Exchange Programme (DDEP), while awaiting similar operations for external debt.
According to Databank’s review of the fiscal position, completing the domestic debt restructuring process is expected to result in substantial interest savings, contributing to effective expenditure management.
Databank’s assessment indicates a positive revision of the fiscal deficit target to between 4.5 percent and 5.5 percent. If realised, it will represent a significant reversal of the 2022 deficit – which stood at 11.8 percent of gross domestic product (GDP) on a commitment basis.
This will be in addition to interest savings from the debt restructuring anticipated to be around GH¢63billion in 2023, a crucial step in steering the country toward a healthier fiscal position.
“We revised our fiscal deficit target toward 5 percent ± 50 bps as interest savings from the completed domestic debt restructuring process, which will aid in containing government expenditure,” Databank stated in its quarterly review.
Government’s commitment to the DDEP has already yielded positive results, with approximately GH¢113billion of local currency bonds tendered for new bonds. Robust investor participation was also witnessed in offers to exchange cocoa bills and USD-denominated Treasury bonds.
Apakan Securities, in its assessment of the nation’s fiscal performance and outlook, singled-out the positive impact of government’s fiscal adjustments under the International Monetary Fund (IMF) programme.
The first-half figures for 2023 reported a nominal growth rate of 41.8 percent year-on-year in total revenue and grants, reaching GH¢59.3billion. Although slightly below the target, this growth was attributed to an increase in non-oil tax revenue.
“The 1H-2023 fiscal figures reported total revenue and grants amounting to GH¢59.3billion. While this fell short of its target for the period, it translated into a nominal growth rate of 41.8 percent y/y compared to 1H-2022, boosted by growth in non-oil tax revenue,” highlighted Apakan Securities.
Government’s expenditure fell by 26.3 percent to GH¢ 68.5billion. This was primarily attributed to capital expenditure containment, coupled with positive impact from the DDEP and suspension of external debt services, resulting in a sharp decline for interest payments.
Tax efficiency, as measured by the value added tax (VAT) to total revenue ratio, has exhibited positive trends; rising from 16.87 percent in the first quarter of 2021 to 19.2 percent at close of the2023 mid-way point.
This reflects the impact of VAT tax policies, including an increase in the VAT rate and implementing the e-VAT. Additionally, fiscal liquidity ratios have demonstrated strength – with a significant reduction in interest payments-to-total revenue ratio and positive shift in domestic and external service-to-total revenue ratios.
The overall budget deficit notably narrowed to GH¢10.34billion, a marked improvement compared to the programmed deficit of GH¢35.5billion for the period. This positive fiscal performance is expected to set the tone for Ghana’s economic trajectory in the coming quarters.
“We expect Ghana’s fiscal operations to benefit significantly from interest savings on the debt restructuring, ” Databank further stated, echoing the sentiments of several financial analysts anticipating a positive turn for Ghana’s fiscal landscape in the near-future.
The generally positive outlook has been moderated by delays in accessing the second tranche of US$600million from the IMF. This delay has been ostensibly attributed to inconclusive negotiations over external debt restructuring. Additionally, there have also been delays with raising some US$800million in cocoa syndicated loans. Nonetheless, the consensus is that there is no immediate cause for worry.
Only last week, Fitch Ratings upgraded the nation’s Long-Term Local-Currency Issuer Default Risk (IDR) to CCC from Restricted Default (RD), citing successful completion of the DDEP. The agency sees the debt restructuring programme as normalising relations with local bond investors.