19 February 2013

Ghana: Economy Is Not Working

Photo: UN-HABITAT / Julius Mwelu
A young boy vending wares in Accra.

When the newly-appointed Minister of Finance, Mr. Seth Tekper, appears before Parliament in the next two weeks to present the 2013 budget statement, and to give details of the current health of the Ghanaian economy, the spotlight will be on the spiraling budget deficit which threatens to throw public finances out of gear.

The government closed the year 2012 with a projected budget deficit of GH¢8.7 billion, amounting to 12.1 percent of GDP.

The gaping deficit has confirmed the worst fears of many economists, who had earlier raised doubts about government's ability to continue its much touted policy of fiscal prudence, while fulfilling its numerous campaign promises in an election year.

This spiraling deficit has since earned Ghana a negative rating by Fitch, a global rating agency. Fitch Ratings has announced revision of its outlook on Ghana's credit rating from stable to negative, due to its gaping deficit.

"Fitch Ratings has revised the Outlook on Ghana's long-term foreign and local currency Issuer Default Ratings (IDR) to Negative from Stable, and affirmed them at 'B+'. The agency has also affirmed the Short-term IDR at 'B', and Country Ceiling at 'B+'," the rating agency noted

Fitch mentioned "the severe deterioration in the fiscal deficit to 12.1% of GDP in the run up to the December 2012 election," as a major factor to the downward rating.

According to the agency, the current deficit "is nearly double the government's target of 6.7%, set in July's supplementary budget, and well above the initial budget of 4.8% agreed at the start of the year. The deterioration suggests a serious loss of fiscal control and reduced credibility."

This development on the Ghanaian economic landscape, according to renowned economist Dr. Mahamudu Bawumia, constitutes an unparalleled mismanagement of the country's economy.

"What is more worrying is that this provisional deficit figure excludes some GH¢4.0 billion in commitments and arrears yet to be paid to contractors and other service providers."

It is estimated that the inclusion of this amount would have placed the fiscal deficit for 2012 to a whopping 23% of GDP.

Dr. Bawumia argues that: "The crux of the problem is that government spending increased astronomically to 34.5% of GDP, even though government revenues amounted to 16.1% of GDP (a gap of over 100%) for the year.

He noted that the current deficit of 12.1% of GDP was almost double the budget deficit of 6.5% in 2008, when Ghana was not yet producing oil.

"In 2008, Ghana was not an oil producer, and the global economy was in crisis. In 2012, on the other hand, Ghana was an oil producer facing a favorable external environment for its exports, and yet managed to double the 2008 budget (which this government described at the time as "reckless"), and in the process, achieved what is a truly unprecedented budget deficit in Ghana's history. "

Wage Bill & subsidies take their toll

The government, on the other hand, says the projected deficit for 2012 is as a result of the huge subsidies government had to pay on fuel.

Fuel subsidies cost the government GH¢1.5 billion from 2009 to 2012, and projections are that subsidies alone could cost the government an additional GH¢2.4 billion this year.

Minister of Finance Seth Tekper explained that the huge subsidies of fuel and public sector wage bill have been a major contributing factor to the gaping deficit.

He made these revelations on the sidelines of an investment summit held in Accra yesterday.

Being the largest single expenditure item in the 2012 budget, the public sector wage bill constitutes a major challenge to public spending, due to the implementation of the Single Spine Salary System (SSSS) in 2011.

The Minister explained further that the payment of areas as a result of the implementation of the SSSS policy has been a "second critical factor, which accounts for the slippage that we experienced."

Oil disappoints

Many economic projections had been made on crude oil from the jubilee oil fields, which were thought to substantially cushion the economic fortunes of the country and support critical areas of the country's infrastructural drive.

But, very characteristic of oil and the uncertainties that surround it, Ghana seems to be receiving its first 'baptism' as a producer country. The 2012 budget projected total oil receipts at GH¢1,239.82 million, based on an estimated average oil price of US 90.00 per barrel, and daily production of 90,000 barrel per day.

Production levels at the jubilee fields had fallen below projections due to well malfunction. Projection levels stood 63,000 bpd at the middle of 2012, closing the year with a production rate of around 85,000 bpd, as against the 120,000bpd earlier projected.

According to the Minister, government projections for 2012 suggested that with production levels at 120,000 bpd, the oil companies would have exhausted their oil cost from the capital allowance given to them, but unfortunately, things did not go as expected.

This, according to Mr. Tekper, also contributed to the deficit recorded in the 2012 fiscal year. He, however, gave the assurance that the government was putting in measures to close the gap.

But, Dr. Bawumia says the National Democratic Congress-led government banked its hopes on illusions, knowing fully well that revenue from the oil would not materialise and, therefore, did not come as surprise that with such economic management the budget deficit would increase astronomically to such levels as was currently being witnessed.

"Poor economic management has consequences. Unfortunately, the burden of the inevitable consequences of the NDC's management of the economy is bound to fall disproportionately on the segments of society which are least able to afford it, as prices for petroleum products, transportation, water, electricity (in the face of water and power shortages), school fees, tax increases, expenditure cuts, unemployment, wage pressures, inflation, interest rates etc, shoot up, and non-oil GDP growth slows down.

This reality is already being felt, and will soon be patently obvious for all to see," Dr. Bawumia noted.

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