Economists cast doubt over govt's ability to cut fiscal deficit
 
Posted on: 2013-Oct-22        
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Economists have cast doubt over the government’s ability to cut the country’s fiscal deficit to nine per cent by the end of the year.

The Head of Research at Databank, Mr Sampson Akligoh, and Mr John Gatsi, a chartered Economist and lecturer at the University of Cape Coast have said that the risk factors such as the shortfalls in domestic revenues and removal of utility subsidies would affect the government’s plan to trim the deficit.

The government had planned to modestly trim its fiscal deficit this year by raising tax revenues from key industries such as oil while avoiding tough spending cuts, despite investor concern over high expenditure and rising debts.

The plan was to pare the deficit to nine per cent of gross domestic product (GDP) from 12.1 per cent in 2012, when spending overrun during an election year and revenues were hit by lower-than-expected oil production.

That deficit target disappointed many economists, who were expecting Ghana to reaffirm its commitment to reach a level around six to seven per cent of GDP - in line with its target for 2012.

Analysts said the three percentage point deficit cut was a step in the right direction but not robust enough to bolster offshore investor confidence in the country’s economy.

Deficit challenges

"It's a huge deficit for any country to be running," Razia Khan, Africa researcher for Standard Chartered Bank said. "The pressure will be on Ghana to change course, and introduce greater spending restraint, or risk deterioration in perceptions of creditworthiness."

But even the modest nine per cent target may likely not be achieved, according to the Databank Head of Research.

“From the way things are going, we are likely to end the year with a minus or plus 10 per cent deficit”, Mr Akligo projected.

Mr Akligo is supported by Mr Gatsi who also doubts the government’s modest fiscal projection of nine per cent by end of year.

Among the government’s first big moves to trim spending was to cut fuel subsidies in February, resulting in a 20 per cent jump in petrol prices at the pumps.

But Fitch Ratings, a day later, revised its outlook on Ghana's credit rating to negative from stable, citing continued worries over accumulating debt.

The economists therefore called on the government to among other things, urgently address the current high unemployment situation, improve the quality of existing jobs, intensify measures to reduce government expenditure and reconsider investing more in the agricultural and industrial sectors through renewed subsides to enhance production and improve government revenue.

The two therefore advised the government to urgently consider broaden its tax base and have a second look at issues such as tax exemptions, corruptions in the Valued Added Tax and Income Taxes, public sector reforms, the size of the public sector and their productivity levels and revisit the issue of the Single Spine Pay Policy (SSPP) and its sustainability.

Expenditure challenges

Ghana's 2013 budget puts total expenditures for the year at about GH¢30.5 billion (US$16 billion), up some 20 per cent from last year, according to Finance Minister, Mr Seth Terkper, propelled by economic growth of eight per cent as oil output rises.

Mr Terkper admitted the fact that the 2013 Budget had some implementation challenges, which included potential short falls, high wage bills resulting from of the implementation of the SSPP, coupled with high interest payments, subsidies on utilities and petroleum, and the need to honour statutory government obligations.

He said these had largely contributed to the increased spending of government, leaving little financial space for expenditure on goods, services and assets.

“As a lower middle income country, this does not only pose a challenge for the achievement of key macro-economic targets, but also has serious implications for economic growth and development”, he said.

He, however, indicated that in recognition of these concerns, the government had put in place various measures to reverse the challenges and generate additional revenue, control expenditure and improve efficiency in public spending, to ensure that the financial targets indicated in the 2013 budget remained achievable.

Rating agencies

Ratings agency Fitch has downgraded Ghana to ‘B’, citing the government’s failure to fully implement its fiscal consolidation plan.

The agency has dropped Ghana from B+, saying: “The government continue to overrun on wages, interest costs and arrears, leading Fitch to expect that the government will fail to meet the nine per cent of GDP fiscal deficit target for this year.”

Ghana’s outstanding bonds include the country’s first dollar-denominated bond, a 10-year note issued in 2007, which on Thursday had a yield of 5.53 per cent.

That’s some way lower than its yield in June, when it hit a year high of 6.98 per cent, having traded for most of the early part of the year below five 5 per cent.

Ghana also tapped the international markets in July for US$750m, but had to pay a higher premium of close to eight per cent, after the talk of reduced appetite for frontier and emerging market debt.

The downgrade by Fitch brings the agency in line with Standard & Poor’s rating of B, while Moody’s has Ghana on B1 (the equivalent of B+).

Both have Ghana on a stable outlook, as does Fitch, which means there should be no further change any time soon.

The B rating from Fitch puts the country on a par with other African nations such as Rwanda, Mozambique, Seychelles, Cameroon and Uganda, but also with Ukraine (widely seen as being close to a balance of payments crisis) and just one notch above Greece and Egypt.

For a country that has supposedly reached middle income status and has been a beacon of democracy in the West African region, that’s not great company.