Zero deficit financing unrealistic

…IFS warns of risk to bailout programme

Economic policy think-tank Institute for Fiscal Studies (IFS) has reiterated that government’s performance in the three-year IMF programme could face serious challenges over the medium-term, particularly as its pursues front-loaded fiscal consolidation on the back of zero central bank financing for government.

The observation from the think-tank comes in the wake of the Fund programme’s first review, which identified that although it remains on track on all performance criteria, the ceiling on central bank financing to government, were missed.

The deal signed between Ghana and the Washington-based lender aims at achieving a single-digit inflation rate over the medium-term, with the support of government’s fiscal consolidation. The independence of the Bank of Ghana (BoG) is to be strengthened, with central bank financing of government gradually reduced to zero in 2016.

But speaking at a lecture on ‘Ghana’s Fiscal Challenge and the IMF Bailout’ on Tuesday, Prof. Newman Kusi, Executive Director of IFS said: “Strengthening the central bank’s independence is supported, but reduction of the bank’s financing for government to zero in 2016 is unrealistic”.

Previously, the BoG Act required that the central bank’s monetary financing must not exceed 10 percent of the current year’s fiscal revenues. But, consistently, the BoG has not been able to keep to this limit.

In 2012, for instance, domestic borrowing by government amounted to 42.6 percent of total revenues and grants; in 2013 it was 36.3 percent; while in the first three quarters of 2014 it was 14.7 percent.

In 2012, BoG lending to government alone was 13.2 percent of revenues compared to the central bank's operational target of 5 percent; in 2013 it was 6 percent; and in the first three quarters of 2014 it was 10 percent.

Wage bill constraints

An IMF review mission last week told the press that it welcomes government’s commitment to implementing the ambitious fiscal consolidation and structural reforms programme; in particular, addressing payroll irregularitie;, enhancing public finance management and transparency; and liberalising the oil distribution sector.

According to the Fund, economic growth in 2015 is expected to remain around 3.5 percent, with low cocoa and gold production, shortage of power…but increasing hydrocarbon production.

While the IMF revealed that government’s fiscal consolidation was on track as of end-April, even excluding the payment of dividend by Bank of Ghana in March, Prof. Newman Kusi said the fiscal targets are optimistic given the structural weaknesses of the country’s public finance and the steep slowdown of economic growth -- and should also be revised to give more space for policy manoeuvres to the government.

The success of the programme, the Fund said, critically hinges on continued spending moderation -- in particular the wage bill, with stricter control of the payroll being put in place, and renewed efforts to improverevenue collection.

“Making public the strategy for the 2016 budget and wage negotiations consistent with this framework will go a long way in restoring market confidence and lowering financing costs,” the Fund told the press.
Prof. Kusi however stated that serious action is required to deal with the wage bill, since it has been a major cause of government expenditure overruns.

“Although an Inter-Ministerial Committee on Payroll is currently addressing the payroll issues, this is not the first time such a comprehensive cleaning of the payroll has taken place. But anytime the ghost-names are expunged from the system, they resurface. The problem with the public sector payroll management is both systemic and human,” he said.

He called for an overhaul of the payroll management system in order to link public sector pay to productivity, position, and qualification; maintain the competitiveness of public sector incomes relative to the private sector; and determine the optimal number of workers needed to efficiently deliver public services.

“In the short-term, the wage bill can be contained and the size of the civil service reduced by combining attrition with a selective hiring freeze (as is currently the case); (ii) centralising recruitment; (iii) cleaning and performing regular audits of the new payroll system to maintain its integrity; and (iv) avoiding across-the-board salary increases,” he said.

The policy think-tank advocated modernisation of the public financial management system in order to allow public sector officials to manage and at the same time hold them accountable; ensure timely provision of quality information; and eliminate waste and corruption in the use of public resources.