IMANI's Critical Sectoral Review of the 2015 Ghana Budget

December 6, 2015

The free fall of the Ghanaian currency, the cedi in 2014 further underscored the weak structure of the economy. The unpleasant effects of this shock left every Ghanaian desiring for an expedient structural transformation of the economy. Interestingly, the theme of the 2015 budget- "Transformational Agenda: Securing the Bright Medium Term Prospects of the Economy ''- clearly aligns with this general desire. The begging question however is whether the policy strategies supporting this fitting theme are pragmatic enough to guarantee Ghanaians a truly transformational and robust economy in the medium to long term. The legitimate issues raised against the budget are manifold. But this short review will focus on broad macroeconomic policy, energy targets and policy, and social policy.

Growth projections: There is a marked difference between the provisional 6.9% growth in 2014 and the 3.9% growth projected for 2015. If the policies enumerated in the budget are not mere rhetoric and the actual base growth is within the proximate of 6.9%, then the GDP growth in 2015 should be higher than the estimated 3.9%. The 3% difference is inconsistent and poses a serious question of data credibility. The nosedive in the real GDP growth is inconsistent with the claim that the medium term prospect is bright. Indeed the minister of finance is giving us a hint that the real GDP growth of 6.9% will be revised downwards at the end of the fiscal year when he said, "the Ghana Statistical Service (GSS) is revising the GDP data based on improved data and methodology..."

Tax policy: Prior to the budget statement, IMANI argued that the approval of the 50% excise tax on the retail price of tobacco product taking the total excise tax on tobacco to 225% in Ghana does not only exceed the ECOWAS 100% limit on Cost, Insurance and Freight Value but may also create a parallel underground market where counterfeit tobacco products may dominate transactions. This will undermine our public health campaigns as one cannot guarantee the content of illicit tobacco. This becomes more worrying when we think about the fact that excise taxes on tobacco in the three neighbouring countries are within the UEMOA limit of 45% and much lower than the rate in Ghana.

It is true that tobacco is inelastic therefore tax hikes may generate more government revenue and may not affect demand. But the energy problem and business-unfriendly macroeconomic environment is making cost of production high. Burdening the industry with higher taxes may collapse the industry. Government decision to increase the excise rate from 150% to 175% instead of 225% is commendable but still high.

Also, we commend government for the removal of 20% taxes on imported mobile phones. However, the raft of taxes on real estate, financial services, key utilities such as petroleum products and the extension of the stabilization fund among others may offset the positive effect of the lower than expected tobacco tax and the removal of the mobile tax. Particularly, the claim by the government that 17.5% special petroleum tax would not have any effect on ordinary Ghanaians is unfounded. Most organizations use petroleum products to generate alternative power in the midst of "dumsor" – erratic power outages. This translates into higher cost of production which is passed on to consumers. The fundamental truth is that people respond to incentives. By allowing entrepreneurs, investors, and workers to keep a smaller fraction of their last dollar earned, hikes in marginal tax rates discourage business starts-ups and investment and reduce labour supply. The relocation of the production plant of Cadbury Ghana and BAT Ghana is a point in case.

Fiscal policy: The fight against fiscal deficit is all over the globe. From USA to the European Union, varied strategies have been adopted within the framework of fiscal consolidation to fight the fiscal cliff. Therefore fiscal consolidation in itself is not a bad policy; however, the emphasis on higher taxes in Ghana is misplaced. In 2010, the European Central Bank presented a study of Fiscal Consolidation in the June Bulletin. They concluded that fiscal consolidations based on spending reform, rather than tax increases, is more conducive for economic growth. In Ghana, It is clear that the budget deficit is not caused solely by lower taxes. Expenditure mismanagement and revenue leakage explain Ghana's fiscal deficit more than any other factor. Of course, lower tax revenue affect budget balance but expenditure mismanagement is the bane of the fiscal problem in Ghana which is why the creation of a Fiscal Responsibility Law is critical at this juncture. Fiscal stabilization policy should focus on prudent measures to broaden the tax base and reduce revenue leakage as higher taxes constitute a withdrawal from the economy. Without the Fiscal Responsibility Law and prudent revenue enhancement measures (broadening the tax base and reducing revenue leakage), the proposed fiscal consolidation in the medium term is a predictable dud.

Debt Sustainability: The debt management strategies adopted to reduce our debt ratio to sustainable level in the medium term: especially the domestic measures; the restriction of non-concessionary borrowing to economically viable and self-financing projects; and the proposed publication of Annual Public Debt Financing Report are good. However, there are important issues that were not addressed in the budget. First, Government is still too confident in the Debt Sustainability Analysis (DSA). Government confidence in the DSA in the last few years cannot be overemphasized. In 2012, when many became worried about our debt profile and admonished government to exercise restraint on borrowing, government citing[in the Medium Term Debt Management Strategy (MTDS II) ]the DSA in the Article IV consultation strongly argued that Ghana has "significant borrowing space and could therefore borrow to fill the financing gap needed to achieve the MDGs". Yet in less than 2 years, the debt ratio has reached unsustainable level. The Debt Management Department should note that the DSA is only a forecast guide. The IMF cautions against excessive confidence in the DSA because the "the scope for error is large, both on the upside and the downside"

If we are to go by our debt profile after the issue of MTDS II, then the DSA should not be the sole guide for total borrowing as intended in the budget. In the DSA, the macroeconomic assumptions under baseline scenario usually deviate from reality. For example, a 30% depreciation is regarded as extreme (unlikely) shock therefore it is only used in the bounds test, a macro econometric model. Furthermore, it is assumed in the DSA that government does not react to shocks. But Ghana's exchange rate experience in 2014 and the palliative measures taken by the BOG show that this forward-looking projection "is only valid within the bounds of the underlying guesses"[1].

On this account, one can argue that it is not right to use the DSA to review the Medium Term Debt Strategy (MTDS). By limiting the non-concessional borrowing to economically viable and self-financing project, government is indicating that revenue and externalities generated from specific debt-financed projects are more central to debt repayment than anything. Therefore, the review of the MTDS should move beyond the projection of debt ratios to debt management at the micro level. This involves prudent project selection and monitoring of revenue and costs throughout the project cycle. Government should prioritize project selection by choosing self-financing projects with high development dividends. The monitoring of revenue flows and cost requirements should be embedded in a well-run system of public finance management with transparency and accountability to all parties.

Energy Policy: Project delays undermined the performance of the energy sector for the 2014 fiscal year. Most strategic projects that government promised to complete in 2014 are still incomplete. In essence, government failed to add an additional 342MW energy capacity it promised in 2014. Considering that the budget allotted to sector has been slashed by 40.37%, it is hard to have confidence in the proposed generation of 770MW + 33.5MW additional energy in 2015. The failure of government to solve the energy crisis since 2007 means that there is a prima facie rationale for private sector participation in the energy sector. For Ghanaians to believe ex ante in government ability to achieve energy targets, we need explicit reports on project timeline, project scope, costs, risks, and planned expenditure and expected variation at the beginning of each project.

Social Policy: Fiscal consolidation is not pro-poor. Therefore consolidation program usually comes with practical package that lessen the effect on the poor. The same cannot be said of the 2015 budget. The pro-poor expenditure, though increased in absolute terms, reduced from 26.8% in 2014 to 22.1% in 2015 as percentage of the total government expenditure. Given the current level of poverty and the transformational agenda, the proposed expenditure on basic education, primary health care, poverty-focused agriculture, water and sanitation and feeder roads is woefully inadequate.

The Ministry of Gender, Children and Social Protection received a budget cut of about GH?47,407,014. Yet it seems prima facie, from the arrears in work they plan to carry over into 2015 (as well as additional projects that they plan to undertake especially the expansion of the LEAP and LIPW), and that they are an infant ministry, warrants more than they have been allocated for the year.

On making education accessible to all, the budget read "Government will progressively absorb GES-approved examination, library, entertainment, SRC, science development, sports, culture, and internet fees charged to secondary level students in the effort to make SHS free'; this is duly unnecessary on the platform that some parents can still afford to pay the school fees. What would be appropriate is to identify the brilliant-but-needy students under the social protection program and rather aid them out. The "vice" this message will send out there without mincing words is "this is another avenue to quietly let public funds go unaccounted for."

The Ministry of water resources, works and housing seem to have carried out a lot of projects in 2014, nonetheless there still remain backdrops in some of the performances. Given that the Water Resources, Works and Housing Commission have a lot more capital expansion projects originally planned for 2014 yet to be carried out, a GHS 68,285,603 cut in budget funding does not suffice. Since community water and sanitation was not mentioned, do we take it that it was completely covered and catered for under 2014?; by implication nothing more needs to be done. Nothing was said about the 69 mechanised pipe schemes under the Sustainable Rural Water and Sanitation Project. There also seem to exist inconsistencies in the borehole-target and institutional latrine projects, unless they are meant to be different.

Per the outlook for 2014, the health ministry defected in achieving rather a large number of its projects. The 'better performance' was seen in the projects carried forward from previous financial year budget statements; hence it can make a strong case for increased funding. However, the sector records a GHS 285,463,186 million cut in budget funding. Lots of attention in the financial year was geared towards acquiring preventive care for the Ebola pandemic. The ministry and as such every other ministry should make provisional funds available for unseen contingencies and appropriately account for it. This is to ensure that funds allocated to completing and undertaking projects are used for that purpose only.

Given that the electoral commission would organize District Assembly and Local Governance elections in all 216 MMDAs, it would have made a good case for an increase in its budgetary allocation, but a cut of GH?105,381,682 i.e., a 295% decrease, rather seem misguided. Are the elections going to be carried out with IGF's from the various assemblies? If not what is the provision being made.

On the issue of value-for-money, the 2014 budget statement reads "Government takes a very serious view of Value-for-Money and transparent means for it's contracting for projects and services that involve the use of public funds". IMANI on that note proposed that government should "Declare a moratorium on all the current projects. The government should list all the projects they are currently funding and submit them to a "Value for Money" review; value for money audits shouldn't take more than 3 months to be completed. The 2015 budget was however very quiet on the value-for-money initiative in 2014. Has it been kicked to the curb like other projects the budget was silent on?

The audit service was allocated GH?125,527,610 in 2015 while it received GH?119,115,792 in 2014. This represents a 5% increase. A review of the activities for 2014 and projections for 2015 appear very similar with no visible extension of role to warrant the 5% increase in allocation.

The 2015 budget said nothing substantial on transparency and anti-corruption initiatives except a reaffirmation of the constitutionally mandated charge on the Auditor-General to perform his duty. In the budget speech, paragraph 142, in 2015 'the government will implement initiatives to enforce the recommendations of the Auditor General's report. This will involve sanctioning and possible prosecution of persons indicted by the report.' Whilst this may be the first time that this has appeared in any budget statement, there is little indication that, what was suggested in the 2014 budget statement has been initiated and generated the needed impact.

What has become the routine is this: we have nothing to tell the nation but since we are required to present a budget statement each year, let's find something to tell them rather than account to them. The ministry of finance and the government should do well to define "various levels of completion" if what they are doing is accounting to the nation.

In sum, the budget does not contain policies that are entirely different from previous budgets that would yield a transformational result. The focus on taxes is wrong as the incentive effect may outweigh the revenue effect. The fiscal consolidation program is likely to fail if there is no Fiscal Responsibility Law and its enforcement to regulate government spending.

For interviews please ask for Patrick Stephenson, Emmanuel Buadi Mensah or Ms Bernice Owusu-Brown at info@imanighana.org or simply call 0302 972 939