A painful spotlight on Ghanaian public financial management
Scrutiny and debate around public financial management in Ghana has increased visibly in recent weeks. Ratings agencies, international organisations and talking heads have questioned government’s ability to raise revenues and debt sustainability. The uncertain picture is harming investor confidence, particularly on international bond markets and will impact the private sector. However, it widens the opportunity for the introduction of painful but risk-positive reform.
Significance – Genuine concerns raised
Songhai Advisory’s 2021 Ghana risk analyses, particularly between August and November 2021, denoted a three-fold bar for public financial management, domestic and international confidence in the same – (a) revenue generation and expenditure restraint measures, (b) establishing a narrative that assuages investor concerns, and (c) judicious use of domestic political capital[1]. The third point has been all the more important given the earlier muted response to the new post-2020 election legislative balance[2]. It is a high bar, and the authorities have struggled. Over the past week, further concerns have been raised about investor confidence, debt sustainability and revenue generation by Fitch Ratings[3], Bloomberg[4], the World Bank and prominent figures within Ghana including Bright Simons[5], the vice president of a think tank.
Fitch’s concerns came as they downgraded Ghana’s credit rating from B to B- and affirmed the outlook as negative, primarily over concerns about the government being priced out of international bond markets leading to an overreliance on (also unpopular) domestic bonds.
The Bloomberg article asserted that investor confidence was hampered by concerns rising from the government’s initial inability to pass a proposed tax on electronic transactions (the ‘E-levy’) (see: Standards, risk and parliamentary business in Ghana). The government gave a detailed response to the Bloomberg article[6], which it called factually incorrect while acknowledging “that the current trading levels of our Eurobonds have widened.”
Explainer or no, domestic revenue raising remains a risk focal point. Government has targeted non-oil tax revenue of GHS 80.3 billion (USD 12.8 billion) in 2022, 44% above the 2021 target. The E-levy in its current form could contribute 19.5% of that growth, underlining its importance and why it remains a priority for when parliament resumes on 25 January. The expectations is that concessions will need to be made to assuage local stakeholders e.g. reduced from 1.75% (early indications are to either 1% or 1.5%) . The minister of finance has already stated that fewer transactions than previously assumed will be affected[7].
But someone must pay. Government was previously projecting USD 1.1 billion (GHS 6.9 billion) in revenues from the E-levy, this will be impacted by any reduction in its amount[8]. Aside the planned reforms in property rates, we can expect new taxation measures to be announced. And the finance minister has said that there may be a cut of up to 20% of the expenditure planned in the 2022 budget, dependent on the performance of revenue collection[9].
Outlook – Revised targets necessary
If cuts are to materialise, possible targets include the ongoing ‘Obatanpa’ CARES covid recovery programme in which GHS 30 billion (USD 4.8 billion) of public money was expected to be used from 2021-2023 or the youth entrepreneurship scheme YouStart to which the government has committed GHS 1 billion (USD 160 million) of its funds annually for the next three years.
Parliament has been on recess since the previous attempt to pass the E-Levy and, whilst signs are positive that it will be passed in some manner when parliament resumes on 25 January, we have as yet seen no reforms or accords to bolster confidence in the parliament machine. The domestic private sector is exposed. Fitch Ratings also downgraded two licensed banks in Ghana (Guaranty Trust Bank and United Bank for Africa) two days after their general downgrade due to their reliance on government bonds and the associated risk. This is not characteristic of the wider banking sector but will not help in maintaining a positive outlook.
—
[1] Six key pointers from Ghana’s Mid-Year Budget. Songhai Advisory (July 2021), Ghana 2022 budget critical tax mobilisation plans hinge on digital levy. Songhai Advisory (Nov 2021).
[2] Ministerial nominations announced in Ghana. Songhai Advisory (Jan 2021). Ghana’s Hung Parliament and Contested President to Be Sworn In. Songhai Advisory (Jan 2021).
[3] Fitch Downgrades Ghana to 'B-'; Outlook Negative. Fitch (Jan 2022)
[4] Ghana Debt Dips Deeper Into Distress as Investors Quit. Bloomberg (Jan 2022)
[5] Bright Simons: Is Ghana Broke? Myjoyonline (Jan 2022)
[6] Response to Bloomberg’s Article on Ghana’s Debt. Ministry of Finance. (Jan 2022).
[7] http://www.myjoyonline.com/e-levy-ofori-atta-lists-transactions-to-be-affected-and-exempted/
[8] A reduction to only 1.5% instead of 1.75% is already a loss of 14% of projected revenues.
[9] Government suspends 20% of expenditure in approved 2022 budget Ghana Web (Jan 2022).
—
We are an African-owned and managed firm delivering local knowledge supporting transformative and sustainable strategic decision-making. Do get in touch if you require assistance: advisory@songhaiadvisory.com