Ghana’s President Nana Akufo-Addo has taken power with ambitious plans to revive once spectacular economic growth, only to discover a $1.6 billion hole in the budget and a deficit twice as high as expected. He may have a strong sense of deja vu.
Ghanaian president Nana Akufo-Addo
The country has a vigorous democracy, with voters ready to eject any leader who falls short of expectations. But for a third successive time, the national finances have gone off track before elections, forcing the winner to confront a fiscal crunch.
With Ghana more than half way through a three-year International Monetary Fund programme, the new government must reveal in its first budget next month how it intends to restore financial discipline while staying true to Akufo-Addo’s election promises to boost growth and fight poverty.
Akufo-Addo entered office last month on pledges to spend the equivalent of $1 million a year on development in each of Ghana’s 275 parliamentary constituencies, build a dam in every village to ensure reliable water supplies and bring a factory to every district.
In winning a big victory in December over incumbent John Mahama, he also promised to cut taxes. His plan is to stimulate private sector investment to raise economic growth – which peaked at 14 percent in 2011 – back into double digits from around 4 percent last year.
The government said last week it would follow through on its promise to make secondary school education free.
It has adopted a triple track approach: preparing the budget, reassuring investors who are major holders of Ghana’s local currency and dollar debt that it will not overspend, and holding fresh talks with the IMF. [nL5N1FM4NZ]
Finance Minister Ken Ofori-Atta acknowledges the balancing act. “One thing that I can commit to is there will be discipline. One thing that I can also assure you is that we are pro-private sector,” he told reporters. [nL5N1FA2PO]
“(But) you cannot win a sweeping mandate of this nature where the cry out there is for jobs and come and have a budget that does not seem to address that,” added Ofori-Atta, a former investment banker.
“UNCHECKED OVERSPENDING”
While the budget crises have coincided with the four-yearly election cycle, Ghana does not entirely fit the model of struggling governments spending freely just before voting in the hope of holding on to power.
The fiscal blowout in the 2012 election year was largely due to pay rises for civil servants. But this was part of a long-term wage reform agreed by government and opposition parties.
The current overshoot has several causes. Shortly before his defeat after only one full term in office, Mahama toured the country opening new schools, roads and bridges. But many of these projects, and spending on them, had been underway for several years.
Revealing that the new government had inherited debt from state-owned enterprises and government ministries of at least 7 billion cedis ($1.6 billion), Ofori-Atta said “unchecked overspending” was part of the problem but he also blamed decreased revenue. [nL5N1FM4NZ]
Ghana’s boom years were fuelled by exports of oil, gold and cocoa. The 2014-15 dive in commodity prices hit it hard, along with a technical fault that halted production last year at its Jubilee oil field, operated by British company Tullow..
The $918 million IMF programme of 2015 was designed to stabilise state finances and the wider economy. Last year the IMF and the previous government repeatedly said that budgetary targets would be respected.
Under the IMF deal, the 2016 deficit was supposed to be the equivalent of 5.25 percent of annual gross domestic product, but it came in at around 9 percent.
Some foreign investors are willing to give the new government the benefit of the doubt. “We do see growth continuing to improve over the next 12-24 months. We do believe that the new administration is fiscally conservative, that they are investing in positive net present value projects like infrastructure,” said Arif Joshi, emerging markets debt portfolio manager at Lazard Asset Management in New York.
Ravi Bhatia, an analyst at Standard & Poor’s credit ratings agency, said the deficit appeared “sizeable but not humongous”.
But others are less sanguine about the missed targets. “They promised they would be fiscally responsible and intentions seemed good, so it was a bit of a let-down. My feeling is Ghana for the time being is dead money,” said Uday Patnaik, head of emerging debt at Legal and General Investment Management.
Elisa Parisi-Capone, a senior analyst at Moody’s ratings agency, said the initial IMF plan was now unachievable and would have to be adjusted.
The government has discussed the possibility of trying to seek an extension of the IMF deal beyond April 2018 but no decision has been taken, a senior government official told Reuters on Tuesday.
The IMF said after a visit last week to Accra that it estimated 2016 growth would be slightly higher than its initial forecasts, but inflation was falling more slowly than expected and the deficit was higher.
“SUPERVISED THE ROT”
Almost two years into the programme, annual inflation was 15.4 percent in December. Public debt is over 70 percent of GDP, while the cedi currency has fallen more than 45 percent against the dollar since the end of 2013 to near historic lows.
Mark Assibey-Yeboah, chairman of parliament’s finance committee, told Reuters that the IMF must share the blame. “The IMF has supervised the rot. Which indicators have shown improvement? None of the targets have been met,” said Assibey-Yeboah, a member of the president’s New Patriotic Party.
One senior source close to the programme said success was crucial for the IMF’s reputation. “Ghana has to be in good shape at the end of the programme, otherwise the IMF has failed as an institution,” said the source, who declined to be identified.
The IMF said the programme had reduced economic imbalances and engendered confidence. It noted in an email to Reuters that the deficit had dropped from 10 percent in 2014 to 7 percent in 2015 and the currency had stabilised.
However, it added that the deficit had deteriorated last year mainly due to poor oil and non-oil revenue performance and large expenditure overruns. “Stronger efforts will be required to achieve the targeted fiscal consolidation,” it said.
Exotix Partners, an investment firm for frontier and illiquid markets, downgraded its recommendation on some of Ghana’s debt to hold from buy, pending the government’s response to its fiscal situation.
One senior official in the ruling party said the bad economic news might offer the government a political advantage by enabling it to dampen expectations and buy time.
So far, voters seem relatively patient. “Reducing taxes will bring in investment and help businesses to employ people,” said Aziz Ziblim, who holds a degree in communications and is one of tens of thousands of unemployed graduates in the country.
“It is not only the government that will do things. It’s also the private sector,” he said.