Terkper shares thoughts on 2019 Mid-Year Review Budget

DON’T RUSH TO PRAISE ALL OF AFRICA’S “POPULAR” BUT FISCALLY UNSUSTAINABLE PROGRAMS

Introduction

Context is 2019 Mid-Year Review and need to be realistic about the fiscal prospects for the country—based on past views in interviews and articles.
A general call on those who relate to Africa and its leaders not to ingratiate or praise all “popular policies and initiatives”, even if well-meaning, that eventually lead to waste of fiscal and economic resources—even disaster.
The call goes for domestic leaders (e.g., chiefs, experts, clergy) and foreigners (e.g., multilateral and bilateral institutions, development partners, CSOs, professionals, etc).
Background

Even the President now concedes (e.g., Oxford University lectures) that the Free Senior High School (F-SHS) will take a lot of resources, including
diversion of petroleum revenues from the path of investment to consumption
including early hints of the use of “Heritage Fund” for F-SHS;
accumulation of arrears (e.g., pensions, roads, bailouts cost, etc) at May Day Speech;
higher levels of borrowing than the government had anticipated; and
despite three (3) (two (2) additional) oil fields with almost 3 times the output since 2017 and recovery of prices that that has tripled revenue from petroleum.
It will involve serious long-term commitment—merit only in leaving a legacy that future leaders will grapple with for decades.
Note that the Minister for Finance also highlighted the point but was quickly shouted down by hawks within the Cabinet and the Party.
The “unsustainable promise” of F-SHS and other political promises



F-SHS appeared sustainable because—
unlike the original promise of a “big bang” during elections (starting with all students), SHS program was “staggered” to start with only Year 1 students:
Years 2 and 3 students continued to pay fees—while program remained “untargeted”, with even middle-class and affluent parents benefitting;
additional petroleum (oil and gas) revenues provided initial buffer from 2017—but these one-time inflows are against expanding expenditures (F-SHS and other very expensive electoral promises such as 1D1F);
averting global and SSA recession and investments in energy sector
Ghana among few SSA states to avoid recession;
reverse rate of accumulation of national debt from positive to negative;
investing directly and supporting private-sector investments in TEN and Sankofa petroleum fields;
a substantial part of highly-rated fiscal consolidation came through another “illusion”—budget “offsets” rather than a program of paying down arrears;
bequeath of buffers—previous administration bequeathed buffers
Sinking Fund: use to pay off outstanding balance of Ghana’s first 2007 Sovereign Bond;
Ghana Infrastructure Investment Fund (GIIF): balanced used; VAT flow diverted to consumption; and no further allocations made to Fund;
Energy Sector Levy (ESLA): continuous flow of Ghc3 billion annually for clearing arrears directed at providing relief for domestic banks;
GDP “rebasing” provided fiscal room and breadth, through
room for borrowing through GDP growth and “illusionary” lowering of Debt/GDP ratio that is being trumpeted as an achievement by the government; and
deferred the impact of increasing costs.
“capping”—has not provided needed fiscal relief, despite diverting vital resources from vulnerable programs (i.e., education {GETFund} and health {NHIL}; rural development {DACF}; and institutions {IGF}
Fiscal signs not favourable—going into Mid-Year



one-time cushions—the “bump” in GDP growth from rebasing and additional crude/gas production is “one-time” and will no longer cushion the worsening indicators like debt and budget deficit;
arrears owed to contractors and suppliers—large amounts owing to these vital economic players in various sectors, including Presidential initiatives, are becoming apparent and are now acknowledged by the Government—
pensions—concession at May Day celebrations by HE the President;
contractors and suppliers—concessions by Roads and Finance ministries and “demonstrations” by contractors;
salaries—civil servants, nurses, and presidential initiative employees;
banking sector “bail-out” costs—despite unprecedented funds from ESLA;
F-SHS—no comprehensive disclosure yet to Parliament and the nation on true costs and inevitable arrears;
increasing tax burden—retention of temporary (“nuisance”) taxes & introduction of new tax measures
retention of temporary (“nuisance”) taxes such as ESLA, special import levy (SIL), national fiscal stabilization levy (NFSL)
increase in ESLA levies: introduced at a period of low crude prices low US$40s pbl so consumers are paying more now at current higher price above US$60pbl;
Implicit ESLA levy: levy should have lasted 3-to-5 years but increased duration of ESLA Bond to 7-to-10 years;
new tax measures—increase in top rate of personal income tax (PIT); 2.5 percent increase in VAT rate (from 15% to 17.5%); luxury tax (user fee) on vehicles; blocking VAT input tax credit (ITC);
discretionary change in basis (valuation and classification) for calculating import duties, VAT, fees/charges; etc;
fiscal expansion—the worsening fiscal gap may not taper or abate due to
subtle, not bold, new tax measures (e.g., luxury tax etc.)
continuing with expenditure programs (likely borrowing, not reallocation to support the pace of president’s electoral promises;
fiscal deficit and borrowing—these indicators are deteriorating fast and corrections for offsets in, and lowering of estimates, will make these indicators worse;
borrowing to support the increasing fiscal deficit;
borrowing to finance belated infrastructure;
pledge of resources (e.g., royalties from minerals, bauxite deposits, etc.) to support the budget;
Sinking Fund—despite three (3) oil fields, not using the SF to reduce debt (as was done from one (1) oil field for the NPPs first 2007 Sovereign Bond;
Ghana Infrastructure Investment Fund (GIIF)—diverting funds (i.e., VAT and ABFA) for investment in infrastructure to consumption.
Wanted now—cautious voices

“Measured” approach is fiscally prudent—being “measured” with
F-SHS [e.g., alternative “progressive” approach] and other programs is consistent with fiscal prudence, as elicited in Public Financial Management Act [PFMA] and Budget Responsibility Act [BRA];
Benefits of being “realistic”—refreshing to hear the voices of caution emerging
Domestic experts—professors, experts, think tanks, and chairperson of vital constitutional commission have sounded note of caution;
Opinion leaders—it is important for other domestic opinion leaders to follow a realistic lead (e.g., clergy and chiefs must reflect condition in religious and community schools);
IMF/WB MD—sounded note of caution, not ringing endorsement, on government expenditure and debt programs; nonetheless
roll-back of tax measures (e.g., VAT on non-core financial sector and commercial real estate) in Program;
failing to acknowledge Ghana’s avoidance of recession; permitting fiscal expansion; and not being critical of “offsets” that underestimated arrears and gave impression of accelerated fiscal expansion;
Development Partners (DPs)—countries that may be capable of free (education) social programs choose to make them “targeted” (i.e., tuition-free programs, as Ghana had) and adopting alternative options (e.g., concessional student loans);
Preference for using fiscal support for investments, not consumption, is global
in advanced countries (e.g., quantitative easing): invest in infrastructure to support private sector and rural/urban development, not place scarce fiscal resources in consumption;
MIC states—approach adopted by middle-income countries (MICs) such as Emirates and Asian economies;
Developing countries—Angola and South Africa now showing a preference for infrastructure development through Sovereign Wealth Funds (SWFs) as in Ghana’s PRMA.
Conclusion

Current fiscal environment is different from late 2014-16 when many SSA countries were headed into recession, due to global financial crisis, fall in crude oil and other commodity prices, and domestic pressures such as non-supply of gas from Nigeria
Now, three (1) oilfields, not one (1); rebound in commodity prices, and, therefore, enhanced budget buffers.
Problem is unbridled expenditure due to electoral promises; non-conventional approach to managing arrears; and borrowing
Time for realistic review and appraisal as well as domestic and international experts toning down their praise or holding back their reservations on Africa’s politically-motivated “popular” but unsustainable electoral and fiscal promises.
By Seth E. Terkper