Ghana: Spending up and maybe debt as well

12 April 2013
Ghana's economy is expected to see robust growth this year, at around 8.5%, but so too will public spending. The 20% increase in government expenditures should help sustain social services and infrastructure investment, and underwrite activity in the energy, agriculture and construction sectors. However, there are concerns the country may not be pursuing fiscal consolidation aggressively enough, and 2013 will see a wide deficit and rising debt.

Following growth of about 8.5-9% in 2012 (up from an initial estimate of 7.1%), the government expects GDP to expand by 8.5% in 2013, with the non-oil economy growing by 6.5%. The IMF forecasts slightly more modest growth of 7.8%

With expansion expected to remain robust, the budget foresees total government expenditure rising 20.6% throughout 2013, to reach 34.4% of GDP - around GHS30.5bn ($15.77bn). The rise reflects the commitment of President John Dramani Mahama, inaugurated in January 2013 following December's election, to strengthen Ghana's position as a middle-income country through social and infrastructure spending, and to ensure that growth - on the back of increased investment in the oil and gas sectors - is inclusive.

Seth Terkper, minister of finance and economic planning, has said that Ghana will push ahead with capital spending, including improvements to the road system, to help underpin long-term growth. The government is prioritising infrastructure improvement ahead of a reduction in the deficit. Officials say they want to avoid the sort of austerity that has been imposed in Europe, taking a more gradual approach to fiscal tightening.

However, capital expenditure will actually fall to 6% of GDP in 2013 from 7.6% in 2010, according to Fitch Ratings. This can partly be explained by the rapid expansion of GDP itself, but the government has been tilting towards current expenditure. Some 8.4% of GDP will go towards public sector wages in 2013, while the overall public wage bill is expected to grow by 12%, around one-and-a-half times broader economic growth. Salaries will thus have risen by 135% since 2010. A large portion of this was due to an alignment in public sector salaries, known as the single-spine salary system, which standardised wages across all public sector bodies - something that will slow wage growth over the medium and long-term but nonetheless increased spending over the past two years.

Admittedly, the government can point to very rapid revenue growth as justification for its largess. Its income is expected to rise by 35.1% in 2013 - down from the 44.5% of 2012 - but still strikingly high. The Mahama administration expects measures including improvements to the tax regime, the continuation of special tax audits and streamlined incentives, to feed through into the public coffers.

The budget projects petroleum receipts of $581.72m, on an assumption of crude output of 83,341 barrels per day (bpd) at an average market price of $94.36 In 2012 output averaged around 72,000 bpd - lower than expected - largely due to technical problems at the Jubilee oil field. Tax collection has also improved dramatically over the past four years, with a centralised tax regime and stronger enforcement. Previously, Ghana's tax revenues as a percentage of GDP were in the low teens - one of the worst in the region.

Rising revenues mean that Ghana should be able to significantly reduce its fiscal deficit in 2013, even while increasing spending by one-fifth. However, consolidation is not happening at the pace that Fitch expected, concerning investors and international institutions alike over Ghana's budgetary sustainability.

The government now aims to bring the deficit down to 9% for 2013 and 6% in 2014, against Fitch's expectation of 8% and 5%. The agency thus expects debt to remain high, having swollen from 40.8% at the end of 2011 to 49.4% at the end of 2012.

Rising spending may also contribute to inflation, which hit 10% in February, quite high even for a fast-growing emerging market. The government targets inflation of 9% for the end of 2013, but the economy remains vulnerable to falls in the cedi, the Ghanaian currency, which push up prices of imports.

Kofi Amoah, owner of PVI Holdings, told OBG that he was optimistic about Ghana's economic future, but that structural challenges needed to be addressed. "Given the economic downturn in Europe, Ghana has become a credible alternative for investors looking for new opportunities," he said. "The challenge is to keep an annual growth at 8%, while keeping inflation below 10% without stifling growth. Also, the economy will grow more slowly than it should if the country continues to have an import dependency. Local production is not strong enough."

Ghana has become one of the world's fastest-growing economies in recent years, and a magnet for investment. The government is understandably keen to spread some of the new wealth and ensure that the foundations for long-term growth are laid. However, Ghana's success should not mean overlooking the need to address internal and external imbalances.

© Oxford Business Group 2013

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