Fiscal stability losing steam; mid-year review must correct it - BoG

For the first time since taking office in April 2017, the Governor of the Bank of Ghana (BoG) and Chairman of the Monetary Policy Committee (MPC), Dr Ernest Addison, has openly expressed worry about the fiscal position of the country, explaining that public spending is gradually picking up at a time when fiscal consolidation is supposed to be gaining traction.

He said on July 19 that while spending was picking up steadily, revenues were comparatively sluggish, creating a mismatch that risked breaching the 2019 deficit target and consequently undermining the fiscal stability achieved in recent years.

Reading the committee’s press statement at a press conference in Accra, the governor said the committee “observed that the pace of fiscal consolidation had slowed down mainly reflecting gaps in revenue mobilisation while the pace of spending had increased.
“This could pose risk to macroeconomic stability, if not addressed,” he said.

He later explained during the question and answer session that the committee had noticed an “increasing pace of spending and, therefore, you do not see the same amount of compensatory reduction in expenditure that occurred in, say 2018, compared to what we are seeing in 2019.

“That, in a way, gives you a sense of the qualitative change in the fiscal stance from a more consolidated position to a less consolidation situation in 2019,” he said

Mid-year Review

“We are saying that we saw some underperformance in the revenue relative to the target and that has been the major source of the problem on the fiscal side,” the governor said, noting that the situation called for “corrective measures” in the form of reduction in expenditures and strong boost in revenues “in order to stay within the budgetary ceiling.”

Those measures, he said, could be announced in the Mid-Year Review of the budget due to be presented to Parliament on July 29.

“This should help address the financing gap challenges, as well as manage the risks from the large unbudgeted energy sector-related payments that could adversely impact foreign exchange reserves and undermine the macro stability gains made so far,” he said.

First quarter performance

Although data on the execution of the budget in the first half of the year is yet to be released, provisional figures from the Ministry of Finance showed that revenues fell short of target by 17.54 per cent in the first quarter compared to expenditures which were below budget target by 9.62 per cent in the same period.

This resulted in a budget deficit of 1.6 per cent of gross domestic product (GDP), above the period’s target of 1.4 per cent of GDP.

A professor of Economics, Prof. Peter Quartey, said Dr Addison’s concerns were well-grounded as he was speaking “to the numbers.”

He said recent developments on the revenue and expenditure sides showed that the mid-year targets would register “marginal deviations” that the budget review should aim to correct.

“Certainly, there should be new revenue measures; if some of the taxes are not yielding the required results, they should be reviewed,” he said, citing the Luxury Vehicle Levy which the government said would be reviewed.

On expenditures, he said “unnecessary expenditures needed to be pruned but cautioned that excessive cutting could undermine capital investment and growth.

“If we have to cut, then it should be the wasteful expenditures. Also, we should target this issue of corruption and get value for money,” Prof. Quartey, who is with the Institute for Statistical, Social and Economic Research (ISSER), he stated.

Expansionary budget

The 2019 Budget targets a deficit of 4.2 per cent of GDP, up from the provisional deficit outturn of 3.9 per cent of GDP recorded in 2018.

The third by Mr Ken Ofori-Atta, this year’s budget was the first revenue and expenditure estimation tool to have targeted a higher deficit, making it an expansion-driven budget.

In its post-budget review, fiscal policy institute, the Institute for Policy (IFS), said last year, the policy change was seen in the fact that government spending for 2019 had been projected to increase significantly.

“In 2019, government spending is projected to increase by a whopping GH¢15.62 billion, up from the increases of GH¢5.78 billion in 2017 and GH¢5.88 billion in 2018.

“If realised, the increase in government spending in 2019 will be the highest in absolute terms in the Fourth Republic.

“In percentage terms, the projected increase in government expenditure of 27 per cent in 2019 is the highest since 2012,” it said.

It noted that while it did not exactly expect the policy reversal, “it did not come as a surprise to the Institute because the consolidation process had seriously constrained fiscal policy and affected economic growth.”

“Therefore, it was just a matter of time that some policy stimulus would be injected into the economy.”