IMANI’s quick picks from Ghana’s post 2016 election budget

Yesterday, Ghana’s Finance Minister, Mr. Ken Ofori-Atta presented his maiden budget to Parliament. The minister christened his budget “Asempa Budget” in the Twi language, loosely translated as “Good News Budget”. The general feeling is that the Minister passed his first test given the replication of major campaign promises in the budget. The structure of the budget itself didn’t change much from the previous and the minister and his economic team employed great skill not to stray significantly from economic targets set by the previous government at least for the 2016 fiscal year. IMANI people, however, picked up the following. We shall in due course present detailed analysis showing the impact of the budget on critical sectors of the economy.

A. Economy

1. The 2017 budget promises a budget deficit of 6.5% amidst significant tax cuts and a volatile commodity market. Total revenue on the other hand is expected to increase significantly this year to GHC44.9 billion from the 2016 outturn of GHc 33.67 billion. Out of this projected total revenue, GHC34.38 billion (The 2017 budget projects an increase of 47.7%, 13.3% and 36.3% in taxes on income and property, domestic goods and services and on international trade, respectively amidst the tax cuts), representing 78% of proceeds expected to come from tax revenue. This is 2% higher than the 2016 percentage of 76%. End of year inflation has also been increasing steadily; inflation rate of 15.2 was recorded in 2012 and gradually increased to a peak of 17.7 in 2015 before falling to 15.4 in 2016.

2. In 2016, the government projected total revenue of about GHc 37.88 billion and was able to raise GHc 33.67 billion which indicates an 11% deviation from target. The NPP government expects to improve on the 2016 outturn by 33.5% to GHc 44.9 billion with an economic structure that has not significantly changed. Non-oil GDP will grow at 4.6% but corresponding government tax revenues will increase by 33% year on year. This must be analogous to the finance minister’s recollection of Jesus’ miracle of feeding over 5000 people with five loaves and two fishes.

3. The proportion of interest payments to GDP between 2014 and 2016 has been more than 6% while Capex to GDP has been just above 5%. This has greatly affected the productive capacity of the economy and GDP levels. Expectations of increased allocations to Capex has not been met, as the 2017 budget estimates a trifling GHc 7.1 billion to Capex which reflects a reduction of 7.2% over 2016 figures and 3.5% of GDP. Interest payments to GDP has been projected to increase by 29.4% from GHc 10.77 billion to GHc 13.9 billion representing 6.9% of GDP. Moreover, the estimated 6.5% budget deficit for the 2017 budget is to be financed solely with domestic debt of GHc 14.5 billion which is 7.1% GDP.

4. 2016 witnessed a decline in yields on government securities. This trend will be difficult to sustain as the expected increase in domestic debt may adversely affect the supply of loanable funds and interest rate which will in turn affect private sector growth. This could potentially counter the gains expected from the tax cut agenda. Moreover, the 2017 budget also highlights a number of tax cuts[1] which includes the scraping of VAT on Airline tickets and abolishing import tax on auto spare parts. Abolishing taxes on auto spare parts will only have a significant impact on the economy if the Cedi stabilizes.

5. Domestic borrowing looks set to be aggressive this year. The budget forecast indicates a GHc 14.5 billion domestic borrowing, which is about 10% higher than the budget deficit of GHc 13.17 billion. Thus government will be borrowing domestically to pay off foreign debt. The 91 day Treasury bill rate over past three months has fallen from 20.24% (as at 21st November, 2016) to 15.94% (as at 2nd March, 2017) yet DMBs are charging interest rates between 30% and 40%. How will this increased appetite for domestic debt affect interest rates and loanable funds?


Source: IMANI