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Press Release
NPP
November 24, 2014
HOW DID WE GET HERE? SOME COMMENTS ON
THE 2015 BUDGET STATEMENT:
Dr. Mahamudu Bawumia
The 2015 Budget Statement was presented against the
background of weak and deteriorating economic fundamentals,
including:
• Declining Real GDP Growth
• Increasing Inflation and cost of living
• Double digit fiscal deficits for two years in a row
• Large and increasing central bank financing of government
• Double digit current account deficits for two years in a
row
• Massive increase in the public debt stock
• Net international reserves at a precarious level
• Government unable to meet its statutory obligations
• Declining consumer and investor confidence
• Exchange Rate Depreciation
• Rising Corruption
• A recent Issue of a $1billion sovereign bond
• A Sovereign credit rating downgrade to B- by international
credit rating agencies
• Rising Cost of Doing Business
• Load Shedding – Dumsor
• Rising Youth Unemployment
• Government Failure to account for workers Tier 2 Pensions
and the Imposition of a pension fund Manager against the law
• IMF bailout talks.
The expectation of Ghanaians was, therefore, of a budget
that would set out at least to address these issues and
alleviate their suffering. However, most Ghanaians have been
disappointed. The 2015 budget provided no relief to the
suffering of Ghanaians after six years of NDC government.
While not providing any relief, the 2015 budget actually
increased the suffering of Ghanaians by implementing some
rather harsh tax measures and failing to address the
fundamental issues of concern. After six years in office,
Ghanaians are now being asked to pay dearly for the economic
mismanagement and corruption of this NDC government which
has resulted in economic decline, high debt levels taking
Ghana again towards debt unsustainability, rising levels of
unemployment, rising cost of living, rising cost of doing
business, depreciating currency, rising interest rates and
an inability to meet statutory payments, including pensions.
In a bid to raise revenue to cover the mess they have
created, the NDC government has resorted to taxing
everything in sight. The budget has demonstrated very little
appreciation of the problems Ghanaian workers and businesses
are going through at the moment. Ghanaians would like to
know when the dumsor will be over, for example.
Now to some of the specifics:
The projected sharp decline in growth in 2015 is puzzling
given the estimated growth performance in 2014.
The 2015 budget shows an economy in decline. After six years
in government, during which the NDC claimed unprecedented
economic growth, the harsh truth is that real GDP growth is
in decline. Real GDP growth has declined from 15% in 2011
(with the onset of oil production to a projected 3.9% in
2015, including oil). The budget is projecting non-oil
growth of 2.7% in 2015. These facts are as revealing as they
are disturbing. The government is claiming that the economy
is recovering. If indeed the economy is recovering as
indicated by the government, and we have “turned the curve”,
what will be explaining the further decline in growth in a
year that should be focused on rebuilding after the
challenges of 2014? What sort of recovery sees real GDP
growth decline from a purported 6.9% in 2014 to 3.9% in
2015? The growth rate in 2015 would be just about what it
was in the year 2000 and half the rate of the 8.4% achieved
in 2008 without oil!!!! Non-oil growth in 2015 will be below
the growth rates attained in 2000! The decline in real GDP
growth is reflected in all the sectors, (Agriculture,
Industry and Services). In the midst of this deep decline in
economic activity we wonder what scope exists for the
Minister of Finance to rake in revenues to support
infrastructure development and meet Government’s statutory
obligations.
There is, however, something that is not quite right with
the real GDP numbers. They lack credibility. How can an
economy which went through so much turmoil in 2014, with a
31% depreciation of the currency and massive load shedding,
register real GDP growth of 6.9% only to decline sharply to
3.9% when the government claims the economy is in
recovering? Is the recovery in reverse gear? Something is
not quite right with the numbers. Our view is that the 6.9%
real GDP growth reported by the Ghana Statistical Service
is, putting it mildly, counter intuitive and needs to be
re-examined. Otherwise, the government should explain the
reason for this sharp decline in real GDP growth in 2015.
This is important because if the real GDP numbers for 2014
are overstated, it would have implications for the 2015
projections and policies. In that case, the 2015 budget
would be out of gear ab initio.
This, notwithstanding, the fact remains that the economy
that was inherited by the NDC government in 2009 was growing
at 8.4% without oil. Having become an oil producer, the
government has superintended over a precipitous decline in
real GDP growth from 15% in 2011 to a projected 3.9% in
2015. Let us put this into perspective—the economy has lost
steam equivalent to 11% of GDP since 2011 suggesting that
for a $50.0 billion dollar economy, almost $5.0 billion
dollars worth of economic activity has dissipated, and this
is worrying. Slow growth means higher unemployment, higher
prices and declining revenues. In this respect, the NDC
administration has woefully failed Ghanaians and one is
deeply worried about the depth to which the economy is
sinking.
Ghana’s Debt Sustainability is in Question
The 2015 budget sadly reported that at the same time that
Ghana’s economic growth has been in sharp decline, Ghana’s
Debt/GDP ratio has sharply risen to 60.8% of GDP as at
September 2014. Ghana’s debt stock has crossed the 60% of
GDP level that developing countries with limited access to
capital flows should worry about in terms of debt
sustainability.
By the end of 2008, Ghana’s total public debt stood at GH¢9.5
billion (33% of GDP). In the last six years, however, the
stock of public debt has risen dramatically to GH¢69.7
billion (60.8% of GDP) at September 2014. This is an
increase in the stock of debt by GH¢56.2 billion or the
equivalent of some $27 billion, using the average exchange
rate for 2009-2014 or $17.5 billion at current exchange
rates . This also represents an increase in the stock of
debt by 591% over a six year period (i.e. an average
increase in the stock of debt by 98.5% a year). This is a
frightening rate of accumulation of debt by any standard
measure. On this track, Ghana is clearly on the way back to
the unsustainable debt levels that pushed us to HIPC.
This is a worrying development because Ghana received HIPC
relief just 10 years ago after a similar debt binge by the
previous NDC Government. If the current borrowing binge
continues, it will only be a matter of time before the
international rating agencies will classify Ghana as a
country with high risk of debt distress. The consequences of
this classification would compromise Ghana’s ability to
raise further financing from the international capital
market.
The accumulation of debt by this NDC government over the
last six years has, quite frankly, been reckless. The
interest payments on this debt in 2014 alone amount to four
times Ghana’s oil revenue in 2014! In 2015, Interest
payments alone on the debt would amount to GH¢9.5 billion
(compared to a total debt stock of GH¢9.5billion in 2008).
The increase in interest payments by 4.3% of GDP between
2008 and 2015 (i.e. from 2.8% in 2008 to 7.1% in 2015) has
taken away critical fiscal space that was available to
Government. In the 2014 budget, the entire allocations to
the Ministry of Roads and Highways (GH¢779 million), Trade
and Industry (GH¢256.5 million), Ministry of Fisheries (GH¢279
million), Ministry of Food and Agriculture (GH¢128 million),
Ministry of Water Resources and Housing (GH¢531 million),
and Ministry of Transport (GH¢89 million) amounted to a
total of (GH¢2062 million). Interest payments in 2014 are
more than three times what was allocated to these six key
ministries combined! The story is no different for 2015.
Given the precarious nature of Ghana’s debt situation, one
would have expected some decisive measures to fundamentally
reduce the building debt overhang which, if not dealt with
would push Ghana into the high debt/low growth trap. The
budget basically dodged the issue.
What has the Borrowed Money Been Used For?
As stated earlier, the NDC government has borrowed an amount
equivalent, at the time of borrowing, to some $27 billion
over the last six years. In addition to revenue from oil as
well as tax revenues, there is no government in Ghana’s
history that has had access to this volume of resources for
development. The government has, however, not been able to
point to loan-financed development projects worth this
amount of debt accumulation, along with oil and tax
revenues. Indeed, what is sad about this whole episode of
borrowing is that it has happened at the same time as
capital expenditure as a percentage of GDP has unbelievably
declined!!!
The evidence is that 94% of the increase in government
spending has been for recurrent expenditure! The increase in
government debt over the last five years is an amount that
could have built at least 15,000km of tarred roads, for
example. It is an amount that could have solved Ghana’s
energy, water, and sanitation problems. However, the
increase in oil revenues notwithstanding, capital
expenditure as a percentage of GDP has actually been on the
decline from 7.1% of GDP in 2009 to 5.2% by 2015. It is, in
fact, a travesty that Ghana before the discovery of oil was
spending a higher proportion of its income on infrastructure
investment than after the discovery of oil.
In the 2015 budget the Minister of Finance mentioned a
number of signature projects that have been financed by the
borrowing. These include:
PROJECT COST $ MILLION
• i. Ghana National Gas Processing Plant to help solve the
energy crisis, 850
• ii. Refurbishment and Expansion of the Ridge Hospital 306
• iii. University of Ghana Teaching Hospital 217
• iv. Expansion of the Kpong Water Pumping Station 273
• v. Kwame Nkrumah Interchange 95
• vi. Sofoline Interchange in Kumasi 35
• vii. Tetteh-Quarshie – Madina road project 38.7
• viii. Achimota-Ofankor road project 46
• ix. Construction of Affordable Housing Units by OAS
Construction 200
• x. Kumasi Central Market 172.5
• xi. Kasoa Interchange 172
• xii. 200 Buses for the Metro Mass Transit, and an
additional 40
• xiii. 295 Scania Buses for the Rapid Transport System 94
• xiv. Parliament House- Job 600 Offices and reconfiguration
of Parliament 102
• iii. The 500-bed Military Hospital Project in Kumasi; 180
• iv. First and Second phase of the Tamale Teaching Hospital
after the 110
• v. The Police Hospital Project; 68.4
• vi. The Ashanti Regional Hospital at Sewua-Kumasi; and 339
• vi. The Upper West Regional Hospital 21.5
• vii. Kpong Intake Rehabilitation Project 21.1
• viii. Accra Tema Met Area Water Supply Project 20.8
It is worthy to note that all these signature projects sum
up to some $3.5 billion out of the increase in total debt by
the equivalent, at the time of borrowing, of some $27
billion, and oil revenues. In fact, the oil revenues alone
could have financed 60% of these projects! So where is the
rest of the money? For the sake of transparency, Government
should list all the projects financed by domestic and
external borrowing and the amounts involved since 2009 to
enable proper accounting for the increase in the stock of
debt and oil receipts. This again emphasizes the case for
the passage of an internationally an acceptable Right to
Information Bill.
Where is the $1billion Sovereign Bond?
Government announced to the world that it was seeking the
support of an IMF supported program to help address the
current imbalances in the economy. On the basis of this, it
was able to calm the nerves of investors and issue a $1
billion sovereign bond. In the prospectus that sought to
convince investors, the Minister of Finance indicated that a
substantial portion of the amount borrowed would be used for
infrastructure development and critical projects. What
projects did the Minister of Finance have in mind? The
Minister should list and provide a detailed plan of what
projects he has in mind. We are reliably informed that the
amount raised has been used to reduce Government’s
indebtedness at the Central Bank and that the funds are not
available anymore for the purpose for which it was raised.
This is sad and raises a whole lot of credibility issues.
How can we borrow such a huge amount to fill a gap at the
Bank of Ghana, the central bank? Is this the use to which
non-concessional borrowing should be put? This is a very
serious development and Government and Bank of Ghana should
urgently comment on this.
Special Tax On Petroleum
The budget has unleashed more hardships on Ghanaians by
hurriedly passing into law a 17.5% Special Tax on petroleum
products. The speed and manner of passage of this tax in
itself shows that Government is aware of the strength of
feeling against this tax and did not want the public to
debate it before passage. We should recall that this is the
same government who at the time Petroleum prices hit $147
per barrel complained that petrol prices were too high. They
went on demonstrations using the Committee for Joint action
(CJA) to protest the high price of petroleum products. At
the time, they argued that the taxes on petroleum products
should be reduced and promised to reduce petroleum prices
“drastically” when elected. Six years down the road, many of
the CJA demonstrators are now ministers in this NDC
government and they have forgotten all their promises to the
Ghanaian people. The NDC has demonstrated in so doing that
they do not care and they cannot be trusted.
In 2008, the price of a litre of kerosene (which is largely
used in rural areas) was Ghp70. At that time it represented
31% of the daily minimum wage. The NDC said the price was
too high. Before the 2015 budget the same litre of kerosene
had increased to GHC3.23, representing 53.8% of the daily
minimum wage. It is clear that an additional special tax of
17.5% will only further increase the burden on Ghanaians.
The government, through the NPA, in applying the automatic
price adjustment formula should have reduced the price of
petroleum products following the recent global reduction in
oil prices. Rather than doing this, the NPA, with the tacit
support of Government, has refused to do so. The Automatic
Price Adjustment Formula has apparently now become an
‘Automatic Upward Price Adjustment Formula’ under this NDC
government. While consumers are still trying to figure out
what is going on, they have now been hit by a Special Tax.
Ghanaians can now understand that this NDC government cannot
be trusted. Is the government going to implement a Special
Wage Increase to compensate workers?
This Special Tax on petroleum products is bound to also
increase the already high cost of doing business in the
country. At the time when many businesses are having to pay
for diesel to run generators as a result of load-shedding,
they are being asked to pay more taxes on fuel. This would
increase the cost of production.
We strongly believe that that this tax measure is
unwarranted. If the deep seated waste and reported
corruption in payroll administration is corrected swiftly,
enough savings could accrue to the budget and this tax
measure could have been avoided. If the leakages are not
plugged, then no amount of tax increases would solve the
problem. We have reached a point in our developmental
trajectory where value for money should be demanded by all
stakeholders and partners.
VAT on Financial Services and Real Estate
In the 2014 budget the Government pushed through against
sound arguments to the contrary, a VAT on fee-based
financial services. The confusion surrounding its
implementation resulted in the withdrawal of the policy
measure. In their desperation to raise tax revenues, the
2015 budget states that this VAT on fee-based financial
services will be implemented. This is a bad policy for the
economy. Ghana’s financial system is underdeveloped with
only some 20% of the population having a bank account. What
the government should rather be doing is providing some
incentives for financial inclusion. The introduction of VAT
on fee-based financial services would only serve to drive
people away from the banking system with the attendant
reduction in financial savings. It will also increase the
cost of doing business for the business community. For
example, a manufacturer who imports raw materials has to pay
VAT on imports. If he transfers money through the bank to
pay for the imports, the manufacturer would pay an
additional VAT for the banking service. The argument is
similar for cost of doing business in the real estate
industry.
Some statistics on the property market in Ghana would be
instructive in placing this VAT on real estate transactions
in context. First, Ghana currently has the highest mortgage
to income ratio (at 605%) in the world. In terms of House
Price to Income ratio, Ghana is the 10th highest in the
world. In terms of housing affordability, Ghana ranks as the
least affordable property market in the world . Given these
facts, it is clear that the real estate industry in Ghana
needs help. Government should rather be trying to encourage
the development of the mortgage market through tax
incentives for real estate developers and better land
administration. A 5% VAT on real estate transactions is the
wrong way to go.
The Focus on Taxation rather than Expenditure is Wrong
The 2015 budget demonstrates one thing for sure. The NDC
government has created a fiscal mess after 6 years in office
but has no clue how to deal with it. The government’s focus
is on raising revenue to hide the fiscal indiscipline.
However, it is clearly more of an expenditure mismanagement
problem. The budget does not address expenditure review and
re-composition and measures to ensure fiscal discipline, but
rather focuses on the revenue side (raising more taxes),
clearly being insensitive to the population and taxing them
to hide inefficiencies. There is a saying that “if all you
have is a hammer everything begins to look like a nail!”
This is so appropriate in the case of this NDC Government.
Propaganda Achievements
In search for tangible achievements by this Government, the
Minister of finance included the following as achievements:
• “virtually eliminating the spectre of long queues for fuel
as well as the huge budget overruns of about GH¢339 million
in 2012 and GH¢135 million in 2013 that resulted from past
failures to adjust prices through the “automatic adjustment”
pricing formula; “
Who created the long queues for fuel in the first place and
budget overruns? How can you create a problem and then
consider it an achievement to revert to the status quo ante?
• “A demonstration of our ability to raise both domestic and
external funds to complete several projects that were put on
Government budget without adequate source of funds”.
How can this be an achievement? Even as a HIPC economy,
Ghana was able to raise funds domestically and externally.
• We achieved another important and significant success in
launching our third Sovereign Bond of US$1 billion in early
September 2014. Similarly, on the same day as the Bond
issue, the Ghana COCOBOD also signed an agreement for US$1.7
billion, which was the result of another successful bid to
access the international capital markets.
How can COCOBOD’s regular annual raising of funds for the
purchase of cocoa suddenly become an achievement by this
Government?
IMF Possible Program and Related Issues
Turning to Government’s budget statement, we see no elements
of an underlying agreement on an IMF supported framework.
Are we likely to see a revised budget statement if a final
deal is concluded in 2015? Where is the financing coming
from to fill the budget gap? Are Donors likely to disburse
without an IMF agreement and in the midst of corruption
especially in payroll administration? Is the government
planning on using parastatals like GNPC (which has recently
entered into an agreement to borrow $700 million without
parliamentary approval in violation of the Constitution and
the Petroleum Revenue Management Act) to fill the gap? What
will the government do if there is no IMF agreement? The
questions are tall and this budget is therefore clouded with
so much uncertainty going forward.
CONCLUSION: The Bottom Line
In the final analysis, the issues that matter to the
Ghanaian people as far as the 2015 budget is concerned are
as follows:
1. Will the budget grow the economy? No
2. Will the budget create Jobs? No
3. Will the budget reduce the cost of doing business? No
4. Will the budget reduce the cost of living and suffering?
No
5. Will the budget provide better conditions of service for
teachers, nurses, doctors, civil servants and workers in
general? No
6. Will the budget allow workers to select their own Tier 2
Pension Fund Managers and account for the deductions made?
No
7. Will the budget restore the allowances of teacher and
nursing trainees? No
8. Will the budget end load-shedding (Dumsor-Dumsor)? No
9. Will the budget stop the high level of corruption? No
10. Will the budget help transform the economy? No
If the 2015 budget cannot answer any of the above questions
in the affirmative, then it may just be meaningless to the
ordinary Ghanaian. At the end of the day if the fundamental
problems with the economy are not dealt with, then there
remains a threat to macroeconomic stability going forward.
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