Nigeria unexpectedly cut its Monetary Policy Rate (MPR) by 100 basis points from 12.50% to 11.50% in an attempt to boost the economy by providing cheaper credits. Analysts, who see the rate cut as suppressing bond yields, aren’t exactly confident this will work.
Ghana’s rising debt shows tax system still not working
Ghana exited a four-year IMF extended credit facility in April – but poor tax collection and rising debt mean that the country is far from out of the woods.
The country’s latest credit facility was the sixteenth time since the 1960s that it has had to be bailed out by the IMF. Persistent weakness in tax collection and fiscal discipline lie at the heart of that record. Central bank governor Ernest Addison has said that Ghana missed its first-quarter revenue target by almost a fifth, while the country’s total debt at the end of March was up 16% from a year earlier – reaching 58% of gross domestic product (GDP).
That shows the tax system is still not under control. In February, the tax administration said that it was considering raising its revenue target for 2019. Reports in March that the commissioner-general of the Ghana Revenue Authority Emmanuel Kofi Nti had been fired due to missed revenue targets and leakages turned out to be false. The tax authority said in its statement of denial that it was focused on achieving the 2019 target.
The chances are that substantial revenue-gaining measures will be delayed until after the 2020 election because they would be unpopular, Renaissance Capital fixed income strategist Gregory Smith argues in research out today. Debt service costs have outpaced revenue growth, and Smith would have preferred a stand-by agreement or at least a policy support instrument with the IMF after the end of its programme.
The Oxford Business Group and PwC argue that Ghana still suffers from significant revenue leakages caused by deliberate undervaluation of imports, hidden sales and non-issuance of VAT receipts. In its review in April, the IMF argued that stronger revenue mobilisation is critical and that tax compliance must be strengthened. Off-budget expenditure needs to be curtailed, the IMF also said. “The Ghana Revenue Authority is still struggling to improve significantly its performance,” it added.
Prospects for fast economic growth have, so far, been Ghana’s saving grace. Moody’s, which rates Ghana’s credit at B3 stable, wrote in March that revenue generation capacity remains a key credit challenge. The strong growth outlook is among Ghana’s credit strengths, Moody’s said.
- According to panelists surveyed by Focus Economics in May, growth should remain strong this year due to more accommodative monetary policy.
- Focus Economics panelists expect the economy to expand 6.3% in 2019 and 6.1% in 2020.
- Yet fluctuations in global commodity prices and lower-than-anticipated oil production would endanger that outlook, Focus Economics noted.
- According to the African Development Bank, dependence on primary commodity exports means the economy remains exposed to external price shocks, which could weaken GDP growth.
According to the IMF, Ghana’s public debt trajectory is highly sensitive to its annual deficits.
- A deviation of even 1% from the projected deficit in 2019 could lead to a much higher debt path.
- Deficits of 5% of GDP in 2019 and 6% in 2020 would raise debt levels to about 65% of GDP over the medium term, compared with 55% percent of GDP under the baseline scenario, the IMF says.
Currently healthy commodity prices can’t be an excuse to keep kicking the can. Ghana needs to improve tax collection to end the cycle of bailouts.