Ghana’s budget deficit teeters on the brink

By Dr. Mahamudu Bawumia
Posted on Monday, 18 February 2013 18:50

At the end of 2012, Ghana’s budget deficit was a whopping Ghc 8.7 bn ($4.6bn), amounting to 12.1 percent of GDP using the rebased GDP numbers (or some 20 percent of GDP in terms of the old GDP series).

This reality, in the face of water and power shortages, is already being felt and will soon be patently obvious for all to see

This is the highest recorded budget deficit in Ghana’s history. From Nkrumah through Acheampong, Rawlings and Kufuor, no government has incurred this level of budget deficit.

What is more worrying is that this provisional deficit figure excludes some Ghc 4.0 bn ($2.1bn) in commitments and arrears yet to be paid to contractors and other service providers.

If we include these arrears the deficit for 2012 would be some 23 percent of GDP using rebased numbers (or some 35 percent of GDP using the old GDP series).

These are mindboggling numbers. The crux of the problem is that government spending increased astronomically to 34.5 percent of GDP even though government revenues amounted to 16.1 percent of GDP- a gap of over 100 percent- for the year.

The provisional 2012 budget deficit of 12.1 percent of GDP is almost double the budget deficit of 6.5 percent in 2008 using the rebased GDP numbers (or 11.2 percent of GDP using the old GDP series) notwithstanding the fact that Ghana enjoyed more favorable economic circumstances in 2012.

In 2008 Ghana was not an oil producer and the global economy was in crisis.

In 2012 on the other hand, Ghana was an oil producer facing a favorable external environment for its exports and yet managed to double the 2008 budget and in the process achieve what is a truly unprecedented budget deficit in Ghana’s history.

The government promised last year that its management of the economy would be more prudent than that of other governments in previous election years.

Despite all the favorable opportunities at its disposal, 2012 has turned out to be the worst election year outcome in Ghana’s history in terms of the management of public finances. This is also yet another failed NDC promise.

For any economy with this historic budget deficit combined with an increasing balance of payments deficit- some 13 percent of rebased GDP- and mounting public debt, this state of affairs will raise alarm bells, but not so in Ghana.

The government has found a way to delay tackling critical economic problems through borrowing domestically and internationally and falsely claiming “unprecedented” achievements at home.

In the process, Ghana’s total public debt has increased from Ghc 9.6 bn in 2008 to Ghc 33.5 bn in 2012, an increase of 248 percent in 4 years.

As has been demonstrated for Ghana and many countries in the past however, this path and manner of managing an economy is unsustainable.

Take the example of the management of oil revenues. It turns out that the NDC government forecast oil revenues from corporate taxes of Ghc 384.1 million for 2012 knowing full well that revenue would not materialize.

This is because the Jubilee partners are entitled to capital cost recovery under the Petroleum Income Tax Law 1987 (PNDC Law 188) and the government knew this.

The government nonetheless forecast the receipt of these revenues because the provisions of the Petroleum Revenue Management Act 2011 are such that the proportion of then oil revenues that accrues to the budget (The Annual Budget Funding Amount) is based on projected benchmark oil revenue.

Under the Act, 70 percent of projected oil revenue accrues to the budget and 30 percent is divided between the Stabilization (21 percent) and Heritage (9 percent) funds.

The government therefore over projected the oil revenue so as to get more of the oil revenue into the budget.

In the meantime, the projected revenues were spent through government borrowing.

Is it therefore a surprise that with such economic management the budget deficit would increase astronomically? Poor economic management has consequences.

Unfortunately, the burden of the inevitable consequences of the NDC’s management of the economy is bound to fall disproportionately on the segments of society which are least able to afford it, as prices for petroleum products, transportation, water, electricity, school fees, tax increases, expenditure cuts, unemployment, wage pressures, inflation, interest rates, among others, shoot up and non-oil GDP growth slows down.

This reality, in the face of water and power shortages, is already being felt and will soon be patently obvious for all to see.

Dr Mahamudu Bawumia was the running mate to Ghana’s main opposition leader, Nana Akufo-Addo in the 2012 election. He is an Oxford-trained Economist, former Deputy Governor of the Bank of Ghana and until recently, Country Director of the African Development Bank in Zimbabwe.

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