Thoughts on 2019 Mid-Year Review and economy

Don’t rush to praise all of Africa’s “popular” but fiscally unsustainable programs

• Context is 2019 Mid-Year Review and need to be realistic about the fiscal prospects for the country—based on past views in interviews and articles.
• A general call on those who relate to Africa and its leaders not to ingratiate or praise all “popular policies and initiatives”, even if well-meaning, that eventually lead to waste of fiscal and economic resources—even disaster.
• The call goes for domestic leaders (e.g., chiefs, experts, clergy) and foreigners (e.g., multilateral and bilateral institutions, development partners, CSOs, professionals, etc).

Background

• Even the President now concedes (e.g., Oxford University lectures) that the Free Senior High School (F-SHS) will take a lot of resources, including
  • diversion of petroleum revenues from the path of investment to consumption
    • including early hints of the use of “Heritage Fund” for F-SHS;
  • accumulation of arrears (e.g., pensions, roads, bailouts cost, etc) at May Day Speech;
  • higher levels of borrowing than the government had anticipated; and
  • despite three (3) (two (2) additional) oil fields with almost 3 times the output since 2017 and recovery of prices that that has tripled revenue from petroleum.
• It will involve serious long-term commitment—merit only in leaving a legacy that future leaders will grapple with for decades.
• Note that the Minister for Finance also highlighted the point but was quickly shouted down by hawks within the Cabinet and the Party.

The “unsustainable promise” of F-SHS and other political promises

• F-SHS appeared sustainable because—
  • unlike the original promise of a “big bang” during elections (starting with all students), SHS program was “staggered” to start with only Year 1 students:
  • Years 2 and 3 students continued to pay fees—while program remained “untargeted”, with even middle-class and affluent parents benefitting;
  • additional petroleum (oil and gas) revenues provided initial buffer from 2017—but these one-time inflows are against expanding expenditures (F-SHS and other very expensive electoral promises such as 1D1F);
  • averting global and SSA recession and investments in energy sector
    • Ghana among few SSA states to avoid recession;
    • reverse rate of accumulation of national debt from positive to negative;
    • investing directly and supporting private-sector investments in TEN and Sankofa petroleum fields;
  • a substantial part of highly-rated fiscal consolidation came through another “illusion”—budget “offsets” rather than a program of paying down arrears;
  • bequeath of buffers—previous administration bequeathed buffers
    • Sinking Fund: use to pay off outstanding balance of Ghana’s first 2007 Sovereign Bond;
    • Ghana Infrastructure Investment Fund (GIIF): balanced used; VAT flow diverted to consumption; and no further allocations made to Fund;
    • Energy Sector Levy (ESLA): continuous flow of Ghc3 billion annually for clearing arrears directed at providing relief for domestic banks;
  • GDP “rebasing” provided fiscal room and breadth, through
    • room for borrowing through GDP growth and “illusionary” lowering of Debt/GDP ratio that is being trumpeted as an achievement by the government; and
    • deferred the impact of increasing costs.
  • “capping”—has not provided needed fiscal relief, despite diverting vital resources from vulnerable programs (i.e., education {GETFund} and health {NHIL}; rural development {DACF}; and institutions {IGF

Fiscal signs not favourable—going into Mid-Year

• one-time cushions—the “bump” in GDP growth from rebasing and additional crude/gas production is “one-time” and will no longer cushion the worsening indicators like debt and budget deficit;
• arrears owed to contractors and suppliers—large amounts owing to these vital economic players in various sectors, including Presidential initiatives, are becoming apparent and are now acknowledged by the Government—
  • pensions—concession at May Day celebrations by HE the President;
  • contractors and suppliers—concessions by Roads and Finance ministries and “demonstrations” by contractors;
  • salaries—civil servants, nurses, and presidential initiative employees;
  • banking sector “bail-out” costs—despite unprecedented funds from ESLA;
  • F-SHS—no comprehensive disclosure yet to Parliament and the nation on true costs and inevitable arrears;
• increasing tax burden—retention of temporary (“nuisance”) taxes & introduction of new tax measures
  • retention of temporary (“nuisance”) taxes such as ESLA, special import levy (SIL), national fiscal stabilization levy (NFSL)
  • increase in ESLA levies: introduced at a period of low crude prices low US$40s pbl so consumers are paying more now at current higher price above US$60pbl;
  • Implicit ESLA levy: levy should have lasted 3-to-5 years but increased duration of ESLA Bond to 7-to-10 years;
  • new tax measures—increase in top rate of personal income tax (PIT); 2.5 percent increase in VAT rate (from 15% to 17.5%); luxury tax (user fee) on vehicles; blocking VAT input tax credit (ITC);
  • discretionary change in basis (valuation and classification) for calculating import duties, VAT, fees/charges; etc;

• fiscal expansion—the worsening fiscal gap may not taper or abate due to
  • subtle, not bold, new tax measures (e.g., luxury tax etc.)
  • continuing with expenditure programs (likely borrowing, not reallocation to support the pace of president’s electoral promises;
• fiscal deficit and borrowing—these indicators are deteriorating fast and corrections for offsets in, and lowering of estimates, will make these indicators worse;
  • borrowing to support the increasing fiscal deficit;
  • borrowing to finance belated infrastructure;
  • pledge of resources (e.g., royalties from minerals, bauxite deposits, etc.) to support the budget;
  • Sinking Fund—despite three (3) oil fields, not using the SF to reduce debt (as was done from one (1) oil field for the NPPs first 2007 Sovereign Bond;
  • Ghana Infrastructure Investment Fund (GIIF)—diverting funds (i.e., VAT and ABFA) for investment in infrastructure to consumption.

Wanted now—cautious voices

• “Measured” approach is fiscally prudent—being “measured” with
  • F-SHS [e.g., alternative “progressive” approach] and other programs is consistent with fiscal prudence, as elicited in Public Financial Management Act [PFMA] and Budget Responsibility Act [BRA];
• Benefits of being “realistic”—refreshing to hear the voices of caution emerging
  • Domestic experts—professors, experts, think tanks, and chairperson of vital constitutional commission have sounded note of caution;
    • Opinion leaders—it is important for other domestic opinion leaders to follow a realistic lead (e.g., clergy and chiefs must reflect condition in religious and community schools);
  • IMF/WB MD—sounded note of caution, not ringing endorsement, on government expenditure and debt programs; nonetheless
    • roll-back of tax measures (e.g., VAT on non-core financial sector and commercial real estate) in Program;
    • failing to acknowledge Ghana’s avoidance of recession; permitting fiscal expansion; and not being critical of “offsets” that underestimated arrears and gave impression of accelerated fiscal expansion;
  • Development Partners (DPs)—countries that may be capable of free (education) social programs choose to make them “targeted” (i.e., tuition-free programs, as Ghana had) and adopting alternative options (e.g., concessional student loans);
  • Preference for using fiscal support for investments, not consumption, is global
    • in advanced countries (e.g., quantitative easing): invest in infrastructure to support private sector and rural/urban development, not place scarce fiscal resources in consumption;
    • MIC states—approach adopted by middle-income countries (MICs) such as Emirates and Asian economies;
    • Developing countries—Angola and South Africa now showing a preference for infrastructure development through Sovereign Wealth Funds (SWFs) as in Ghana’s PRMA.

Conclusion

• Current fiscal environment is different from late 2014-16 when many SSA countries were headed into recession, due to global financial crisis, fall in crude oil and other commodity prices, and domestic pressures such as non-supply of gas from Nigeria
  • Now, three (1) oilfields, not one (1); rebound in commodity prices, and, therefore, enhanced budget buffers.
• Problem is unbridled expenditure due to electoral promises; non-conventional approach to managing arrears; and borrowing
• Time for realistic review and appraisal as well as domestic and international experts toning down their praise or holding back their reservations on Africa’s politically-motivated “popular” but unsustainable electoral and fiscal promises.