“It's clearly a budget. It's got a lot of numbers in it”, this was George W. Bush's renditionof what a budget is. Perhaps, George Bush got it all misconstrued, because budget goes far beyond a lot of numbers and looks into the strategies and approaches of using the numbers to deliver efficient and quality goods and services to people.
The 2014 budget statement and medium term economic policy as read by the Minister of Finance, Mr. Seth Tekper carried the theme “ Rising to Challenge: Re-aligning the Budget to meet key National Priorities”. I say the theme couldn't have been framed any better, considering the age old problem of the misalignment of our limited resources to areas or sectors that do not really need them, whiles we starve crucial sectors and priority programmes of required resources to meet our development aspirations. Indeed, we have limited or no choice at all, than to rise to the challenge.
We are at an economic crossroad, where any economic decision taken has far reaching implications for the development objectives of our economy. We have had a very weak and quite undefined economic fundamentals which has impeded economic and social growth in the over 55 years of political and economic independence.
This paper seeks to empirically analyse the budget statement and economic policy to determine the extent to which it meets the economic aspirations of our people. For a country with a relatively lower tax effort relative to its potential and a larger untaxed informal sector, gathering, allocation and distribution of resources plays a very critical role in the attainment of economic and business success.
PERFORMANCE OVERVIEW
Macroeconomic Performance
Growth
The Ghanaian economy has greatly improved and stabilised significantly over the last medium term (2009-2012). The indicators showeda souring trend of economic growth which peaked in 2011, with real GDP growth of about 15%. The growth in 2011 is mainly attributed to the inclusion of oil production in Ghana.
The growth rate in 2012 fell to 7.9% becauseoil production targets were not met and the energy crisis also affected the productive sectors of the economy, thereby reducing general productivity. In 2013, the provisional GDP growth rate reduced further to 7.4%, however, this is considered quite a good performance considering the fact that the2011 GDP was revised from 14.4% to 15% and that of 2012 from 7.1% to 7.9% in 2012, hence the 7.4% growth was over bigger principal (8.2% based on the unrevised GDP). The provisional real GDP of 2013 also exceeded target by GHC 223 million. This was very impressive considering the enormous economic challenges ranging from the election petition to the energy crisis that characterised this fiscal year.
In 2013 the services Sector once again led the overall GDP growth, with a growth of 9.2%, a percentage point lower than that of 2012, followed by the Industry Sector with 9.1%, higher than that of 2012 by 31 percentage points and Agriculture with 3.4%, also higher than the previous year. Agriculture saw crops grow 3 times higher than the previous year, as well as cocoa growing from -6.9 to 3.7%. Most significantly is the growth of the fishing sub sector that was as twice that growth of the previous year from 4.7% to 8.9%. This can perhaps, be attributed to the enormous investment in the fishing sub-sector ranging from the supply of large number of out-board motors by MASLOC to fisher folks in the coastal regions and the cushioning of the premix fuel prices. This also reflects the success of government's efforts towards curbing pair-trawling and other criminal activities.
In the industrial sub-sector, apart from manufacturing and construction that suffered a slow growth, mining and quarrying, including petroleum sub-sector performed exceedingly better.
Inflation
Inflation has been on an upward trend since the beginning of 2013, resulting in inflation above single-digit from January through October 2013 (10.1% to 13.1%).
The Ministry of Finance and Economic Planning attributed this upward trend to the pass through effect of the fuel and utility price increases and demand pressures.
Figure 3: Year-on-Year Inflation Rate in 2013
Source: Ghana Statistical Service, Budget 2014
Contrary to the assertion that the upward trend of inflation, is due to the pass through effect of the fuel and utility price increases and demand pressures., I believe the upward trend from January through October could mainly be as a result of the pass through effect of the exchange rate depreciation (4.12% and 14.1% against our major trading currencies the US Dollar and Euro respectively) over the period under question. This is because non-food inflation basket which contributes about 56.4% to the CPI, mainly comprise of import products and for that matter are hardly or lowly elastic to fuel and utility price adjustments.
Empirical evidence by Anokye and Frimpong 2010 shows a high exchange rate pass-through to inflation in Ghana, which is virtually confirmed by Antwi-Asare and Otokunor 2013, proving a high exchange rate pass-through to import prices in Ghana.
Monetary Sector Performance
Money
The effort by the MPC to compliment government efforts at fiscal discipline and macroeconomic stability was quite impressive with the annual growth rate of Broad Money Supply (M2+) declining to 17.7% year-on-year, compared with a growth of 24.3% in December 2012 and 28.8% in September 2012.This had some negative implications for general inflation as well.
The robust Open Market Operations resulted in a slower reserve money growth of 21.0% (GH¢1,362.7 million) on year-on-year basis in September 2013 compared with 49.3 % (GH¢2,141.1 million) the previous year and 37.8% (GH¢1,191.1 million) in 2011. The slower pace of expansion in reserve money in the year was due to slower growth in Net Domestic Assets, which increased by arelatively meagre GH¢734.3 million (30.0%) during the review period, compared with an increase of GH¢3,414.6 million (351.9 %) in 2012.
Fiscal Sector Performance
Even though there were general shortfalls in both revenue and expenditure, that of revenue exceeded expenditure, thereby resulting in a fiscal deficit on cash basis in equivalence of 8.4% of GDP against a target of 7.2%. This compares unfavourably to a deficit of 7.7% of GDP for the same period in 2012.
Net Domestic Financing of the deficit amounted to GH¢4,419.5 million (60.3%), against a target of GH¢4,532.7 million (71.2%). Foreign Financing of the deficit was GH¢2,915.0 million (39.7%), against a target of GH¢1,835.6 million (28.8%). This outturn has positive implications for domestic private investments and enhances the tendency for reducing the challenges of 'crowding out' posed by domestic financing of the fiscal deficit.
Total revenue and grants for the period was GH¢13,868.2 million, equivalent to 15.9% of GDP, against a target of GH¢16,341.9 million, equivalent to 18.4% of GDP. Whiles, in nominal terms, the provisional outturn was 17.6% higher than the outturn for the same period in 2012; the shortfall has telling negative implications for fiscal stability. This shortfall has been attributed partly to low disbursement of grants from our development partners and, mainly due to lower than anticipated domestic revenue collections.
Total expenditure, including payments for the clearance of arrears and outstanding commitments for the first three quarters of the year amounted to GH¢21,202.8 million (24.3% of GDP), against a target of GH¢22,710.3 million (25.6% of GDP). The outturn was 6.6% lower than the budget target and 25.5% higher than the outturn for the corresponding period in 2012.
The growth in expenditure was mainly due to the increase in interest cost and the growth in the wage bill during the period.
OUTLOOK ANALYSIS
Macroeconomic Target Analysis
Quite a number of the macroeconomic targets that were set in the 2013 budget were missed by the third quarter. This is indicative of what will happen by the end of the fourth quarter. Nevertheless, some of the indicators performed extremely well.
Much more important is the economic targets for 2014, because it will determine our commitment as a nation, to re-engineer the required mix of economic growth that really addresses the canker of unemployment. The macroeconomic targets set for 2014 include among other things;
Non-oil real GDP growth of 7.4%;
Overall real GDP (including oil) growth of 8.0%;
Endof year inflation target of 9.5% within ±2%;
Overall budget deficit equivalent to 8.5% of GDP;
Gross international reserves of not less than 3 months of import cover of goods and services.
I believe these targets are realistic even though they appear a bit ambitious, especially in the face of the projections made by the IMF in their World Economic Outlook Survey on Sub-Saharan Africareleased in October.
Economic activity in Sub-Sahara Africa was robust in the first half of 2013, amidst the recent global financial market volatility which has affected mainly frontier economies in the region. The region is expected to end 2013 with an average growth rate of 5%, which is projected to reach 6% in 2014. This makes our growth target of 8% quite ambitious and inspirational. But we can achieve this on the account of a sustained robust domestic demand. Other factors that are expected to feed into the growth in 2014 include investments in infrastructure and increased output from energy and other resource projects coming on stream in the Ghana.
In major emerging market economies, inflation has been relatively higher, a problem that has been magnified by the exchange rate depreciation of recent months. The external financing condition that has led to the weakening of emerging market currencies in recent months could also drive up inflation, so our target of 9.5% ±2% at the end of 2014 is also very realistic.
Monetary sector Outlook
Local sub-sector
The Minister of Finance indicated that, the thrust of monetary policy over the medium term will continue to be as follows;
The maintenance of stability in the general level of prices as a necessary ingredient for sustainable growth. In this regard, policies will focus on improving stability in the foreign exchange market while accumulating more comfortable level of reserves.
boosting credit delivery for economic growth, the Bank of Ghana will continue to pursue policies to ease credit accessibility,
to bring transparency in the setting of lending rates and improve financial intermediation.
To strengthen its supervisory role in the banking and non-bank sectors, especially in the area of micro finance in response to the rapidly evolving developments in the sector.
This are very important policy actions that must be strengthened by BOG, however, it is about time the BOG thought of engaging in some commercial investments activities on the local money market to help rake in more revenue, because the returns remains higher on the local market than the international markets. This perhaps may also help in our exchange rate stability programme, because our limited reserves will not be taken out of the country for investments.
External Sub-sector
According to the Minister of Finance, the BOG is expected to maintain macroeconomic stability to enhance the inflow of foreign direct investments, portfolio inflows as well as increase the inflow of foreign exchange from both traditional and non-traditional export sources. This is aimed at accumulating a more comfortable international reserve level of a minimum of four months import cover to cushion the economy from any adverse external shocks.
The main threat to this target is the fluctuations in commodity prices on the international market and the domestic preference for foreign products and the attendant pressure it exerts on our international reserves.
Fiscal sector Outlook
Revenue and Expenditure Overview
The fiscal sector outlook is very interesting. Table 1 and 2 below which represent revenue and expenditure estimates which indicate that the 2014 budget will result in an overall budget deficit of GH¢8,970.8 million, equivalent to 8.5% of GDP.
Table 1: Summary of Revenue and Grants Estimates for 2014
Sourece: Ministry of Finance
It also welcoming to note that, estimate for grants or Donor Partners Funding (DPF) for the 2014 budget have been reduced from 5.6% in 2013 to an estimated 4.3% of estimated expenditure in 2014 as shown in Table 1.
Table 2: Summary of Expenditure Estimates for 2014
Source: Ministry of Finance
Financing of the 8.5% deficit is from both domestic and foreign sources as usual, but unlike 2013 Net Domestic Financing is estimated at GH¢4,117.9 million, equivalent to 3.9% of GDP compared to GH¢5474.8million representing 6.2% of GDP IN 2013. This will have both short run and long run implications for private sector investment in the economy, because it makes available about GHC 1356.9 million extra credit for the private sector and will further reduce to a large extent the incidence of 'crowding out' of the private sector .
On the hand, financing from foreign sources are estimated at GH¢4,921.9 million, equivalent to 4.7% of GDP, compared to GHC 2536.0 million representing 2.9% of GDP in 2013.
Resource Allocation to MDA's
In line with the NDC government's ideology of social democracy it has committed GHC 9,385,326,545to the social sector, representing 56% of total resourceallocationfor goods and services. This is very significant considering the level of development of our economy and the fact that we remain infants in a league of middle income economies. The enormous support to the social sector is expected to provide social services that will enhance and sustain our children, youth and the work force to improve productivity and efficiency to grow our economy.
The economic sector which forms 15 % of the total resource allocation followed the social sector in the allocation of resources, with Energy and Petroleum sub-sector receiving the highest allocation of GHC 1,340,908,515 representing 52% of allocation to the economic sector. The economic sector is expected to receive GHC 2,592,265,398in total for the 2014 fiscal year.
The Ministry of Education received the highest allocation among the MDA's with a total allocation of GHC 5,816,315,034 representing 33.94% of the total allocation to MDA's. This is expected to give life to the NDC manifesto promise of building 200 new ultra-modern community SHS across the country, continuing the removal of the schools under trees, expansion of infrastructure in all the public universities especially, the University of Health and Allied Sciences and University of Renewable and Natural Resources in the BrongAhafo and Volta Region respectively, the provision of free school uniforms, the provision of free exercise books, as well as the provision free text books for all basic schools, enhancement of ICT education through the distribution of free laptops and computers for all students and teachers across the country, the upgrading of teacher training colleges into college of education, the upgrading of polytechnics into Universities of Technology and so on.
These investments are expected to enhance the quality of human resources produced from the various educational institutions, to meet the demands of the growing job market.
It is however interesting to note that, out of the total of GHC 17,137,427,397allocation to MDA's, GHC 3,591,119,902 representing 21% of the total allocation is financed by Donor Partners Fund (DPF) as shown in figure 3. This simply means failure to realise substantial amounts from our donor partners will lead to a 0.21 probability of throwing our policies and programmes for out of balance. This means much effort must be put into ensuring that donor partners honour their commitment to the budget. The largest source of funding representing 58% of the total allocation to MDA's is from government of Ghana (GOG). The others are from the Annual Budget Funding Amount (ABFA) and Internally Generated Funds (IGF).
POLICY OVERVIEW
Some of the policy measures among others outlined in the budget for the 2014 fiscal year are as follows;
A 10% salary cut for Executive to go into the construction of CHPS Compounds purely for Maternity Health Care.
Establishment of Infrastructure fund: The fund is expected to fundamentally change the funding and delivery of infrastructure in the country; reduced cost, enhance timely payments, and promote more efficient delivery of capital projects. This fund is indeed long overdue considering the extent of the deficit in infrastructure and its attendant hindrance to the transformational objectives of the country in terms of the road, rail and energy to facilitate trade and expansion of businesses.
Provision of credit support for SME development
Setting up of contingency fund for the first time since constitutional rule
These policy measures are targeted at bringing the expected relief to domestic investors and also to strengthen our enviable position as one of the most congenial business destination in the sub region.
The following fiscal measures are considered laudable in our attempt at bringing fiscal discipline and instilling some level of fiscal legitimacy in the economy.
Use of oil resources for targeted infrastructure development
Focus on on-going and pipeline projects to enhance speedy achievement of related development outcomes
Innovative debt management strategy
Removal of taxes on HIV prevention and treatment imported products
Removal of taxes on printing material: This will not only make Ghanaian printers competitive but will also reduce the cost of doing business in Ghana significantly. As a matter of fact printing forms major part of the cost of doing any kind of business in Ghana, thus this initiative will be very instrumental in bringing relief and life to the private sector.
Refinancing strategies
Use of long term funds to fund capital projects
Adopting escrowing and other innovative methods of debt financing
Undertaking rating of major funds
State Owned Enterprises borrowing on their own balance sheet
Realignment of major expenditure items towards national priority programmes
Reduction and ultimate removal of subsidies (Petroleum and Utility Subsidies)
Strategies to sustain the payroll
Public Financial Management Reforms
Budget Reforms – efficiency value for money, better results
Introduction of Programme Based Budget
Introduction of performance Management Information
OPINION AND COMMENTS
One can only commend His Excellency President John Dramani Mahama and his team led by the Minister of Finance, Mr Seth Tekpe for a wonderful job done to stabilise our economy so far and the measures that has been put in place to improve and sustain the economy for the 2014 fiscal year.
However, the brilliant policy measures in this budget alone cannot yield the expected results in isolation; it requires even much more hard work and strict compliance to the ethics of the implementation process. There is no doubt though, that, the team at the Ministry of Finance will implement this budget with all the professionalism it requires. They are indeed capable and have proven to better managers of the economy over the last few years, but a strict budget monitoring mechanism will add to the efficiency as well.
I would want to further submit, that, much more effort is put into bringing the exchange rate fluctuations under control, so as to enhance the effectiveness of our inflation targeting policy.
Finally, measures must be put in place to make sure that donor partners fulfil or honour their commitments to the budget in time or in full, to enhance the effectiveness of the budget implementation process.
All in all, the 2014 budget is a perfect mix of policies and programmes that meets the development expectations and aspirations of the ordinary Ghanaian.
Long Live Mother Ghana!!
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