Ghana 2016 Budget Analyses: Ghanaians Should Not Raise Their Hopes

In 2016, the government of Ghana intends to prosecute a programme for a brighter medium-term economic progress for the country. According to the 2016 budget, this programme hinges on the collection of more domestic revenue, wiser spending, proper debt management and public sector reforms. These will, however, be done in lieu of finding immediate solutions to the country’s socio-economic problems.

For the 2016 financial year itself, the budget failed to offer a lifeline or mention a programme through which the government could give Ghanaians some immediate reprieve from the challenges of the year before. It contained no policy or set of policies which will stimulate an increase in local production and consumption, to bring real economic relief. In the absence of such stimulus, the economic outlook for 2016 promises no improvement from that experienced in 2015.

1. No Significant Changes in Fiscal and Monetary Policy Paradigm

One issue that critics always sight as a major problem for the country is its borrowing culture; the chronic desire to overspend, fostering a chronic need to borrow. In 2016, this culture is to continue. Essentially, the government will spend more than it can generate; borrow to cover the cost of the excess spending and then borrow some more to pay part for the interest of earlier borrowing. What is to change is how the government will source the money to finance its excess expenditure (Table 1).

In addition to changing its lending source pattern, for which a greater portion of the borrowing will be done locally (from the Bank of Ghana and commercial banks), the government is also targeting a 13.5% reduction in deficit and has committed to not spending beyond its planned GH₵46 billion. Suppose, the government is to be trusted in an election year to maintain discipline and spend according to budget, its efforts may yet remain insufficient in changing the cycle of spending and borrowing that has plunged Ghana into a GHȻ 92 billion debt noose.

The choice to defer the use of other measures, such as making further cutbacks on expenditure, consciously improving exports, increasing profits from state-owned industries etc., to further reduce deficit will have consequences for the ordinary Ghanaian in 2016. The cycle of cedi instability, failed inflation targets, higher lending rates, narrow window for activities to improve economic wellbeing are likely to continue in 2016.

1.1 Risk of Inflation Rise
a. The government is targeting a 10.1% end of year inflation for 2016, down from the present 17.4% in 2015. But the Bank of Ghana (BoG) has a rather grim outlook on inflation ahead. Its Monetary Policy Committee holds the view that, “there are imminent upside risks to the inflation outlook such as worsening external financial conditions and the planned utility tariff adjustments which are now likely to be higher than anticipated during the last MPC”.

b. Adding to the fears of the BoG, 2016 is an election year, so in spite of the rhetoric of fiscal discipline, the government will make emotional expenditure choices. Political parties will also spend millions of cedis in campaign expenditures and all that activity are likely to drive money supply upwards in 2016 and therefore potentially raise inflation several points above the targeted 10.1%.

c. Naturally, the BoG will be driven to act like it always has to manage the money supply (inflation), by raising the prime rate, in order to mop up the excess liquidity. The result of such a move might be an end of year prime rate range between 25% - 28%. While this action may slow inflation down, it is not likely to bring it below 11% by the end of the year.

d. Even in the very unlikely situation where expenditure and the BoG’s counter-measure for the year even’s out so the government reaches its target, workers and households whose incomes do not rise above 10% will most certainly experience the same economic conditions they did in 2015; with the likelihood their conditions will get worse.

1.2 A Potential Increase in Interest Rates

Under pressure from inflation, the BoG is not likely to bring the prime rate below 25%. Commercial banks will follow this signal and maintain lending rates at above 25%. This coupled with the government’s plan to increase domestic borrowing by 14.5% will negatively affect access to capital for private businesses and households. Banks will more readily lend risk-free to the government than approve loans to aid business and households. Consequently, lending rates will be driven up, beyond the already high rate (25% + per annum). A grim outlook for domestic entrepreneurs may be ahead.

1.3 A Narrow Window for Improving Economic Wellbeing of Ghanaians

1.3.1 Over 60% of Government Expenditure will go into Non-Profitable Expenses

In 2016, as with previous years, in spite of excess expenditure, not enough money will be devoted to activities which will improve the total wellbeing of Ghanaians (Table 2). In the end, less than 40% of all the money spent will be used to improve the lives of Ghanaians.

The distribution of expenditure in 2016, show that 32% of the total is dedicated to salaries of about 1 million government sector workers only. The next 30% will be spent on paying arrears and interests on public loans. This leaves about 38% of the total expenditure to fund relevant infrastructural and welfare activities such as the National Health Insurance, the Ghana Education Trust Fund, the District Assemblies Common Fund, the Road Fund, subsidies and other social benefits.

1.3.2 The Government will Rather Spend on Administrative Processes in 2016 than Production Activities

Collectively, government’s ministries. departments and agencies (MDAs) will not get more than a 4% budgetary raise. Yet, MDAs are to experience a major redistribution of their allocated funds, though, not aimed at motivating the needed productivity change the country needs. The government, in this instance, appears to be looking in another direction, when it could stir activity in the productive sectors of its MDAs, like the Ministry of Food and Agriculture, to improve this year’s crop yields, for instance. (Table 3).

Instead, the fund redistribution exercise takes the shape of a minimal budgetary raise (7%) for the economic sector and a heavy cut back (31%) from that infrastructural development sector, while the administrative budget goes up by half (50%) of what it was the year before.

It is instructive to point out that 26% of the increase in the administrative budget will go to the Electoral Commission ahead of the next general election. But even so, what justifies a 58% increase in the budget of the Office of the President from 453,889,073.00 in 2015 to 718,854,911.00 in 2016, or the more than 1000% increase in the budget of the Ministry of Local Government from 290,983,971.00 in 2015 to 605,039,658.00 in 2016?

2. On the Brighter Side
2.1 There Could be Some Relief for the Cedi in 2016

The falling and unstable cedi was a major source of the economic woes of Ghana. The government hopes to reduce international borrowing to finance deficit by some 33.5%. This implies that, at least one source of the high demand for foreign currency may see a 33.5% decline. By the simple law of demand and supply, the price (value) of foreign exchange could see a significant reduction, with other factors held constant.

2.2 The Government can Give all Ghanaians an Economic Break by Solving the Energy Shortfall ‘DUMSOR’

It is important not to lose sight of the impact that the shortfall in electricity generation and supply (dumsor) has had on the national economy in 2015. Its negative impact on productivity was felt in the public and private sectors alike. Occasional power cuts can be a real barrier to attracting foreign investment, more so, scheduled power cuts lasting years. No doubt it contributes to a fall in revenue, a weakening of the national currency and a rise in inflation. With these in mind, if promised efforts to fix ‘dumsor’ are to yield the desired results sooner rather than later, it could very well provide that reprieve that the budget so clearly failed to provide.

2.3 Medium-to-Long-Term Institutional Reforms

There are in addition to a likely cedi recovery and an end to the energy crises, several reforms initiatives being carried out by the government. These include reforms of the budgeting processes, tax reforms and reforms in the management of public finance. If well implemented, these measures will also be of benefit to the country, albeit, in the medium to longer term.

Conclusion
The average Ghanaian will be advised to look forward to two possible outcomes in the year to come. They are that, their overall economic status is likely to remain the same as what it has been in 2015 or that it will get worse. From the Budget Statement and Economic Policy of the government of Ghana for 2016, any raised hopes will be nothing but a fleeting illusion.

This is quite simply due to the government’s failure to strategically invest in the productive sectors and stimulate real growth; the decision to borrow more on the local market, as well as the real risk of excessive election-related spending which will further rock an already unstable national economy. While these decisions will not increase revenue for the state, they threaten to starve businesses of capital and result in more debts which will require future borrowing to pay off.

Any real improvements in an individual’s life is most likely due to a combination of that person’s wit and peculiar opportunities, than the outcome of the policies of the government for 2016.

By Trends and Rating Consult
www.trendsrating.com