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25.11.2013 Feature Article

If Present Day Ghana Were A Company Would You Buy Shares In It?

If Present Day Ghana Were A Company Would You Buy Shares In It?
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I get frustrated that for a country of 25 million people, all of us allow ourselves to be sidetracked every year following the reading of the budget. The discussions about the budgets tend to settle on the inconsequential pronouncements by the Minister of Finance whilst we ignore the bigger picture.

Normally when leading companies publish their annual financial statements, they are pored over by accountants and other investment advisors. They do this to be able to assess the quality of profits, check for any potential for financial distress and to judge the ability of the companies to grow based on the investments being made.

The judgements these professionals make are informed by trading profit (sales against cost of sales); operating profit (after accounting for operating costs); the level of debts and their breakdown in terms of long and short term; financing mix between equity and debt; one-off items whether revenue or write offs; and the efficiency with which the companies are carrying out their operations. The outcomes from these analyses guide the accountants and other investment professionals in advising their clients as to the companies into which to put their investment funds.

If company financial statements face this amount of scrutiny, why are we are failing to carry out similar analysis for our national budgets. Why do we continue to dwell on the inconsequential instead of the fundamentals that will determine whether or not the budget proposals can be realised?

Whenever the budget is read, there are certain fundamentals that we ought to look out for – estimated revenue and expenditure, wages and salaries, statutory payments, level of public debt and the amount to be spent on servicing the debt as well as the projected deficit. The relationships between these will determine if the promises on investments can be fulfilled.

According to the budget statement, the government expects to raise GHC26 billions as revenue for 2014, which is 25% higher than the 2013 outturn. How achievable is this estimate given that for 2013, we managed to raise 92% of the estimated revenue (i.e. GHC20.8 billions against an estimate of GHC22.5 billions)? This situation would even have been worse had it not been for an unexpected increase in oil receipts.

The sources of revenue for 2014 include grants from development partners, which have been estimated at GHC1.3 billions. How realistic is this estimate when as at the end of September 2013, less than 50% of grants estimated for 2013 have been received. If the full estimated amount does not come in, the 2013 budget deficit would be even higher than the projected GHC8.9 billions.

In terms of expenditure, the government expects to spend GHC35 billions, some GHC9 billions greater than the revenue it hopes to raise. So we are looking at a projected budget deficit of GHC9 billions for 2014. To bridge this gap implies adding more to the nation's debt stock. Financing the greater part of this from domestic sources will maintain the current high interest rates and lead to further crowding out of the private sector in the search for investment funds.

In 2013, we just managed to come under the budgeted expenditure but fell short of the estimated revenue. What then happens if there are revenue shortfalls in 2014 too and/ or if we spend more than we have committed ourselves to? Spending beyond the budgeted amount is not far fetched at all. Keeping within the 2014 expenditure will be determined by how successful the government would be in cutting subsidies, which was GHC1.3 billions in 2013, to just GHC50 millions in 2014. This will no doubt lead to severe hardships and will certainly invite political pressure. Will the government be able to stand firm and not buckle under the pressure that may be mounted? The expenditure estimate is out of the window if it succumbs or something else would have to give.

Examining the spending areas constituting the expenditure, compensation to workers (i.e. wages and salaries, pensions, gratuities and social security contributions), account for GHC10.6 billions whilst grants to other government units (i.e. transfers to DACF, NHIS, GETfund, etc.) account for GHC6.5 billions. The rest are GHC6.2 billions for interest payments on borrowings and GHC5.7 billions to cover payments, deferred payments and arrears. Capital expenditure accounts for the remaining GHC6.0 billions.

If you study the disbursements, it becomes clear how development is being crippled by the high levels of domestic and external borrowing. Figure 5 of the budget statement shows how steeply we have been stacking up the national debt since 2009. It shows that we are rapidly approaching a debt-to-GDP ratio of 60%, almost wiping out all the fiscal space that was afforded by the HIPC initiative. The initiative was to free us from debt such that we could divert the monies we used to spend on debt servicing into developments that would improve the quality of life.

This government has rapidly returned us to those bad days in five years. It is projected that in 2014, interest payments, which were GHC0.7 billion in 2008, will top GHC6.2 billions, greater than what we have committed to spend on capital investments. Is it any wonder that all across the country, people are complaining about bad roads? We are constrained by the high level of borrowing and the consequent interest payments.

Coming back to the budget therefore, what matters are not the proposals and the areas that are mentioned, but rather the ability of the government to implement the proposals within the financial constraints under which it is operating. If one looks again at the areas of spending, the government is legally or statutorily bound to discharge all commitments except in the level of capital expenditure. Thus at the first sign of trouble, this is the area of the budget that suffers. That is why no specific details are given of how much is to be spent on building the 50 senior high schools. It is also the reason why no one is talking anymore about construction of 230 constituency offices for MPs. As an example, for 2013 the government budgeted to spend GHC5.2 billions on capital investment but is expecting the outturn to be less than that at GHC4.5 billions.

In the face of the financial reality, the government has to serve up some gimmicks to save face. So what have been served? They include removal of some taxes, the intention to create an infrastructural fund and a voluntary 10% cut in executive pay.

The budget fails to tell us how much government finances would be set back with the removal of some unpopular taxes that were recently imposed. But if you consider that VAT has been increased by 2.5% the net effect of the tax changes is to result in more tax take by the government.

Some NDC commentators and MPs are hailing the proposed establishment of an infrastructural fund. According to the budget statement, the details are yet to be fleshed out; so it is difficult understanding what they are hailing. Establishment of such a fund is laudable but the reason behind it is not even something to be celebrated. The government has reached the point where, given the high level of indebtedness, it is running out of opportunities to contract more loans. The government sees the creation of the fund as an alternative means of raising funds for infrastructural development. It hopes that by imposing the discipline required for the success of such fund, it can attract private capital into funding public investments without adding to the national debt.

In line with the opacity that attends some of the budget proposals, no details are given of how much the 10% pay cut by the President, Vice-President, ministers and appointees is meant to contribute to avoiding budget overruns. The amount to be saved, though, is a drop in the ocean. It cannot be more than GHC1 million. This pales into insignificance when it is compared to the projected GHC9, 000 millions deficit. If the government were serious in reigning in spending, it could have instructed all MDAs to find 10% savings in their budgets. This would have saved about GHC65 millions and would have forced everyone to work harder to reduce the high budget deficits that appear to have come here to stay.

From the foregoing, would you invest your funds in Ghana if it were a company? Its revenues are not guaranteed, its expenditure is higher than revenue; its debt is soaring; its interest payments are rising; and profitability is far from reality. You probably would not but the sad fact is that you and I are shareholders in Ghana Plc.

We have arrived at this juncture because the Board and the CEO we hired are not delivering. Let us all avoid being sidetracked into debating and discussing the gimmicks instead of focusing on the fundamentals. At the end of the day, it is only the fundamentals that will determine whether or not the budget proposals can be realised.

May we put the Board and CEO on their toes to deliver or else fire them at the next opportune time!

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