PART I: GHANA’S FISCAL DEFICIT IS ABOVE  7.3 PERCENT, NOT 3.9 OR 4.5 PERCENT

Introduction

These articles on the 2019 Mid-Year Review and update of 2019 Budget analyze and draw conclusions on several topics, including some tracking since 2017. Part 1 focuses on the use of a very narrow concept of budget deficit or fiscal balance as well as “offsets” and relatively low provisions of arrears to give an impressive fiscal consolidation outcome.

The wider and realistic deficit is over 7 per cent compared to the narrow headline ratio of 3.9 to 4.5 per cent. The latter is complacent, ignores fiscal reality, and continues to defer the fiscal pain since several official disclosures show large sector arrears than the budget provisions.

Deficit and fiscal balances: narrow definition & offsets

The content of recent Budgets, Mid-Year Reviews and Annual Debt Reports show the headline budget deficit and fiscal balances on a narrow basis while the broader higher negative outcomes are in Appendices and Memoranda.

Narrow positive fiscal outcomes

The 2019 Mid-Year Review notes: “Mr Speaker, Government fiscal operations in 2018 were broadly in line with expectations. The fiscal deficit, excluding financial sector bailout costs, declined further from 4.8 per cent of GDP in 2017 to 3.9 per cent in 2018” (p10, par. 44; emphasis added). Table 1 reproduces this outcome as the official position.

Table 1: Summary of Central Govt Operations and Financing (2017-2018)

Figure 1: Trends in Fiscal Deficit (2015-2018)

Use of wider fiscal framework

To illustrate the point, the article puts the condensed framework in Table 1 (Table 2, p. 10 par 44) in the wider fiscal framework in Appendix 4 to 12 (p. 57-68) of the Mid-Year Review.

Table 2: Summary of Central Govt Operations/Financing (2017-2018), Appendix format

Table 2 shows the gaps and, more importantly, ridiculous fiscal outcomes that include the following:

fiscal identities comprising the nominal amounts (Ghc12,4400.0) and ratios (a) 4.8 percent of GDP as 2017 Provisional Outturn; (b) 3.4 percent in the 2018 Budget; (d) 3.7 percent in 2018 Revised Budget; and (e) 3.9 percent as 2018 Provisional Outturn)—are the same in lines 3 to 8 for the budget deficit, fiscal balances (commitment, cash, cash plus discrepancy, and cash plus discrepancy plus exceptional items) and financing; and

fiscal “offsets”: the Review “offsets” arrears (Ghc858 million) against a higher total expenditure provision (Ghc60,030.0 million), compared to Ghc58,171.7 million in the 2019 Budget—unlike the past, not by equating the deficit and fiscal balances.

As explained in the ensuing sections, these offsets and omissions result in significantly lower non-cash or accrued fiscal balances in the fiscal framework.

Showing non-cash items in the fiscal table

Table 3 uses the extended fiscal framework in Table 2, with the omitted values—arrears, discrepancies, and exceptional (bailout costs)—from various parts of the Mid-Year Review.

fiscal balance (commitment plus arrears): Items 1 to 6 show that the budget deficit from cash inflows (revenue) and outflows (expenditures) plus arrears and discrepancy; and

fiscal balance (cash basis): items 7 to 9 show the level 1 fiscal balance (commitment) plus exceptional costs (e.g., bank bailout costs and capitalization).

As compared to Table 2, the addition of these missing spaces in Table 3 results in the fiscal balances becoming non-uniform and higher in almost all instances.

Provision for arrears and discrepancies

The use of data in Appendix 4 (p57) to update arrears points to low provisions of Ghc858 million (2018) and Ghc730 million (2019), given high official acceptance of outstanding arrears, including claims by contractors (Ghc3 billion); the President acceptance of pensions arrears (Ghc 3.0 billion); and energy sector arrears in the Mid-Year Review (Ghc5 billion).

Table 3A: Summary of [Extended] Central Govt Operations and Financing (2017-2018)

A comparison of Table 3 (Part A) with the uniform values in Table 2 shows varying outcomes that include:

budget deficit and overall balance (commitment): the values and ratios are equal but, as noted in Part 2, subject to changes in the expenditure line in the 2018 Revised Budget;

overall cash balance (1) outcomes, subject to correcting for “offsets”, include

2017 Provisional Outturn remaining unchanged because arrears is zero (0);

arrears of Ghc858 million increases the 2018 Budget and Revised Budget and Provisional Outturn to Ghc10,971 and Ghc11,418 million, respectively; and

overall cash balance (2): the only change occurs in the Provisional Outturn, due to the discrepancy amount of Ghc254 million.

Financial sector bailout and capitalization costs

Table 3B shows higher deficit and fiscal balances giving rise to tough fiscal situation,

using updates from Appendices and notes to Budgets, Mid-Year Reviews and Debt Reports to include bailout and capitalization costs for the financial sector restructuring.

Table 3B: Summary of [Extended] Central Govt Operations and Financing (2017-2018)

Table 3B shows that the fiscal burden of the bailout to taxpayers and stakeholders is high and requires fuller disclosures and improved projections to avoid significant deviations.

Nil or inadequate provision for bailout costs in both 2017 and 2018 Budgets portray optimism, containment (e.g., ESLA) or poor judgement.

High actual costs: estimated Ghc2.2 billion in the 2018 Revised Budget is far lower than the actual cost of Ghc10.2 billion, made up of bailout (Ghc9.8 billion) and capitalization (Ghc450.5 million) costs—as derived from Appendix 4.

Capitalization costs: the 2019 Budget’s all-inclusive provisional deficit was only 4.4 per cent while the current bank restructuring costs increases the deficit to 7.3 per cent (even with a revised GDP of Ghc300.6 billion instead of Ghc298.7 billion).

Despite the high fiscal impact, the only authoritative statement on the bailout is in the 2018 Annual Debt Report: “The provisional budget deficit outturn for 2018 (excluding the financial bailout) was Ghc11,672.4 million (3.9 per cent of GDP) … including the financial sector clean-up costs, however, the provisional budget deficit outturn was ghc21.474 million (7.2% of GDP)”—which excludes the capitalization cost of Ghc420.5 million.

Financing the Budget

Financing depends on the accuracy of forecasting reliable deficit and fiscal balances to ensure certainty in domestic and capital markets. In contrast, the situation described may result in wide budget or fiscal deviations and market uncertainty.

As Table 4 shows, actual financing is almost double the official disclosures in the Mid-Year Review—Ghc21.9 billion compared to an estimate of Ghc11.7 billion, which gives rise to a large deviation of Ghc10.2 billion (3.4 per cent of GDP).

Table 4: Predictability of financing with wide deviations

Conclusion

It is obvious that the fiscal cost of bailing out banks is significant and unsustainable. First, Ghana could not have borrowed Ghc20 billion (approximately US$3.6 billion) during the BRIC-induced SSA downturn in late-2014 to 2016. At the time, under the IMF ECF Program, the annual non-concessional borrowing limit was only US$500 million. Hence, the alternative of imposing a levy under the ESLA law is justifiable since it has also become the backbone for ESLA plc’s (ESLA) Bonds for the bank restructuring.

The mainstreaming of ESLA receipts as budget flows and likely inclusion of ESLA Bonds in Public Debt show the fiscal weight of the bank restructuring costs. Since 2017, it has worsened the effect of replacing fiscal austerity with expansion as well as offsets, omissions, and low estimates for “arrears”. Ghana throws its oil revenues at consumption in defiance of the PRMA’s mandate of using them to stabilize the budget, expand investment (through a PRMA edict to use 70 per cent of ABFA for capital expenditure), and manage public debt through the Sinking Fund

Besides borrowing heavily for the bailout, we dissipate substantial fiscal space from two (2) oil fields (TEN and Sankofa) and a rebasing that increased GDP by 25 per cent. This is not an efficient use of fiscal resources compared with using a “basket” of pragmatic measures to resolve the banking crisis. The opportunity cost is enormous and includes lost investments (in particular, by domestic investors), employment, deposits, household social protection, and confidence in the financial system.

The lack of details of the bailout costs and compromised arrears is worrisome because domestic and external authorities appear to tolerate the applause that comes with stating the budget deficit, fiscal balances, and public debt “without bailout costs”—to the applause of “the successful consolidation in our public finances” (2019 Mid-Year Review p.11, par 46).