The Finance Minister, Mr Ken Ofori-Atta, presented the budget statement for 2020 to parliament yesterday, November 13, 2019. In this post I will analyse the 267-page document under five main sections – the performance of the economy in 2019, updates on the government’s flagship policies, the macroeconomic targets for 2020, financial sector reforms and what it means for investors, and significant policy proposals.
2019 Macroeconomic Performance
GDP growth from January to September 2019 was 6.2%, with non-oil GDP growing at 5.2%. Unless we experience something remarkable in Q4 2019 we are unlikely to hit the target of 7.1% GDP growth that was presented in the 2019 mid-year review budget.
Inflation of 7.6% as September 2019 is better than the expected 8% target set for the year. However, the Ghana Statistical Service (GSS) has made significant changes to how it measures inflation (a detailed explainer here) and so comparison with the previous inflation figures is not appropriate. Be that as it may, a slowdown of inflation is a positive development for the economy.
Government’s revenue from Q1-Q3 2019 was GH¢36.3 billion, 13.6% below the target of GH¢42 billion. Total expenditure was GH¢51.9 billion which was 7.5% below the budgeted expenditure for the period. This leaves a fiscal deficit of GH¢15.6 billion. The shortfall in revenue despite the increase in Communications Service Tax (CST), increase in Energy Sector Levies, and stricter enforcement by the Ghana Revenue Authority (GRA) could mean that even more pressure would be put on businesses and individuals to make up for the funding gap.
The fiscal deficit, which is the difference between government’s revenue and expenditure, was equivalent to 4.5% of GDP compared to a target of 4.1% of GDP. There are two interesting points here. Firstly, the rebasing of GDP in October 2018 which resulted in GDP being restated upwards by 24.6% (detailed explainer here) means that the deficit can be larger in monetary terms without being larger when expressed as a percentage of GDP. And so once again, comparison with previous figures becomes a bit problematic. The second thing to note is that parliament passed the Fiscal Responsibility Act in December 2018 which requires the fiscal deficit to not exceed 5% of GDP. Given that expenditure would likely increase next year due to election pressure, having the fiscal deficit at 4.5% of GDP now would make it more difficult for it to be below the 5% limit by the end of 2020. This is even with a potential increase in GDP accounted for.
Public debt as at the end of September 2019 was GH¢208.6 billion (US$39.2 billion). This is equivalent to 60.6% of GDP. Once again, the rebasing of GDP means it would not be appropriate to make comparisons with previous years. However, the debt is hovering around government’s target of 60% of GDP. What is concerning though, is how prominent external debt is as a component of public debt. External debt as 51% of our debt means that 51% of our public debt is susceptible to swings in exchange rates. If you owe in foreign currency, you can only pay in foreign currency. And our foreign currency earnings such as those earned through exports, interest on government investments made outside Ghana, or sale of domestic assets to foreign investors is what would be required to pay off the debt. For more of my thoughts on external debt, you can read this.
Flagship Policies
Free SHS. A 43% increase in Senior High School (SHS) enrolment between 2016 and 2018 is a remarkable jump by all standards. The increase is certainly a combination of people taking advantage of the free SHS and students with BECE results which would have been hitherto rejected now getting the opportunity to attend SHS. 794,899 students are currently beneficiaries and the minister expects that number to jump to 1,264,000. GH¢2.2 billion has been spent on this policy so far. Even though several mistakes have been made, the government’s commitment to this particular policy is commendable. I think this is by far their biggest achievement.
NABCO. The Nation Builders Corps (NABCO) currently employs about 100,000 young people, according to the minister. The engagement of the staff does not seem to be in any sustainable capacity and it is no wonder that this project has been dogged by unpaid allowances.
Teacher & Nursing Trainee Allowances. A total of GH¢999 million has been paid in allowances since 2017. In my opinion, these payments cannot be justified in the kind of tight fiscal situation the country is in. Better to spend the money to ensure that the trainees can actually get jobs when they are done.
1D1F. The One District One Factory (1D1F) project currently has 58 projects out of an expected 260 in operation. An extra 97 are expected to commence at the end of 2019. Generous tax holidays have been granted to the companies. I think that it takes more than tax exemptions and credit facilities to make a company viable. Demand for the product and its competitiveness on the market is essential. Instead of being committed to a raw number of factories, doing the work to establish factories with competitive products which would survive after government support has been withdrawn should be the objective.
Macroeconomic Targets for 2020
Election years always get investors nervous due to government usually trying to get votes through targeted spending as well as the fears of political unrest. You can therefore be sure that the targets that government has set for 2020 would be closely monitored. The major targets are 6.8% GDP growth, 8% inflation and fiscal deficit of 4.7% of GDP. Among these targets, the fiscal deficit is the target to come under the most pressure as I have explained in previous sections.
Total revenue is expected to grow to GH¢67 billion which would require even more pressure from tax authorities to meet. The government proposes to meet this by extending the National Fiscal Stabilisation Levy and Special Import Levies for another 5 years. One should not expect any reduction in taxes for next year. And if it happens, it would be inconsistent with the government’s revenue targets.
Financial Sector Reforms
The financial sector clean up cost GH¢11.7 billion in 2017 and 2018. This involved the reduction of banks from 36 to 23. The government expects to spend an additional GH¢2.4 billion paying depositors in 23 savings and loans companies and 347 microfinance companies that have been closed down.
The recent closure of 53 fund management companies is expected to protect 77,000 investors, according to the minister. The total assets of these companies are GH¢8 billion of which GH¢2.4 billion was invested in treasury bills, banks and listed stocks. As I explained in this post, those type of investments are the type that can be easily recovered. The government suggests that GH¢1.5 billion would be spent to pay investors.
Assuming that the GH¢2.4 billion is recovered and paid to depositors, and GH¢1.5 billion is paid out by government, that still leaves GH¢4.1 billion outstanding. One can deduce that the balance would have to be paid out through the liquidation and realisation process and investors should therefore expect to receive a part of their investments first, and then wait for a period to see what comes out of the liquidation.
Significant Policy Proposals
Enterprise Credit Scheme. The government plans to make GH¢2 billion available for banks to lend to the private sector at reduced lending rates.
Micro Business & Household Lending. The government wants to partner with fintech companies, banks and mobile money operators to lend to businesses and individuals. This is already a thriving business and I hope government intervention would drive the interest rates down.
Removal of VAT on Private Equity, Venture Capital and Mutual Fund management fees. If this is going to be done, why not remove VAT on tech related purchases as well? Encouraging investors to invest in start-ups by removing VAT for investors in these start-ups would not be as effective as not charging VAT on the products these start-ups produce.
National Development Bank. There are enough national banks in my opinion. I do not know why a new one is required when the existing ones are hardly thriving.