Dramatic changes to 2020 fiscal framework

In response to the unprecedented, inevitable negative effects of the coronavirus pandemic on Ghana’s economy, government has proposed extraordinary changes to its fiscal framework for 2020, involving a combination of temporary amendments to key financial management legislations and novel initiatives in collaboration with a plethora of public and private sector institutions.

While the expected direct effects on government’s finances amount to GHc9.505 billion, this would add on to an already substantial budgeted fiscal deficit for the year. Indeed, the Ministry of Finance has computed that the overall fiscal deficit for the year would rise from GHc18.9 billion as planned in the 2020 national budget (equivalent to 4.7 percent of Gross Domestic Product), to GHc30.2 billion (or 7.8 percent of GDP). This would be accompanied by a deterioration of the primary balance from a hitherto projected surplus of GHc2.811 billion (equivalent to 0.7 percent of GDP) to a deficit of GHc5.62 billion (1.4 percent of GDP).

The GHc9.5 billion hit government is projected to take as a result of the COVID 19 outbreak is primarily a culmination of a GHc5,679 million shortfall in oil receipts due to the price crash on global markets, translating into a GHc3,526 million shortfall in the Annual Budget Funding Amount (which would be accompanied by a GHc1,058 million shortfall in the Ghana Stabilization Fund and a GHc453 million shortfall in the Ghana Heritage Fund); a GHc808 million shortfall in import duty revenues and a GHc1,446 million shortfall in other tax revenues (bringing the total non oil tax revenue shortfall to GHc2,254 million); increased health spending of GHc572 million on a virus preparedness and response plan; and expenditure of GHc1 billion on a Coronavirus Alleviation Programme.

The drastically increased fiscal deficit is not only imprudent, despite the extraordinary circumstances causing it – it also gives government an extra GHc11.4 billion financing gap to close, this being equivalent to 2.7 percent of GDP.

Consequently, Finance Minister Ken Ofori-Atta has presented a number of emergency measures to Parliament for approval.

Firstly, government wants to lower the cap on the Ghana Stabilization Fund from US$300 million to US$100 million, in accordance with provisions contained in section 23(3) of the Petroleum Revenue Management Act. This will allow an estimated GHc1,210 million to be transferred into the contingency fund which will be used to fund the Coronavirus Alleviation Programme.

Secondly, Government will arrange with the Bank of Ghana to defer payments on non-marketable debt instruments issued through it – estimated at GHc1,222 million – to 2022 and beyond.

Thirdly, government wants to slash its budget on goods and services by GHc1,248 million.

Fourthly, Ghana is expecting immediate World Bank assistance to the tune of GHc1,716 million, even as it secures a Rapid Credit Facility worth the equivalent of GHc3,145 million from the International Monetary Fund.

Another key measure proposed is to reduce the net carried and participating equity interest of the Ghana National Petroleum Corporation in impending upstream oil and gas projects from 30 percent to 15 percent. This means halving the state’s ownership in these projects, but the immediate savings will be substantial.

Finally, government is seeking an amendment in the PRMA that will enable it use some of the monies in the Ghana Heritage Fund. Interestingly this is the proposed measure which the minority in Parliament is vehemently opposing but government has the requisite numbers in the legislature to see the amendment through and this will make the US$591.1 million in the Fund available for use. How much of this is actually used however will depend on need.

All the proposed measures are expected, in combination, to cut the fiscal deficit down to 6.6 percent of GDP and lower the primary balance deficit to 1.1 percent. However this fiscal deficit is still higher than the 5.0 percent cap imposed by the fiscal responsibility act and that legislation also insists that the primary balance not be negative.  But left with no choice government will have to get Parliament to put these provisions aside this year, as allowed by clauses within the legislation that can be activated under extraordinary circumstances – of which the COVID 19 outbreak most clearly qualifies.

Government has also announced some other fiscal initiatives which do not require parliamentary approval, but which can serve as direly needed buffers for its fragile financial position.

Key here is government’s potential abandoning its policy of zero borrowing from the BoG, instituted since 2015 under the guidance of the IMF. Indeed, government has declared that it could be ready to go above the current five percent legislative threshold if domestic financing conditions tighten further.

However, in a bid to loosen those conditions, government is negotiating with institutional investors to accept a 200 basis points (two percent) reduction in yields on short term treasury instruments of 364 days or less. If this proposal is accepted, government could save as much as GHc300 million on its public debt servicing costs.

Parliament is expected to quickly approve the executive’s proposals, even as the BoG is expected to resume lending to government if yields demanded by investors on domestic debt securities rise sharply. What is unclear however is whether those investors will rather accept a significant reduction in those yields as requested by government.

The real certainty though is that government will incur a much higher than originally planned fiscal deficit this year as a result of the COVID 19 outbreak, even as Ghana’s growth rate falls sharply, possibly to as low as between two and three percent.