Presented by Dr Eric Osei-Assibey, Senior Adjunct Research Fellow of the IEA
Ladies and Gentlemen of the Media,
I welcome you to the IEA.
We have called you here today to present to you the views of The Institute of Economic Affairs on the
2017 mid-year budget review as presented to Parliament on Monday, August 31, 2017 by the Minister
I will present the highlights of the economic performance as at June 2017 and the target reviews that the
Finance Minister announced. I will then proceed to make an assessment of whether the targets can be
achieved or not given the challenges. I will also outline some other challenges facing the economy
presently and assess whether the budget review presented by the Minister well addresses these
challenges. I will end with a concluding remarks and also make some policy recommendations for
KEY MACROECONOMIC PERFORMANCE AS AT JUNE 2017
According to the finance Minister, developments from January up to June 2017, indicate:
The overall GDP for first quarter of 2017 grew by 6.6 percent against 4.4 percent for the same
period in 2016; with end of year target maintained at 6.3 percent
Inflation reduced to 12.1 percent at the end of June 2017, from 15.4 percent at end-December 2016;
with end of year target maintained at 11.2 percent;
Interest rates are on the decline. For example, the 91-day Treasury bill rates have reduced from 16.4
percent at end 2016 to 12.08 percent at end-June 2017.
The fiscal deficit as a percentage of GDP for the period January-June 2017 was 2.7 percent
compared with a deficit of 4.0 percent over the same period in 2016. However, the overall fiscal
deficit has been revised downwards from 6.5 percent of GDP to 6.3 percent of GDP with a primary
balance of a surplus of 0.2 percent of GDP;
The primary surplus for January-June 2017 was 0.6 percent of GDP compared to a deficit of 1.3
percent over the same period in 2016; with end of year expected to record a surplus of 0.2 percent
instead of the targeted 0.4 percent of GDP;
The Gross International Reserves at the end of June 2017 was US$5.9 billion, the equivalent of 3.4
months of import cover, up from US$4.9 billion at the end of December 2016 (equivalent to 2.8
months of import cover). This is expected to reduce to at least 3 months of imports cover at end of
The minister also noted that in the Inter-Bank Market, the Ghana cedi depreciated on cumulative
basis by 3.7 percent, 8.3 percent and 10.8 percent against the US dollar, the pound sterling and the
euro respectively by end-June 2017.
Given these indicators, it is quite clear that government is making significant progress in stabilising the
macro economy after a period of economic instability attributed to fiscal overruns in connection with the
2016 elections which resulted in government missing key macroeconomic targets such as inflation and
fiscal deficit by a wide margin. Macroeconomic developments in 2017 point to a recovery in GDP
growth, declining inflation, declining interest rates, narrowing fiscal gap, a relatively stable currency
and increasing foreign exchange reserves. However, challenges and downside risk to fiscal sustainability
and economic growth remain. In what follows, I discuss some of these key challenges and what needs to
Real GDP Growth
Although the targeted growth of 6.3 percent is attainable, on the back of rising oil production and the
benefits from macroeconomic stability, downside risk persists particularly from the non-oil sector
growth. According to the Ghana Statistical service, in the first quarter of 2017 non-oil sector growth was
weaker turning in at a modest 3.9 percent, against 6.3 percent recorded for the same period of last year
(2016). Government projects 4.6 percent non-oil sector growth at the end of the year 2017. However, we
think that the chances of missing this target is high because of the possible negative effects of
government’s plan to cut expenditure by 1.1 percent of GDP from GH¢58.1 billion to GH¢55.9 billion.
The key revisions include a cut in Capital expenditure by 0.3 percent of GDP and Good and Services by
0.4 percent of GDP.
Government expenditure on infrastructure in particular is a key driver of growth in the economy and a
reduction in capital expenditure is likely to negatively impact on growth. Also, the delay in arrears
clearance can reduce liquidity in the economy and slow economic activities. Another downside risk to
growth is the halt in small scale mining activity (which is known to contribute about 15% to the total
gold production). Although this may be marginal, it could have some negative effect on gold exports,
foreign exchange earnings and ultimately impact on our growth projection for 2017.
Interest Rate and Credit Developments
It was our expectation that the reduction in Monetary Policy Rate (MPR) from 25.5 percent to 21
percent over the last six months and the fall in Treasury Bill (TB) rates from 16.4 percent to 12.08
percent in the same period would cause banks to reduce their lending rates significantly. However, the
average lending rate’s responsiveness to this significant reduction in MPR has been slow compared to
periods when MPR is adjusted upwards. This situation has resulted in wider interest rate spreads in the
country particularly between lending rate and MPR.
The high lending rate is inimical to economic growth as it inhibits private sector credit growth, and
thereby constrains domestic investments and production expansion of the economy. The banks argue
that the downward rigidity is due to the rising Non-performing loans and the fact that funding costs
remain high which are already locked-in, and so until such time that these locked-in funds are retired,
Ghanaians should not expect lending rates to fall.
We think this rationalisation is very lopsided and unfair to banks customers since these banks do not
make the same argument when the MPR and TB rates are rising. One major underlying factor to the high lending rates in the country is the downward rigidity embedded in the formula for calculating the average base rate. We are aware that last year the Bank of Ghana constituted a technical committee to review the formula. However, the revised formula is yet to be adopted. We urge government to ensure a more transparent, flexible and competitively driven interest rate determination in the banking sector.
This should not be limited to mainstream commercial banks only but also non-bank financial institutions
including the saving and loans companies and microfinance institutions which even quote much higher
lending rates. If these steps are not taken, government’s efforts at bringing interest rates down will not
have the desired impact on the real sector of the economy.
The combined effect of delays in settling arrears and the government’s new directive which enjoins all
public institutions to transfer public sector deposits and cash assets from commercial banks into a
Treasury Single Account (TSA), can pose a serious liquidity constraint to the banking sector and affect
their ability to give credit to private sector businesses. Although the introduction of the TSA as a
measure to control public spending and leakages is laudable, government should find ways of mitigating
the effect of this initiative on the banking sector.
IEA applauds government’s commitment to fiscal consolidation and its efforts to ensure fiscal and debt
sustainability; particularly for aligning expenditures with realised revenues. The overall fiscal deficit for
the first half of the year was 2.7 percent of GDP against a target of 3.5 percent while the year is
expected to close at 6.3 percent instead of the targeted 6.5 percent. However, weak domestic revenue
mobilisation remains the biggest threat to the attainment of this fiscal target. The 33 percent projection
of revenue for the year was overambitious particularly looking at the volatile nature of the expected
sources – international trade taxes and corporate income tax. Also it is expected that various government
tax initiatives would take time for the economy to achieve the desired gains.
Although government has revised downward its revenue projection for the second half of the year, we
believe that government may still not realise the projected revenue as the above challenges remain.
Government should therefore pursue a more aggressive domestic tax revenue mobilisation by ensuring
that the compliance rate is increased substantially and the loopholes within the tax collection system are
plucked. Much more innovation should be introduced in the tax collection system particularly within
the informal economy to reduce cost of collection and evasion.
We also welcome government’s decision to implement IEA’s recommendation of adopting a numerical
fiscal rule aimed at introducing fiscal discipline in the economy. The minister in his presentation stated
that “government has taken a decision to introduce a numerical fiscal rule to guide the implementation
of fiscal policy. In this regard, we will bring to this house an amendment to the PFMA to limit the fiscal
deficit within a range of 3 to 5 percent of GDP for any fiscal year”. Indeed the IEA has advocated for
fiscal rule for years and we are happy to know the government intends to enshrine this in our laws.
Debt Overhang Issues
The government has indicated that it is likely to end the year 2017 with a debt to GDP ratio of 71%,
about a two percentage point reduction of what was recorded last year (2016). Despite the debt
management efforts by government, we think that the debt stock is still very high and unsustainable. The
International Monetary Fund noted in the 2017 spring meeting that Ghana remains at a high risk of debt
distress, which has implication for its creditworthiness and borrowing cost.
We commend government for the debt re-profiling initiative that is aimed at minimising cost and
maintaining a prudent degree of risk while helping to develop the domestic capital market. However,
while the increasing participation of non-resident investors in the domestic bond market is laudable,
particularly the foreign currency inflows that they bring to shore-up the reserve buffer, we think that it
has to be managed in order not to over expose the economy to external shocks such as sudden
withdrawals that can impact negatively on exchange rate stability.
Moreover, government should ensure that the plan to clear the energy debt/arrears owed by energy
utilities through the sale of a 10 billion cedi ($2.3 billion) local-currency bond, will not lead to increase
in the public debt stock. Although government has said it intends to do this through a special purpose
vehicle, it is still not clear in which books this debt will sit. We also encourage government to
aggressively pursue the non-debt infrastructure financing initiative that is aimed at leveraging our
untapped natural resources to bring private capital to finance major infrastructure projects.
Free Senior High School
Government has indicated its readiness to begin the implementation of the Free Senior High School
(Free SHS) Policy in September this year. We believe that free and all inclusive educational system is a
major driver and indeed a catalyst for sustainable growth and development. Successful implementation
of this initiative will not only ensure equity in the educational system but also have positive multiplier
effect in all sectors of the economy through a skilled and competent work-force.
However, we are concern about the sustainability of the financing source for this programme. The 2017
Budget indicates budgeted funding for the initiative to include GHC188.28 million (47%) – GoG, and
GHC 211.72 million (53%) – ABFA. While this funding arrangement could introduce another level of
rigidity in the budgeting system, the ABFA source of funding which contributes the major part of the
total amount as we know is not stable but highly volatile. This is due to dynamics in the oil and gas
industry; specifically relating to fluctuating oil prices which pose risk to sustainable funding for this
Given the important nature of this initiative for our country’s sustainable development, we are therefore
calling on government to revisit its funding arrangement for this important initiative. A national forum
or stakeholder workshop on how to ensure sustainable financing for the Free SHS programme in Ghana
as a matter of urgency will be welcomed. We believe that a more sustainable funding should be pursued
domestically. For example, just as we did for NHIS, increasing the VAT rate by say 1% and ringfencing
it for exclusive funding of the Free SHS will be very ideal. Domestic tax revenue provides a
more stable and predictable source of financing expenditure for important public programmes such as
In conclusion, we think that government is on track in achieving macroeconomic stability as most of the
macro-indicators are moving in the right direction. The challenge however is the sustainability of these
gains which means more needs to be done in the following areas:
Aggressive domestic revenue mobilisation effort;
Ensuring Sustainable Debt management: Achieving debt sustainability largely bothers on three
critical factors; accelerating growth for base effect, closing fiscal gap to reduce the fiscal gap effect
and ensuring exchange rate stability to control exchange risk and convertibility effect;
Increase investment in growth-enhancing infrastructure; and
Radical economic transformation to ensure export diversification
Finally, we also wish to commend government for introducing the Fiscal Responsibility Act, which has
become increasingly a common tool to enhance fiscal prudence and public expenditure transparency in
However, the lack of monitoring and enforcement institutions to safeguard fiscal discipline and enforce
adherence to such fiscal rules remains a problem. We will therefore urge government on to make good
its promise of establishing an independent fiscal council that will among other things independently
assess government fiscal forecasts and ensure compliance to fiscal rules.
Dr Eric Osei-Assibey
Senior Adjunct Research Fellow, IEA
For further information contact:
Dr Frankie Asare-Donkoh
Director of Advocacy and Programmes
Mob: 0248 666 007
Tel: 0302 244 716 / 0302 226 333 / 0307 010 713 / 0307 010 714