How the 2018 budget is turning out

Even as Parliament meets to examine government’s plans for 2019, information provided by the budget proposals presentation has given a clearer picture of just how well the incumbent government is doing with regards to managing the economy, as it approaches the mid-way point of its four year tenure in office. TOMA IMIRHE assesses Ghana’s economy where it currently stands.

While a groundswell of discontent is rising on the streets, the President Nana Akufo-Addo administration can lay claim to some commendable achievements with regards to its efforts in 2018 towards restoring macroeconomic stability, as measured by key parameters. To its advantage, following the rebasing of the economy recently, which has computed that the economy is 24.6% bigger than was hitherto thought, government now has two targets to aim for – pre rebasing and post rebasing and in some cases they are significantly different.

Real Gross Domestic Product growth has been targeted at 6.8% for 2018 although the rebased target is lower at 5.6%. But by mid-year, annualized growth was 5.4%, well below the full year target, and instructively barely half of the growth rate achieved by the corresponding period of 2017. Non-oil GDP growth is targeted at 5.4% (this has risen to 5.8% following rebasing), but by mid-year it stood at 4.6%.

This must be somewhat disappointing for Ghana’s economic managers. In its first year in office, the incumbent administration more than doubled the country’s economic growth rate to 8.5%, up from just under 4% in 2016, the last year that the Mahama administration was in office. But hopes of a sustained surge in economic growth are now being questioned. Nevertheless, government is hoping for a rebound in growth, to 7.6% in 2019, propelled by increased public spending.

Government is also a little behind target with regards to its own fiscal target too. The fiscal target for 2018 was set at 4.5% (3.7% following rebasing) with a further 1.9% added on specifically to finance a public bailout of some troubled banks to protect depositors funds. During the first nine months of this year however, government has incurred a fiscal deficit of 3%, against the target for the period of 2.6%. This is primarily the result of a 9.5% shortfall in total revenue and grants , although the GHc31.7 billion in domestic revenues collected was 15.8% higher than what the public purse attracted over the corresponding first nine months of 2017. The deficit has been funded from domestic and foreign sources in roughly equal proportions at GHc4.2 billion and GHc4.9 billion respectively.

A primary balance surplus has been achieved, of GHc1.5 billion although at 0.5% of the rebased GDP this is considerably lower than the target of 0.9% of GDP, or GHc2.8 billion.

This has meant government’s net debt accumulation rate has been faster than planned, but at about 15% (including borrowing for one off financing of bank bail outs) this is much lower than the peak of 43% growth in the public debt reached in 2013. The public debt as a proportion of GDP has fallen to 57.4%, largely thanks to the rebasing of the economy. While fiscal consolidation has not been as fast, deep or smooth as the International Monetary Fund had envisaged when it started its Extended Credit Facility programme in April 2015, aimed at restoring Ghana to macro-economic stability, enough has been achieved for the incumbent government to begin moving from demand management to supply side economics – the fiscal deficit target of 4.2% for 2019 is in actual fact higher than the rebased deficit target for 2018 of 3.7%.

Importantly, inflation has fallen significantly, to 9.5% by October, down from 11.8% at the start of the year and government still hopes to achieve its 8.9% end of year inflation target of 8.9%. This has been accompanied by lower interest rates.  The benchmark Monetary Policy Rate had been brought down to 17%, prior to the November meeting of the Bank of Ghana’s Monetary Policy Committee,  from 20% at the turn of the year, although short term interest rates have been sticky, with 91 day treasury bill rates indeed rising from 12.8% to 13.37% over the 12 months up to September.

Despite claims of severe illiquidity on the streets, broad money supply growth has actually accelerated, from 23.1% over the 12 months up to September 2017 to 24.1% over the ensuing one year period. However, the grassroots complaints indicate that increased liquidity is not trickling down to the streets in sufficient quantities. Indeed, this illustrates, among other things, the effects of growth in the enclave upstream oil and gas sector, which has been stronger than growth in the all-encompassing non-oil sector.

The biggest economic management challenge so far this year, aside from the financial sector cleanup has been the pressure on the cedi by a combination of rising US interest rates, which have instigated capital outflows from Ghana, and rising foreign exchange obligations in servicing the public debt. This forced a drawdown of Ghana’s gross international reserves by US$798.41 million, to US$6.5 billion by September this year, enough for 3.6 months import cover, a little less than the 3.9 months cover as at the end of 2017. Inflows from the latest international syndicated loan, of US$1.3 billion, for cocoa purchases from local farmers has increased this in October and expectations of further inflows next year from major new loans and infrastructure investments, possibly reaching US$6.5 billion, have settled the nerves of local foreign exchange traders somewhat.

On the downside however, the cost of earlier borrowing is beginning to tell harshly on Ghana’s external accounts. The merchandize trade surplus, now in its 9th consecutive quarter is being largely nullified by rising debt servicing obligations in foreign exchange. The quantum of those obligations is underestimated because a large segment of Ghana’s public debt is classified as domestic debt although it is owed to foreign portfolio investors who, this year have increasingly moved their monies elsewhere in the face of rising US interest rates, falling medium to long term cedi instrument intertest rates and a resultant faster depreciation of the cedi against the dollar this year than last year.

All this means Ghana can look forward with cautious optimism with regards to its macro-economic fundamentals, even if not everyone on the streets quite shares it with regards to their own personal economies.