The Economist Intelligence Unit (EIU) has said in its latest report on Ghana that it expects a widening of the fiscal deficit in 2019 to 4.6% of GDP, from 3.4% of GDP in 2018.
“We expect further fiscal slippage in the election year of 2020, with the deficit increasing to 5.2% of GDP as a result. We then forecast a return to consolidation, leading to a lower deficit in 2023, of 3.1% of GDP.
“The rate of decline in the fiscal deficit at a time of robust economic growth will be enough to make a modest dent in the public debt stock, which will edge down from an estimated 53.5% of GDP at the end of 2018 to about 52% of GDP at the end of 2023,” the EIU said in the report.
However, longer-term debt sustainability, according to the report, will still require ongoing fiscal responsibility and continued robust levels of economic growth.
“Ongoing currency weakness exacerbates the risk of holding dollar-denominated debt, as it becomes more expensive in cedi terms to service,” the forecasters said.
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More on fiscal policy projections
EIU says it expects the government to pursue an expansionary fiscal policy in the run-up to the 2020 election as it seeks to boost economic growth (and as spending is not restricted by the need to adhere to an IMF programme), before financing constraints necessitate a shift to a contractionary policy.
“The government has sought to strengthen the Ghana Revenue Authority, ensure broader enforcement of tax identification number measures, and build the capacity of local governments to collect taxes. However, enforcement remains an issue and many companies continue to benefit from various loopholes. Accordingly, we do not expect these collection measures to provide a major boost to government revenue.
“Oil prices will decline in 2019, although production volumes will increase slightly. In net terms, the production gains will outweigh the negative price effect and government revenue will rise in 2019. With oil prices forecast to decline further in 2020—together with lower growth in production volumes and weaker enforcement of taxation legislation in an election year—we expect revenue to slip. From 2021-23, however, we expect to see a recovery in oil prices, combined with increased output volumes and modest growth in the non-oil economy, causing government revenue to rise in 2023,” the report said.
In March the government issued a $3bn Eurobond, designed to finance spending in 2019 and pay off previous debts.
Following the conclusion of the IMF programme in March, the EIU projects that there will be some laxity after a period of fiscal consolidation.
The authorities, according to Unit, will remain reluctant to lower spending on salaries and subsidy programmes, given the risk of public resentment ahead of the 2020 elections.
The public sector wage, together with high-interest payments and capital expenditure to help to deliver ambitious industrialisation promises, will drive expenditure increases.
“We forecast that expenditure will increase in 2020, owing to higher election-year spending. Over the remainder of the forecast period, we expect to see some fiscal consolidation, particularly in the wage bill, with expenditure declining slightly by 2023 as the government seeks to limit the fiscal deficit,” said the report.
In January the monetary policy committee of the Bank of Ghana reduced the policy rate by 100 basis points, from 17% to 16%.
According to the report, “inflation will remain elevated in 2019, moderating slightly to 9.6%, from 9.8% in 2018, suggesting that rates will not be cut further over the year.”
As inflation moderates further in 2020-21 and domestic demand growth weakens, the EIU projects that there will be an opportunity for a resumption of monetary easing.
“This will be followed by renewed tightening in 2022-23, as domestic demand once again strengthens and inflation picks up. Monetary policy has tended to be volatile as the BoG seeks to balance inflationary pressure while also encouraging lending,” the report said.