Initiatives to enhance access to business finance: The Central Point of the 2020 Budget

Initiatives to enhance access to business finance: The Central Point of the 2020 Budget
Source: Yaw Baafi and Emmanuel Kwasi Zewu, FBNBank Ghana Limited
Date: 28-11-2019 Time: 08:11:54:am


The 2020 budget of the government which was presented to Parliament by the Finance Minister, Hon. Ken Ofori Atta was themed “Consolidating the gains for growth, jobs and prosperity for all.” GDP growth stood at 5.7 per cent at the end of Quarter 2 of 2019 relative to 5.4 per cent in the same period of 2018. Non-oil GDP for the period under discussion was 4.3 per cent relative to 5 per cent in 2018. Also, the industry and services sectors recorded growth rates of 6.1 per cent and 6.5 per cent respectively.

Surprisingly, the Agriculture sector had a weaker performance of 3.1 per cent relative to 4.8 per cent same period in 2018. Agriculture sector growth in 2019 averaged 2.6 per cent, that is 3.1 per cent in Quarter 1 and 2 respectively as against 4.7 per cent and 4.8 per cent respectively in the same period 2018.

Meanwhile, most macroeconomic variables continue to improve largely due to fiscal discipline shown by the government so far. Inflation as at August 2019 stood at 7.8 per cent. This is positive considering the fact that this is the lowest in the last two decades. However, inflationary pressures exist due to recent tariff hikes and ex-pump price hikes resulting in hikes in transport fares. Gross International Reserve increased from 7.024 billion (December 2018) to 8.22 billion at the end of September 2019, sufficient to cover 4.3 months of import. Net International reserve rose to $5.05 billion from $3.8 billion within the same period.

This notwithstanding, the Cedi depreciated significantly in 2019 relative to 2018. The cedi depreciated against the dollar by 10.3 per cent at the end of September 2019 compared to 8.20 per cent in the same period of 2018. Also, the country’s currency lost 6.0 per cent and 5.1 per cent against the Pound and the Euro respectively, relative to 4.2 per cent and 4.6 per cent over the same period in 2018. We believe these and many other reasons including government fiscal operation this year were thoroughly considered in setting the macro targets for 2020.

Highlights for 2020 Macroeconomic Targets

Expenditure: The government proposes to spend (including clearance of areas) GH¢85.9 billion (21.6% of GDP), this represents a growth of 21.2 per cent relative to the projected outturn for 2019.

Receipts/Revenue: The receipts (total revenue and grants) for 2020 are projected to increase to GH¢67.1 billion (16.8% of GDP) up from a projected outturn of GH¢54.6 billion in 2019. This represents a growth rate of about 23%.

Deficits: Fiscal deficit for 2020 is targeted at 18.9 billion equivalent to 4.7 per cent of GDP

GDP growth: The government has projected an overall real GDP growth of 6.8 per cent and 6.7 per cent for non – oil GDP growth in 2020.

Primary Balance: This is projected to be 0.7 per cent (GH¢2.8 billion) of GDP for the 2020 fiscal year

Gross International Reserves: To cover at least 3.5 months of import of goods and services

Review of Some Policy Issues

• Domestic Resource Mobilization: Government proposes to raise the tax to GDP ratio from under 13 percent currently to around 20 percent. This according to the Finance Minister, will be achieved through efficiency and base broadening rather than imposing new taxes. This has been a problem for every government. For the first 9 months of 2019, tax to GDP ratio stood at 10.2 per cent. This performance is a signal that it must take some extraordinary effort to ensure the attainment of the revenue target. However, if the past three years has taught us something, it is the government’s ability to be fiscally disciplined. 

Therefore, we expect a downward review of this projection in the mid-year budget review. We also hope that despite election pressures, the government will reduce the pace of frontloading of expenditure in order to stay within the fiscal deficit target. Lastly, the government should as a matter of urgency leverage on the national addressing system and Ghana card, to close the expected revenue gap.

•  Enhance Financial Support to Local Enterprise: Government is expected to deploy initiatives to enhance the access of businesses to finance, including medium to long term capital. This includes the establishment of the National Development Bank, the Ghana Incentives – based Risk Sharing Systems for Agricultural Lending (GIRSSAL), the Ghana Commodity Exchange, the Enterprise Credit Scheme and a strengthened Venture Capital Trust Fund. We believe this is the central point of the 2020 budget as far as policy intervention is concerned. This is because the initiatives will support expansion of businesses to absorb more people thereby reducing the unemployment rate in the country. 

We believe the GIRSSAL initiative is a laudable idea. With the level of risks associated with agricultural financing, this risk sharing vehicle if properly executed may be the beginning of a more productive relationship between farmers and the financial sector. Also, it has the tendency to encourage mechanized farming so that Ghana can reverse the poor performance of the agricultural sector over the years. This will in turn be very critical in rural poverty and inequality reduction.

Under this program, government has earmarked GH¢100 million for small and microcredit. This intervention may be well-intended because, after the financial sector clean-up, the small and micro businesses have been strangulated. This intervention may help solve this challenge. However, with 2020 being an election year and the challenges of recovery by Masloc, the government will have to do more to recoup the GH¢100 million. The establishment of the National Development Bank and the Enterprise Credit Scheme will be a great addition to the finance sources in the economy. Aside from adding to the existing source, the credit guarantee expected to be provided by the NDB to commercial banks to increase credit creation should serve as risk-mitigating factors for commercial banks. This should help reduce the NPLs of the sector. Finally, the establishment of the NDB should complement the efforts of the Ghana Exim Bank to ensure sustainable growth of the economy. The concern, however, is that, information provided particularly on the shareholding structure of the NDB is still unclear. Therefore, we believe government needs to bridge this information gap to clear any misconception about this initiative. 

Concluding Thoughts

The 67.1 billion revenue target is an ambitious projection and may not be realized looking at the current performance and revenue measures of government. Taking a glance at the revenue flow of 2019, it is seen as revenue targets from the personal income tax and companies tax categories have been missed significantly. Enterprises also had their fair share of the difficulties presented by the financial sector clean up. Restoring or closing the revenue gap in these areas require a massive job creation drive. This must be preceded by improvement in the business environment to attract investment by owners of capital.

Aside this, the government should introduce strategies to rope the informal sector of the economy into the tax net in the mid-year budget review. The informal sector constitutes about 70 per cent of the economy. However, only about 2 per cent pay taxes. Recent statistics from the Ghana Revenue Authority showed that there are about 6 million eligible taxpayers in the country but only 1.5 million honour their tax obligations. Furthermore, only 200,000 out of the 1.5 million (13 per cent) come from the informal sector. This epitomizes the revenue shortfall challenges; that is, only 13 per cent of the 70 per cent of the economy pay their taxes. This is because the policies of governments over the years to increase the tax base have yielded little result. Hence, there is the need for innovative and effective policy measures which are capable of achieving the desired impact.

The planned participation in the capital market or issues of US$3 billion and reopening of some instruments are very important for the implementation of the budget. Therefore, the government should ensure that the macroeconomic variables are in good shape to get the best deals on the market. This means that inflation, exchange rate, interest rate and the rate of debt accumulation should be under control. Most especially, with the current Debt to GDP ratio of 60.55% at the end of September 2019, most investors may ask for higher premiums. Using the old series, the debt to GDP ratio could be well over 70%. This is important because investors know that rebasing, which reduced the ratio last year is at best only a statistical process and may not necessarily increase the country’s payment abilities.

Finally, Ghana as a country should rethink the mode of financing the development of her infrastructural needs. It is estimated that Ghana needs about GH¢22 billion annually to close the infrastructure gap in 10years. This was confirmed by the President in 2017. However, the 2020 budget has allocated about 40% of this amount to capital expenditure. With this pace, it will take the country about 35years to be where it intends to be in 10years. Since there will be deterioration and the need for constant maintenance, the finance gap will not be closed.

Hence, we must rethink our approach. For any comments related to this article, kindly email