It is 2016! And another electioneering process beckons in Ghana as the country goes to the polls in Nov2016.
Since the advent of the 4th Republic, Ghana has always seized every opportunity to emphasize its democratic credentials, maintaining political stability and sustaining investor confidence in the country’s commitment to democracy.
On the basis of the positive political history, there is a strong and sufficient reason for a vote of confidence in sustaining Ghana’s political stability post-2016 elections. On the fiscal side, however, Ghana’s history with fiscal operations during election years has been a major constraint to sustaining macroeconomic stability for private sector investments and robust economic growth.
Elections in Ghana (and Africa in general) have largely been episodes of expansionary fiscal policy, sometimes culminating in fiscal overruns which required up to two (2) years of fiscal consolidation and adjustments to restore macroeconomic stability.
State of the Nation: Following the start of the 3-year IMF program (which commenced in Apr2015), Ghana’s fiscal operations have been undergoing some structural reforms aimed at charting a new course to support investor confidence post-2016 election. On February 25, 2016, Ghana’s President, John Dramani Mahama, addressed the country’s legislative house on the State of the Nation (SOTN) with emphasis on the ongoing social intervention programs and infrastructure projects.
Despite the limited focus on monetary and fiscal adjustments as well as reforms currently underway with the IMF’s assistance, we noted the following highlights.
- Interventions in power generation capacity have improved Ghana’s power supply situation, but much work is required to sustain power supply stability.
- Public sector wage bill-to-tax revenue declined from 49% (in 2014) to 44% in 2015, supporting the narrowing of fiscal deficit.
- The government remains committed to the 5.3% fiscal deficit target for 2016 despite election-related pressures.
Databank Research: Analysis and Views on the SOTN Address
The improved power supply requires greater effort to avert recurrence of last year’s supply deficit: Last year’s state of the nation address highlighted the President’s commitment to fixing the power supply crisis which imposed significant constraints on private investments and productivity.
By FY-2015, we observed a marked improvement in Ghana’s electricity generation and supply capacity as various interventions during the year added 800MW, virtually eliminating the power supply deficit but without scope for a reserve margin.
Ghana’s peak demand for electricity currently hovers around 2,300MW with an estimated annual growth rate between 10% – 12%. Our investigations reveal that to effectively fix the power supply constraint, a 20% reserve margin is required as a backup to operating power plants after demand and supply have been matched.
The current situation (without a reserve margin) therefore underscores lower but persistent risks to the power supply in Ghana.
Ghana’s electricity generation mix has largely tilted in favor of thermal sources as continued dependence on hydro proves unsustainable on account of climate change. We expect the thermal-based electricity supply to exert upward pressure on electricity tariffs as the cost of production exceeds that for hydro-powered electricity.
The President noted that State-owned electricity producer (the VRA) incurs 32cents/KWh (~GH¢1.24/ KWh) as the cost of electricity production on account of the changing generation mix. Our assessment of current electricity tariff, however, revealed a charge of 25cents/KWh (~GH¢0.97/KWh – excluding monthly service charge and the energy sector levies) by power distributor (the ECG), supporting our view of latent upward pressure on electricity tariffs.
We, however, note that the upward pressure could be tapered by the following factors: sustained reduction in ECG’s technical and commercial losses, increased use of gas (compared to light crude oil) and sustained exchange rate stability.
Wage – bill – to – tax – revenue Reduction to enhance Fiscal Space
The government’s effort to restore sustainability in the growth of Ghana’s wage bill is yielding steady gains as the percentage of tax revenue committed to public sector wage bill declined to ~44% in 2015 compared to ~49% in 2014.
The decline was supported by a faster y/y growth in tax revenue in 2015 (24.4%) compared to that for wages and salaries (10.6%). In 2016, the government intends to sustain the downward pressure in order to achieve a 40.6% ratio, a trend we perceive as necessary to ease the borrowing appetite and lower the interest rates for short term debts.
At the current pace of decline, we also expect Ghana’s wage bill-to-tax revenue ratio to drop below the 35% limit by 2020 as agreed under the ECOWAS convergence criteria while the tax revenue-to GDP ratio rises above 20%. We, however, flag election-related shocks to government expenditure plans as a potential risk to fiscal operations in 2016.
Although the President emphasized the government’s commitment to sustain efforts to narrow the fiscal deficit to 5.3% by FY-2016, we remain cautious in our optimism ahead of the Nov-2016 general elections.
The emphasis on protecting social intervention programs (particularly the vote maximizing ones) could elevate the risk to a substantial decline in the fiscal deficit. The government appears to have softened its stance against demands by teacher unions for payment of wage arrears (GH¢16 million) by approving a GH¢1.5 million part settlement.
Against these upside risks to planned expenditure, we remain conservative with a projected fiscal deficit of 6.3% ± 50bps by FY-2016.
Navigating the Fiscal Risk: The Key to Consolidating Investor Confidence
After impressively containing the seasonal depreciation risks for the first two (2) months of 2016, investor confidence in the Ghana cedi appears to be firming up gradually.
The local currency recorded a much slower pace of depreciation during the first two (2) months of 2016, dropping by only 2.2% at the end of Feb2016 compared to a 7.9% loss over the same period in 2015. This resilient outturn is underpinned by consistent policy measures implemented by Ghana’s central bank to regulate the forces of demand and supply, minimizing unanticipated shocks to the currency market.
Apart from the high monetary policy rate (at 26%), the central bank has been actively mopping up excess GHS liquidity on the interbank market (weekly) and this has contributed to sustaining the tight monetary regime. A less obvious (but very supportive) measure has been the elimination of fiscal dominance in Ghana’s monetary policy due to the zero-financing policy for 2016 under the ongoing IMF program.
Elevated central bank financing for government deficit has been a major fuel for fiscal excesses in election years. Fiscal slippages in the lead up to the 2012 elections was largely accommodated with strong financing from the central bank by up to 18.8% of the previous year’s domestic revenue, 8.8% above the required limit.
Eliminating the fiscal dominance in the implementation of monetary policy particularly ahead of the Nov-2016 election would help navigate the fiscal risk, ensuring that the government remains committed to fiscal consolidation even in an election year.
The authorities’ commitment to eliminating fiscal dominance in monetary policy was reflected in the Bank of Ghana’s policy measures during the first quarter which has largely anchored exchange rate expectations. The foundation appears to have been laid to navigate the election-related risks and chart a new fiscal path in this election year.
Successfully avoiding the fiscal slippages in this year’s election should firmly place Ghana in a positive perspective within the investment community and trigger the much-anticipated re-engagement with foreign investors.
Other Structural Reforms to Mitigate the Fiscal Risk
Ghana’s 3-year IMF program currently underway (since Apr-2015) includes the benefit of technical assistance in the implementation of key reforms to instill fiscal discipline and sustain a low ratio of fiscal deficit to GDP in the medium term. A key reform (amongst others) relates to “pre-budget statement” to be approved by cabinet and made public by May-2016 in order to strengthen the credibility of the budget planning process.
Highlights from the pre-budget statement are expected to include: recent fiscal developments as well as the government’s debt and deficit targets for 2017 with a broad outline of fiscal policy measures to achieve the fiscal objectives and targets.
Another reform aims at “improving controls in budget execution” to limit the authority of Ministries, Departments, and Agencies (MDAs) in committing the government to contracts without prior approval. To achieve this, the government is expected to introduce a provision in the new Public Financial Management (PFM) law to prevent MDAs from engaging new contracts or making adjustments to existing contracts which involve off-budget financing or for which funding is not guaranteed within the approved budget.
This particular reform (if followed through) should be very critical in aiding the government’s commitment to the budget limits and fiscal deficit target despite the election pressures. We have taken cognizance of the anticipated extra fiscal pressure to cover election-related costs (estimated at about 0.5% of GDP).
Despite the pressure of an already budgeted extra expenditure (due to the elections), unanticipated increases in the elections material costs could introduce shocks to the fiscal plans, exerting upward pressure on the 2016 fiscal deficit.
Nonetheless, the pluses outweigh the risks to sustaining fiscal consolidation. However, it is also worth noting that there are strong indications pointing to a new fiscal narrative for this year’s elections.
The ongoing fiscal and structural reforms with the IMF’s assistance provide a new perspective within which to form fiscal expectations for this year’s elections as the foundation appears to have been laid to minimize the fiscal risks ahead.
Ultimately, the 2016 elections can be viewed as an opportunity to rewrite Ghana’s fiscal history in election years and the ongoing IMF program (which extends beyond the Nov-2016 elections) provides the basis to attain this feat.