President John Mahama has ordered a slowdown in the awarding of new project contracts by government ministries and agencies as he tries to rein-in spending to cut the deficit.
Speaking at a post-budget briefing in Accra last week, officials of the finance ministry said efforts to control spending and the budget deficit have the full backing of the President, whose approval must now be sought before any new project is initiated by any government ministry.
“Ministries cannot initiate projects without explicit authorisation from the presidency. Ministries have also been told clearly that unfunded projects shall not be countenanced,” said Simeon Patrick Kyei, Director of Budget at the finance ministry.
Finance Minister Seth Terkper said on Tuesday that government will narrow the budget gap, which widened to 12.1 percent of GDP in 2012, to 9 percent this year and 8 percent in 2014. But analysts, including ratings agency Fitch, said they had expected a sharper reduction in the deficit to send a strong signal of the authorities’ commitment to curb borrowing.
“We had expected declines to 8 percent and 5 percent respectively. Therefore debt, which was 49.4 percent of GDP at end-2012, will remain high over the next two years,” Fitch Ratings, which last month lowered the outlook on Ghana’s debt to negative from stable, said in a statement.
“The budget highlights how the impact of the fiscal blow-out ahead of December’s elections will persist for several years, as the authorities now appear to have moderate ambition and limited scope for a quick correction,” Fitch stated.
But the finance ministry has defended the new deficit target, arguing that a sharp adjustment of the slippage that occurred in 2012 will create problems for economic management.
“I know some people expected us to bring it down to, say, 5 percent of GDP; but when you have such a high deficit you can’t reduce it sharply to that level. You have to do it slowly,” said Kwabena Oku-Afari, Director of Economic Research and Forecasting.
“It is important to set a target that is credible, and we think investors will find the 9 percent target more credible,” he added.
In a separate interview with B&FT, Head of Databank Research Sampson Akligoh said though the 9 percent target is lax, it shows the extent of stress on the public finances.
“I am of the view that a gradual approach to fiscal consolidation is more realistic for Ghana under current circumstances, but it must be supported by a clear fiscal-gap target over the medium-term,” he said.
The budget deficit rose due to a sharp increase in spending on salaries, higher interest costs, and a binge on subsidies which was worsened by lower-than-expected revenues and grants, Mr. Terkper told Parliament on March 5.
He said to mitigate the impact of the rising wage bill, which swallowed more than 70 percent of tax revenues in 2012, government will move to align productivity with workers’ wages in the public sector.
Government will also shift to longer-tenor bonds and loans, “preferably from the international capital market”, to meet capital-spending requirements and ease pressure on the short-end of the domestic Treasury market, he said.
Investors have shown strong appetite for debt sold by government, with successive three- and five-year bond sales significantly oversubscribed as investors moved to cash-in on the high yields offered. Last week, the Bank of Ghana sold GH¢415.9million of three-year debt at an interest rate of 16.9 percent, up from 16.7 percent in January.