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The missing link in 2018 Budget [Article]

The author, Alhassan Farihan.

The New Patroitic Party (NPP) 2018 budget read in Parliament by the Minister for Finance on behalf of the President, has really launched a debate between economists and public commentators .

On the whole though, the budget has been fairly well received by those who understand what budgets really are. Indeed, on paper it appears well conceptualized, seeking to achieve a prudent compromise between fiscal consolidation and the acceleration of Ghana’s faltering economic growth.

However the national budget is no more than a statement of intent whose implementation rarely goes quite according to plan. Indeed, the out turn for 2017 illustrates this vividly. While government has commendably kept to its key target of keeping the fiscal deficit down to 6.3% of Gross Domestic Product, this has been at the expense of a lot of public spending programmes aimed at restoring the country’s economic expansion. Even key policy initiatives towards private sector growth such as one district one factory, provision of  venture capital and economic stimulus for distressed yet viable enterprises suffered from severe public expenditure cut backs because of financing constraints.

While we understand the inevitable implications of these constraints and indeed sympathizes with government in this regard, financial experts disagree with officialdom’s strategy of refusing to own up to these, preferring instead to be over ambitious in the name of fulfilling its 2016 election campaign promises. The 2017 budget suffered over this and it is likely that the 2018 will suffer the same fate to some degree.

Importantly, this strategy is generating friction between government and the International Monetary Fund, which questions the credibility of some key budget targets, particularly those relating to tax revenues. Instructively, the success of the 2018 budget as a whole rests on government’s ability to meet those targets. Like it did in March this year when unveiling the 2017 budget, government has reacted to widespread doubts as to its ability to meet its revenue targets with assurances that it can; however the admission that it will end this year some 9.3% short of its revenue targets is more instructive than those assurances.

Lofty ambitions can be a good thing – at least they keep everyone involved in meeting the budgetary targets on their toes – but emphasis on false propaganda  about actually meeting them is not helpful in any way. Here it is illustrative that even minutes before Finance Minister Ken Ofori Atta admitted to the 9.3% revenue shortfall, members of the NPP communications team were going round the various electronic media who had set up at Parliament house to cover the budget presentation, confidently declaring live on air that the revenue shortfall for this year is 5%, and that is better than the performance of its predecessor administration in this regard.

Despite the capping of allocations to statutory funds, Ghana’s budget is still very rigid with most public spending inevitable going into recurrent expenditure and interest payments. This leaves very little for the discretionary expenditures on the programmes which the 2018 budget claims will turn Ghana’s economic fortunes around; if cuts become necessary as they have been this year, those programmes will again be under-funded except in the claims of the NPP communications team as has largely happened in 2017.

The difference between this year and next year though is that in 2017, most of the initiatives aimed at reviving economic growth were still in their planning stages and so expenditure cuts have not been crucially debilitating. Next year though similar expenditure cuts would effectively lead to the postponement, if not outright cancellation of those initiatives. For instance companies to receive financial stimulus support have been identified as  projects to be established under the one district one factory programme.  If government cannot provide the requisite funding such programmes would grind to a halt in 2018.

This is a real possibility even as government has risked the ire of the IMF – and with it a reluctance by the Fund to endorse Ghana’s economy to the international financial community that it is still critically reliant on – because it has opted for a slower fiscal consolidation than the Fund’s Extended Credit Facility programme called for in its final year. If  government  is not able to fund the initiatives supposed to expand the economy more rapidly this will have been for nothing. I want to believe this will not be the case.

However I can see the real cause to worry over the gamble the government is taking. While positive media spin can cover economic performance shortcomings – at least temporarily – among the lower market segments it cannot among the economic decision makers both at home and abroad.

Which is why government, having devised a very ambitious 2018 budget, will have to ensure it derives the requisite revenues to finance it. Any thing else will turn what looks to be a good budget on paper into a fiasco in reality.

The other key issue has to do with the expected growth for 2018. The Gross Domestic Product (GDP) for 2018 is expected to slow compare with 7.9% growth forecasted in 2017.

The real GDP is expected to grow by 6.8 percent in 2018, while real non-oil GDP is expected to grow by 5.4 percent over the same period.

The overall growth takes into account the anticipated reduction in petroleum output as a result of planned maintenance works scheduled for 2018.

While the overall projected growth for 2018 is lower than that estimated for 2017, the non-oil projected growth which is 5.4 % for 2018 is higher than that estimated for 2017 which was 4.8%, on account of government’s intervention in the non-oil sectors of the economy.

Real GDP is projected to grow by 7.3 percent and 5.6 percent in 2019 and 2020 respectively, yielding an average growth of 6.2 percent over the medium term.

Agriculture is expected to grow by 4.5 percent in 2018, largely driven by a strong growth performance of 4.5 percent in the Crops subsector. Growth in Agriculture is expected to be 5.8 percent, 5.0 percent and 5.3 percent in 2019, 2020 and 2021, respectively. The sector is expected to record an average growth of 5.2 percent over the medium-term.

The Industry Sector is expected to grow by 9.4 percent in 2018 compared with 17.7 percent estimated for 2017. Growth in Mining and Quarrying is projected at 17.9 percent, with upstream petroleum, the dominant component of the subsector, projected to grow at 23.4 percent.

Over the same period, Manufacturing and Construction are expected to grow by 4.6 percent and 4.1 percent, respectively.

Industry is projected to grow by 9.5 percent, 5.1 percent and 1.2 percent in 2019, 2020 and 2021, respectively, resulting in an average of 6.3 percent over the medium-term. The Manufacturing subsector is expected to remain on arecovery path, having experienced a contraction in output at the height of theenergy crisis.

The subsector is projected to record an average growth of 5.1percent over the medium-term, aided by a continued normalization of power supply. Over the same period, Construction is also expected to pick up, achieving an average growth rate of 4.7 percent.

The Services Sector is projected to grow by 6.2 percent in 2018, with Information and Communication expected to be the leading subsector recording a growth of 15.9 percent. Education is projected to grow at 8.1 percent, while Health and Social Work is projected to grow at 5.7 percent.

The Services sector is expected to grow by 6.5 percent and 6.1 percent in 2019 and 2020 respectively. Overall, the sector is projected to grow at an average rateof 6.6 percent over the medium term. It is expected that service delivery will be generally enhanced by attempts to achieve greater formalization of the economy, while trade activities will continue picking up in response to a fairly stable exchange rate.

The government must put in good policies that would propel a continued growth.

By :  Alhassan Farihan