Ghana finance minister looks to regain fiscal credibility

Given Ghana’s status as one of the world’s fastest growing economies, and with foreign investors so bullish about its prospects, it might have been expected that Seth Terkper’s first six months as the country’s finance minister would be fairly undemanding.

Yet the former International Monetary Fund (IMF) economist has been under plenty of pressure. Within six weeks of taking up his role in January, his ministry announced that Ghana’s budget deficit for 2012 ended up being 12% of gross domestic product (GDP), far higher than the projected figure of 6.7% and triple that of the 4% it recorded in 2011.

Making matters worse, 2012 was an election year in Ghana; the news seemingly confirmed analysts’ fears that the west African country’s history of going on a spending binge in the run up to polls would be repeated. Exotix, a prominent frontier markets investment bank, described it as a “fiscal shocker”.

Reduction vow

Reducing this deficit is Mr Terkper’s immediate priority, and he aims to cut it to 9% this year. The government looked in danger of missing this target, which some analysts had already said was unambitious, after first quarter revenue data were released.

But Mr Terkper, who was previously Ghana's deputy finance minister, is confident he will make good on his plan. He argues, moreover, that last year’s expenditure growth was not primarily related to the December elections. Although the main reason for the deficit was the introduction of a so-called ‘single spine salary structure’, which put all public sector workers on the same pay scheme and saw the government’s wage bill soar, he says this was a policy supported by previous administrations and necessary for the country’s development.

“The reason we are optimistic about the meeting the deficit target is that the wages were not election year promises,” he tells The Banker in an interview in Accra, Ghana's capital. “It was a policy the current government inherited in 2009 [when it came to power]. But the main point is that we’ve all been concerned about the public sector haemorrhaging badly. We were even exporting nurses and doctors to the UK, partly because of their low salaries. Everybody realised our teachers were leaving and that we had to do something.”

The government promises that with the single pay structure now in place, future hikes in wages, equivalent to about 55% of its revenues, will be sustainable. “By controlling the annual increments, and negotiating more effectively, we will see, with GDP and revenues going up, wages falling to about 30% to 35% [of revenues by 2015],” says Mr Terkper.

Cutting subsidies

Other reasons for the fiscal gap included a rise in subsidies and a shortfall in donor funding and corporate taxes, especially in the oil sector. Mr Terkper has been conservative this year with estimates for oil production, which in 2012 fell about 15,000 barrels per day (bpd) below the budgeted amount of 100,000 bpd.

He has also started to tackle fuel subsidies, the presence of which economists have long criticised. Although they are expensive, costing the Ghanaian taxpayer 623m cedis ($310m) last year, policy-makers have tended to be wary about slashing them, lest they damage themselves politically. But the ruling National Democratic Congress (NDC) has started to phase them out, having increased petrol and diesel prices several times in the past few months. By 2014 it plans to scrap both fuel and utility subsidies completely.

Ghana’s fuel price increases, which have been welcomed by the IMF, have so far not led to significant ructions, let alone mass protests similar to those seen in Nigeria when it tried to remove subsidies last year. Mr Terkper credits this to the decision to make the adjustments, which are based on global oil prices and can move prices down as well as up, on a more frequent basis. “The reaction hasn’t been violent,” he says. “Over the years, we chose a method of adjustment where we would wait for three months, six months or even a year. Then we’d do 15% or 20% adjustments. That was destructive, because we were increasing the cost of production all of a sudden by a substantial amount.

“The new strategy is that we will make adjustments more regularly, on a monthly basis or maybe even every two weeks.”

Long-term goals

Mr Terkper, a technocrat whose has written extensively about tax reforms, wants to bring the budget deficit down to 5% or 6% by 2015. As well as addressing subsidies, he has put a moratorium on new public contracts until some of the government’s arrears are cleared and asked legislators for permission to introduce new levies and raise taxes as a way of boosting revenues.

Over the longer term, he is overseeing an overhaul of the state’s expenditure system, which includes centralising the records of all public sector employees and better monitoring and controlling of transactions.

“The goal is to put every single government transaction onto an electronic platform,” he says, “and to be able to use electronic means of cutting ministers’ departments off when they submit releases that are beyond their budget.”

Such reforms are vital, given that loose fiscal policies have hurt Ghana. As domestic borrowing has gone up to plug the deficit, so have the government’s funding costs. Yields on three month Treasury bills, less than 10% in late 2011, stood at 23% in June. And despite the high rates attracting inflows from portfolio investors, the cedi has been under pressure. Increased borrowing, along with Ghana’s large current account deficit (more than 10% of GDP last year), has resulted in the currency weakening about 18% versus the dollar in the past 18 months.

Ghana’s central bank has raised its base rate and banks’ reserve requirements to rein in liquidity and strengthen the currency. Fiscal policy-makers will do their bit, says Mr Terkper, by trying to slow domestic borrowing. As part of measures to diversify from the local funding market, the country plans to issue its second Eurobond in mid-July. Barclays and Citi will lead what is expected to be a $1bn 10-year deal.

Election challenge

A looming supreme court ruling on December’s polls has the potential to shake up Ghanaian politics. The New Patriotic Party, which narrowly lost to the NDC, is challenging the results. Regardless of the outcome, which could include an order for the election to be re-run, few people predict it will lead to unrest in what is considered one of Africa’s most mature democracies. Mr Terkper says that although the NDC believes it won fairly, it will accept the ruling. “The government remains optimistic about its case,” he says. “But we are respecting due process and waiting for the court to come up with a decision.”

Yet despite the calm atmosphere, the uncertainty scarcely helps Ghana’s business environment, which has already been dampened somewhat this year by the slowdown in government spending. Bankers say many companies are holding back investments until the ruling is made.

Nonetheless, Mr Terkper, who says he will not cut the deficit so quickly that it hurts the economy, is confident about sustaining Ghana’s high growth. He has the backing of the IMF, which predicts GDP will expand about 8% in real terms this year, the same level as in 2012.

Oil is one of the reasons for this continued buoyancy. Production has steadily climbed since the country started exports in late 2010 and should reach 120,000 bpd in 2013. The government hopes it will increase to 150,000 bpd to 250,000 bpd within a few years, by which stage the commodity will have overtaken gold to become Ghana’s biggest export earner.

The non-oil sector is robust, too. Output from services and the construction industry was up by more than 10% in 2012. The financial and information and communications technology sectors each rose 23%, according to Standard Bank.

Mr Terkper says that Ghana's economy could grow even quicker than predicted. Policy-makers are trying to ensure this happens by boosting energy supplies and thus lowering electricity costs for businesses. A gas pipeline from Ghana’s offshore oil fields to the mainland and a gas processing plant near Accra are close to being completed. “When it goes into full operation next year, that will provide us with more gas and lower the cost of production for manufacturers,” he says.

Cheaper power will be a key facet of the NDC’s attempts to diversify the economy by developing Ghana’s manufacturing base and processing some of its main products, including gold, manganese and cocoa, of which it is the world’s second largest grower. “We have a long history of exporting our natural resources raw,” says Mr Terkper. “Today the strategy is to add value.”

Ghana may still be one of Africa’s brightest prospects in the eyes of international investors, but Mr Terkper knows they are watching its fiscal management more closely than ever. The measures he has implemented are already leading to improvements, but a lot more needs to be done. However, if he succeeds in reducing the deficit, while at the same time ensuring economic growth is sustained and diversification is enhanced, the pressure of his job might just start to ease a little.