This week the Minister of Finance, Mr Ken Ofori-Atta, is expected to move for the adoption of the Mid-Year Review Budget Statement and Economic Policy of Government.
The Mid-Year Budget, which is the Government’s supplementary estimate for the 2021 financial year, would be proposed to legislators on Thursday, July 22, at the Parliament House, Accra.
Mr Alexander Afenyo-Markin, the Deputy Majority Leader, announced this on the floor of the House in Accra, on Friday, when he presented the Business Statement for the Ninth Week Ending Friday, July 23, 2021, of the current meeting of the Legislature.
Ministry of Finance officials have been extremely tight lipped as to what is planned as the fiscal framework for the second half of the year, although the general expectation is that further fiscal tightening will not be engaged in because of the ongoing protests under the umbrella of #fix the country, which in recent days has expanded from a social media campaign to a long planned physical demonstration along the streets of Accra was initially blocked by the police and the law courts, which cited concerns about the possible spread of COVID 19 as their reason.
During the first quarter of the year government basically kept to its own fiscal script.
Provisional data on budget execution for the first quarter of 2021indicated an overall broad cash budget deficit of 2.6 percent of GDP, against the target of 2.5 percent of GDP. The primary balance also recorded a deficit of 0.7 percent of GDP compared to the target deficit of 0.4 percent of GDP.
However this has been achieved at a cost. Over the first quarter, total revenue and grants amounted to GH¢12.8 billion (3.0 percent of GDP), lower than the projected GH¢15.8 billion (3.7 percent of GDP).
Therefore to stay close to the fiscal deficit target government has had to cut back on its planned spending. Total expenditures and arrears clearance amounted to GH¢24.3 billion (5.6 percent of GDP) against the target of GH¢26.5 billion (6.1 percent of GDP).
Financing of the fiscal deficit in the first quarter was mainly from domestic sources, which pushed up the stock of public debt to GH¢304.6 billion at the end of March 2021, compared with GH¢292.7 billion at the end of December 2020.Of the total debt stock, domestic debt was GH¢163.6 billion (37.7 percent of GDP), while the external debt was GH¢141.0 billion (32.5 percent of GDP).
With the full-year fiscal deficit target already at 9.6 percent – significantly higher than the 8.6 percent government had originally planned to aim for, before reality set in – government will be unlikely to raise the target any further. This means any further revenue shortfalls will have to be met by further expenditure cuts.
Here the obvious option is capital expenditure and there are two primary reasons why government will be comfortable with a reduction in planned public spending on development projects during the second half of the year.
One is that the incumbent administration is in its second and final term of office and neither the President nor his Finance Minister (who will certainly leave office with him) need electoral support anymore.
The other is that the Ghana CARES programme can be tweaked to increase the space for private capital to make up for a reduction in public spending on capital projects.
Besides it is recurrent expenditure – particularly on interventions to ameliorate the socio-economic impacts of COVID 19 that will have priority at least until the end of the year by which time Ghana would expectedly be heading towards herd immunity through the ongoing nationwide vaccination programme.
The First Deputy Governor of the Bank of Ghana (BoG), Dr Maxwell Opoku-Afari has recently warned policy makers against the early withdrawal of support measures instituted to address the effects of the COVID-19 pandemic, saying it could harm the economic recovery process.
Dr Opoku-Afari, warns that the timing of withdrawal policy support would need to be carefully done not to jeopardise the recovery process.
“A careful balancing act between unwinding the policy support would be needed by policy makers to ensure that stability in a post-pandemic environment is guaranteed,” Dr Opoku-Afari asserts.
Importantly the private sector is regaining its confidence in Ghana’s economic fortunes going forward, even though one of the three international ratings agencies that assess Ghana’s sovereign credit ratings status – Fitch – has downgraded its rating from B with stable outlook to B with negative outlook, while another – Moodys – has retained its rating at that same level, both agencies thus predicting that the economy’s creditworthiness will get worse before it gets better.
In the domestic economy, the recovery process from the pandemic has gained some momentum evidenced by the latest high frequency indicators. The Bank of Ghana’s Composite Index of Economic Activity (CIEA) registered a strong annual growth of 26.8 percent in March 2021, compared to a contraction by 1.9 percent in the corresponding period of 2020.
The key drivers of economic activity during the period were domestic consumption (proxied by VAT collection), construction activities, international trading activities, resumption of industrial production activities and air-passenger arrivals.
The latest Ghana Purchasers Managers Index, which gauges the rate of inventory accumulation by managers of private sector firms and measures dynamics in economic activity, also improved in April 2021.
Conversely though the BoG’s confidence surveys conducted in April 2021, showed some dip in both consumer and business sentiments. Consumer confidence dipped slightly on account of recent increases in petroleum prices at the pump, new taxes, and transportation fares.I
n a similar direction, the optimism of businesses also softened during the first half of this year on concerns that the imposition of new taxes as announced in the 2021 Budget statement and the ongoing electricity maintenance management programme would adversely impact operational costs.
These provide further impetus to government not to terminate its COVID 19 alleviation interventions just yet even though businesses polled by the central bank in its surveys have expressed optimism about their company and industry prospects.
However, government’s fiscal policy stance will be influenced by the latest data set from the newest BoG’s polls which it has access to by now, but which will not be released to the public until after the latest Monetary Policy Committee meetings scheduled for later this week.
Key reasons for increased business confidence are falling inflation and the stability of the cedi.
Although consumer price inflation rose slightly in June, it remains below the meridian of the BoG’s target band of between 6 percent and 10 percent. In June food contributed 41.8 percent to overall inflation while transport contribution increased from 16.5 percent in May to 18.1 percent in June.
“Inflation for June 2021 indicates that the six-month continuous decline in food inflation has been reversed by 1.9 percentage points,” says Professor Samuel Annim, the Government Statistician.
The Month-on-Month inflation was 1.3 per cent while the Month-on-month food inflation exceeds non-food inflation by 1.0 percentage point.
Year-on-year variation between food 7.3 percent and non-food inflation 8.2 per cent was 0.9 percent.
“A reversal in the declining trend of food inflation has been observed for the first time in six months as it increases by 1.9 percentage points between May and June 2021. This has contributed in closing the gap between food and non-food inflation,” Prof Annim said.
Inflation for locally produced items has regained its dominance over inflation for imported items, surpassing inflation for imported items by 0.9 percentage points, this the result of fiscal tightening pushing domestic prices upwards while the cedi’s stability has kept imported inflation stable. Inflation for locally produced items was 7.9 per cent compared to that of imported items at 7.0 per cent.
Importantly however, the BoG’s core inflation measure, which excludes energy and utilities is running at about 100 basis points above headline consumer inflation.
Despite some weakening in export receipts due to lower crude oil production, and a smaller balance of payments surplus, the cedi has remained relatively stable during the first half of the year. Cumulatively, the Ghana Cedi appreciated by 0.2 percent against the US Dollar in the year to May 2021, compared with a depreciation of 1.3 percent in the same period of 2020.
The country’s Gross International Reserves reached US$11.3 billion at the end of May 2021, providing cover for 5.2 months of imports of goods and services compared with a stock position of US$8.6 billion (equivalent to 4.1 months of import cover) at the end of December 2020.
Ghana’s ongoing economic rebound is being spurred by a sharp growth in money supply as a result of the BoG’s monetary easing in response to the economic slump originally brought about by COVID 19.
Latest trends in monetary aggregates point to significant expansion in reserve money and sharp growth in broad money supply, reflecting lingering effects of the liquidity injection and Covid-related fiscal stimulus programmes implemented during 2020. Reserve money increased by 32.0 percent in April 2021, compared with 21.7 percent in the corresponding period of 2020.
Similarly, broad money supply (M2+) grew by 25.8 percent, relative to 16.8 percent over the same corresponding period of 2020. The increased M2+ growth was largely driven by the net domestic assets of the banking system. In terms of components, the observed expansion in M2+ was reflected in increased growth in currency outside banks and total deposits.
Interest rates on government securities have trended downwards across the maturity curve. The 91-day and 182-day Treasury bill rates declined to 12.8 percent and 13.6 percent respectively in April 2021, compared with 14.1 percent and 14.3 percent respectively, in April 2020.
Similarly, the rate on the 364-day Government instrument declined marginally to 16.5 percent from 16.7 percent over the same comparative period. Broadly, the yield on all the medium-to-long-term Government debt instruments declined over the review period, relative to the same period last year.
The weighted average interbank rate declined to 13.6 percent from 14.0 percent, largely reflecting improved liquidity conditions on the interbank market. This translated into a marginal decline in average lending rates of banks to 20.9 percent in April 2021, compared to 22.4 percent recorded in the same period of 2020
At the May Monetary Policy Committee meetings, the Policy Rate was lowered by 100 basis points to 13.5 percent on account of muted risks to the inflation outlook. The lower policy rate is expected to trigger further downward adjustments in interest rates more broadly.
Notwithstanding sluggishness in credit demand conditions due to the pandemic, the COVID-related regulatory reliefs and policy measures continue to support lending activities in the banking sector. However there is the need to accompany cheaper credit with more availability.
In response to the crisis, there was substantial paying down of debt incurred before the crisis by the private sector in tandem with rapid growth in issuance of new loans.
From the beginning of the year to April 2021, new advances totalled GH¢10.5 billion, marginally lower than the advances of GH¢10.9 billion during the same period in 2020. Due to weakened demand conditions, and the substantial pay down of debt (about GH¢36.0 billion in 2020 and GH¢15.0 billion during the first five months of 2021), annual growth in private sector credit was 6.9 percent as at April 2021 compared with 17.9 percent recorded in April 2020.But it is expected that as the economic activity rebounds and lending rates drop further, private sector credit will pick up.
This will be crucial for economic performance in the second half of the year as government remains constrained with regards to its expenditure by revenue shortfalls.
Asserts Dr Ernest Addison, BoG Governor: “economic activities have picked up strongly, evidenced by the high frequency economic indicators. Consumer and business confidence softened, triggered by the new revenue measures and recent instability in power supply.
These have served to dampen sentiments but are viewed as temporary and should improve in the near-term.
Private sector credit growth still remains below pre-pandemic levels but we expect banks to respond to the observed emergence of increased demand for loans to support the expected pickup in economic activity.
”There are signs that the execution of the budget for the first four months point to some improved revenue collections and expenditure containment to ensure real re-alignment to the consolidation path. The fiscal data shows that fiscal revenues have significantly outpaced developments a year ago but slightly lags behind target. The gap in revenue performance viz-a-viz the budgeted target has been somewhat compensated for by expenditure containment measures.
”However, in the near-term there are noted risks in the fiscal outlook surrounding wage settlements, energy IPP payments, the potential for arrears build-up, potential for scaled-up expenditures associated with COVID-19 waves and mass vaccination efforts, and the implementation of the Ghana CARES programme, which would have to be carefully managed in a time-consistent manner to minimize any deviation from the path of fiscal consolidation. But projected growth in the extractive industries, steady rollout of the vaccination programme and recovery in industry and the services sectors should work their way in supporting a faster closure of the output gap in the medium-term.
“.While the economy seems to have withstood the impact of the COVID 19 relatively well so far, we must also acknowledge the challenges that it brought” says Dr Addison. “The slower growth in private sector credit was not only because the banks were investing in less riskier assets but also because, of the impact of the crisis on business expectations and the scarring effect of the crisis, through a heightened risk aversion in the business community and a limited appetite to undertake riskier investments.”
The lack of fiscal space now facing government makes monetary policy all the more important. Indeed, the overall fiscal framework will not change much during the second half of 2021.