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Vol 59 No 24

Published 7th December 2018


Hey, big spender!

The debt overhang and over-priced projects threaten the government’s social programmes and industrial policy

As Finance Minister Ken Ofori-Atta rose to his feet in Parliament on 15 November to deliver his 2019 budget statement, he faced scepticism about his arithmetic from the opposition benches as well as analysts overseas.

Chart Copyright © Africa Confidential 2018

Ofori-Atta, a banker whose professional instincts clash with some party political imperatives, announced a bold plan for big spending on infrastructure, promised steps towards 'A Stronger Economy for Jobs and Prosperity' and progress towards realising President Nana Dankwa Akufo-Addo's celebrated vision of a 'Ghana Beyond Aid'. Although Ghana's foreign aid receipts are declining, mainly because of its newish status as lower-middle income economy, many are unconvinced by the plan to ride a wave of international borrowing towards the firm ground on which it wants to build an industrial hub for West Africa (AC Vol 58 No 1, New order tackles old debts).

Not only has the government failed to persuade people that its debt strategy is sustainable, it faces growing questions about the integrity of senior officials in government and their close family members. Horror stories are circulating about slews of deliberately mispriced contracts, mimicking the pattern of the previous government and in some cases surpassing it.

Getting tough on corruption was a central plank of Akufo-Addo's election manifesto, which promised to appoint a robust and independent special prosecutor to pursue suspected officials and business people. Martin Amidu, a serious appointment as special prosecutor, is about to test his remit.

He should be busy, according to Auditor General Daniel Domelevo, whose latest reports show a continuing drain on public finances. Richard Quayson, deputy head of the Commission on Human Rights and Administrative Justice, reckons the country loses 13.5 billion cedis (US$2.8bn) each year to overpriced contracts and commercial criminality.

Ofori-Atta's budget sounded some notes of optimism. Following clearance by the World Bank, Ghana will complete its International Monetary Fund $900 million credit programme in April 2019, which started under the National Democratic Congress (NDC) government led by John Dramani Mahama. Leaving the IMF's tutelage will allow Ghana to borrow still more on the money markets.

Second, the government promises to revive the oil and gas industry after the slump in oil prices. President Akufo-Addo has been frustrated by exploration and production companies which have failed to develop their concessions.

With the NPP government at the halfway mark, having entered office in January 2017, its willingness to adhere to fiscal consolidatory measures seems to have convinced the Bank and the IMF, if not all their commercial counterparts, that the government is serious about recovery and macro-economic stabilisation.

There was a political price to pay for the tighter budgets. Complaints by business owners reached a crescendo in August as both government and citizens stopped spending. Then the big banks stopped lending to small and medium-sized enterprises and the cedi fell against the dollar.

Heavy dependency on imports of everything from textiles and white goods to rice and tomatoes has left Ghana exposed to fluctuations in exchange rates and a dip in foreign investment inflows as rising US interest rates draw money away. The cedi has remained relatively stable over the past couple of months at around 4.95 to the dollar. 

The slowdown in spending has led to a liquidity squeeze that is hampering Ghanaian-owned businesses (AC Vol 58 No 25, Power to the president's elbow).

Now, the government wants to encourage spending by putting money back in people's pockets, boosting employment – despite its creed of leaving business to the private sector. It rowed back on a top income tax rate introduced this year, scrapping taxes on Ghanaians who earn the minimum wage and spending more on modern farming methods and infrastructure, especially roads and railways.

An analysis by Ecobank last month cites a dwindling foreign appetite and increased preference for short-duration securities as reasons for the government calling off five- and 15-year cedi bond auctions it had scheduled for August and September.

The government raised $2 billion at auctions in May in London and New York, having obtained parliamentary approval for $2.5bn; it agreed $1bn at 8.63% over 30 years and the remainder at 7.63% over ten.

The government bruited that the offer was four times oversubscribed. The last bond issue by the NDC was for $750m over five years at 9.25% in 2016. Ecobank also forecasts slower foreign inflows, given deeper sensitivity to risks from emerging markets. Much of the money the Akufo-Addo government has raised on the open market has gone towards servicing debt, rather than productive ventures (AC Vol 59 No 1, A year to deliver).

Tightening of the money markets in the West has prompted a pivot to the east. Akufo-Addo was accorded a state visit in August at which Beijing promised $2bn worth of soft loans towards infrastructure and health. They signed eight cooperation agreements.

The government's plans for a turnaround depend on scaling up from production of raw commodities for export to expansion of the industrial sector. The goal is a diversified and stable economy.

The industrialisation targets outlined in the NPP's flagship policies in its 2016 manifesto involve mainly agro-processing and light manufacturing under the party's much-touted One District, One Factory scheme – that is 216 new industrial projects.

Agriculture focus
The government says 79 industrial projects will be at some stage of completion by the end of this year: a far cry from the target. The 2019 budget also stepped up measures to modernise agriculture through the existing Planting for Food and Jobs programme and the newly announced Rearing for Food and Jobs, which targets livestock farming.

It is working through the newly created Ministry for Special Development Initiatives, led by Mavis Hawa Koomson, and the One Village, One Dam irrigation programme, co-ordinated by Local Development Minister Alima Mahama, with a focus on the poorer northern regions.

In September, President Akufo-Addo signed into law the Ghana Integrated Bauxite and Aluminium Development Corporation. From bases in the Eastern Region at Awaso and Kyebi – the President's ancestral town – as well as Nyinahin in Ashanti, the corporation will process the raw material into alumina for export. The Nyinahin reserves are estimated to be worth over $45bn but the government has less than two years to deliver on their potential before the next election in 2020.

Historically dependent on gold and cocoa, Ghana became an oil economy when production of petroleum in commercial quantities began in 2010 at the Jubilee field, run by Tullow Oil (AC Vol 53 No 17, The first oil election). Oil earnings outstripped those from cocoa in August this year, and both oil and gas and the services sector, contributing over 56% of GDP in 2017, seem promising.

But electricity supply problems caused by systemic mismanagement and creaking plant and equipment left Ghana facing repeated power shutdowns which slowed activity to a crawl for long periods since the millennium. Much of the country came to a standstill between 2012 and 2016.

A dispute over pricing of gas through the West African Gas Pipeline led to a rash of power cuts in November, leading the opposition NDC to claim the country was experiencing a return to the days of darkness. Delayed action by Energy Minister John Peter Amewu ended the clamour for heads to roll but sources at the presidency say that any further problems will lead to dismissals.

Plummeting commodities prices led to a decline in large-scale gold production four years ago. AngloGold Ashanti announced retrenchment at its mine in Obuasi in 2014, closing underground operations and laying off over 4,000 workers as it faced attacks by illegal artisanal miners. 



Running after revenues

The government's main challenge is raising money. With foreign investment down to a trickle, the state's success in taxing its own people and collecting revenue will be of critical importance. Analysts at Ecobank, headquartered in neighbouring Togo, do not see much chance of a speedy improvement, however, citing the 'underwhelming' performance of the recent past. 

Ecobank and ratings agency Moody's report that Ghana remains at high risk of debt distress despite official projections that the country's debt-to-GDP ratio will fall from 69.2% in December 2017 to 54% by the end of this year. That fall is mainly due to the rebasing of the economy: under the revised figures GDP is 24.6% greater, so reducing its ratio to the debt. Moody's, however, still has concerns about the overall rise in indebtedness this year and its sustainability. 

Cassiel Ato Forson, finance spokesman for the opposition National Democratic Congress (NDC), has slammed the government for announcing unbudgeted spending and adding 48 billion cedis (US$9.8bn) to the national debt since taking office. Forson calculates the government has increased the national debt by 32bn cedis in the past year alone. Bailouts of Ghanaian-owned banks have cost the economy 2.3% of GDP since August 2017. 

However, reforms to streamline business at the ports of Takoradi and Tema have boosted customs revenue this year. Transactions have gone online and involve no physical exchanges of paper, narrowing opportunities for corruption. Importers accustomed to massaging import duties opposed the reforms and threatened a boycott of the new systems. They were eventually mollified by President Nana Addo Dankwa Akufo-Addo in September, but some gripes persist.  

In 2017 the Ghana Revenue Authority recorded a 22.3% increase over the previous year in taxes collected but still missed its target of 33.4bn cedis ($6.8bn) by 1.1bn cedis. It aims to collect just under 40bn ($8bn) this year. Amid talk of another shortfall, the GRA banned all foreign travel by its staff. 

A senior official at the Ministry of Finance told Africa Confidential that a raft of aggressive methods to collect revenue will be rolled out in the next few months.  

A crackdown on defaulters on excise stamp duties, enforceable since 2015 but only policed since last year, has led to raids on some of the plushest bars in Accra, including those at the Kempinski and Mövenpick hotels, and the seizure of quantities of spirits without the necessary stamps. 

The source said measures to monitor income and expenditure using mobile phone technology and electronic point-of-sale records will lead to a boost in collection of VAT. There will also be a shake-up at the GRA 'from top to bottom' to counter connivance of the staff in tax evasion, he said.

Reforms for the extractive industries underwent a little-noticed review in Finance Minister  Ken Ofori-Atta budget. The quantity and quality of minerals extracted will be subject to closer inspection, and the government says it will act on the undervaluation of royalties. The regime governing repatriation of foreign exchange through the Bank of Ghana will come under scrutiny. And tax exemptions for oil and mining companies, long a subject of dispute, will increasingly be accounted for as state-owned equity in these firms (AC Vol 59 No 10, Tax and spend dilemmas).

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