Ghana’s fiscal discipline expected to slip towards Election 2012 – EIU
The United Kingdom-based Economist Intelligence Unit (EIU), has predicted that Ghana’s fiscal discipline will slip as Election 2012 draws closer and improve in 2013.
“Strong domestic economic prospects across most sectors will be tempered by global uncertainty. Growth will be robust at 7.4 per cent in 2012 and 7.1 per cent in 2013 but still below its 2011 level, which was boosted by the onset of oil production.
“Strong agricultural performance and lower international commodity prices would allow a gradual fall in inflation to 8.4 per cent in 2012 and eight per cent in 2013,” the EIU stated in a statement obtained by Ghana News Agency in Accra on Thursday.
The EIU report noted that increases in commodity exports would be offset by falling prices, especially in 2013, coupled with strong import demand, the current-account deficit would increase to 4.8 per cent of Gross Domestic Product (GDP) in 2012 and 7.1 per cent of GDP in 2013.
It said that” economic policy would centre on bringing down the large fiscal deficit and repaying domestic arrears that have built up while the main challenge for economic police would be to regain control of the public finances.”
The EIU acknowledged that the Government of Ghana was aware that fiscal policy management needed to improve, but pressing demands for greater development spending, as well as public-sector pay increases, would mean that there would be slippages on the fiscal targets laid out by the International Monetary Fund (IMF) in particular.
The report said donors were likely to overlook minor lapses, but would be less tolerant of any further large-scale build-up of arrears.
It said the overall economic policy of the Government would continue to focus on improving public expenditure management, increasing revenue collection, developing the business environment, reducing poverty and extending credit and support for the private sector.
The report said progress on all fronts was expected to slow gradually as political manoeuvring intensified ahead of Election 2012.
On the impact of oil on the Ghanaian economy, the EIU explained that government’s stance on the nascent oil sector was another important aspect of the policy mix.
The report said the Government’s decision to allow the use of 70 per cent of future oil revenue as collateral for borrowing was a cause for concern and stressed that the risk was that, if the revenue is not managed properly little benefit would be seen in return for a larger debt stock and greater potential for corruption.
It said in this regard, how the Government handled a recently agreed three-billion-dollar loan package from China would be closely monitored.
The report said although the Government’s efforts to reduce the fiscal deficit would behelped by strong growth in the economy, which would boost tax inflows, reduction in the deficit would fall short of the targets initially set by the Government and the IMF.
It said “there is a need to widen the tax net by eradicating numerous exemptions, revisiting tax agreements with mining companies and integrating the various government agencies that currently collect taxes in order to improve efficiency.
This is important, as tax revenue as a share of GDP is below 14 per cent low even by African standards, however, the onset of oil production hasprovided a boost to tax revenue, but the impact would not represent a panacea for government finances.”
The report said much of the revenue generated by the oil industry during the early years of production would go towards reducing the domestic payment arrears that grew heavily in 2008 and remained large in 2009 and 2010.
It said “Moreover, the rise in revenue from oil taxes may weaken theGovernment’s commitment to increasing the tax net elsewhere, especially with general elections due in 2012.
The Government faces a difficult task in managing public expectations as to what could be achieved with the oil revenue.”
The report said the Government has stated its commitment to restraining spending growth, and early in its tenure, made some promising moves such as cutting fuel subsidies.
It said this commitment would waver as elections approached, and the fiscal deficit was expected to increase modestly, to 6.3 per cent of GDP, in 2012 as a result.
The report said with the elections out of the way, the next government should be more successful in bringing the fiscal deficit down; and added that”We forecast that it will decline to 5.5 per cent of GDP in 2013″.
It said the deficit would probably be slightly higher under an NPP Government, as it attempts to implement its campaign promises and reward those who helped it return into power, although both sides of the political divide appear aware of the need to exert tighter control of fiscal policy.
The report said “The Government expects the deficits to be financed in a roughly even split between local and foreign sources. This should help to allay concerns that domestic public borrowing is increasingly crowding out the private sector, but would bring new concerns over transparency as some of the foreign lending would come in the form of oil-backed borrowing.”
Source: GNA