Terkper Shares Reflections on 2019 Mid-Year Review

Company News of Monday, July 29, 2019

Source: Seth Terkper

2019-07-29

Do not rush to praise all of Africa's "popular" but globally unsustainable programs

introduction

– The context is the mid-year review 2019 and the need to be realistic about the country's fiscal outlook, based on the views taken in the interviews and articles.

– A general call to those who relate to Africa and its leaders that they do not praise all the "popular policies and initiatives", even well-intentioned, that lead to waste of tax and economic resources, even in the event of a disaster.

– The call is intended for national leaders (chiefs, experts, clergy, for example) and foreigners (multilateral and bilateral institutions, development partners, civil society organizations, professionals, etc.).

Context

– Even the President now recognizes (for example, lectures at Oxford University) that Free High School High School (F-SHS) will require many resources, including:

– diversion of oil revenues from the investment route to consumption

– including early indications of the use of the "Heritage Fund" for F-SHS;

– accumulation of arrears (for example, pensions, roads, rescue costs, etc.) during the speech on 1 May;

– higher borrowing levels than those anticipated by the government; and

– Despite three (3) (two (2) additional) oil deposits with production almost three times higher since 2017 and a price recovery that tripled oil revenues.

– This will involve a serious long-term commitment – the merit of leaving a legacy with which future leaders will attack for decades.

– Note that the Minister of Finance also stressed the point, but was quickly criticized by the hawks within the Cabinet and Party.

The "unsustainable promise" of F-SHS and other political promises

F-SHS seemed sustainable because …

Contrary to the initial promise of a "big bang" in elections (starting with all students), the SHS program was "phased" to start with only freshmen:

– Grades 2 and 3 continued to pay tuition fees, while the program remained "untargeted", benefiting even middle-clbad and wealthy parents.

– additional oil revenue (oil and gas) served as an initial buffer starting in 2017 – but these non-recurring inflows offset the rising costs (F-SHS and other very expensive election promises such as 1D1F );

– prevention of global recession and SSA and investments in the energy sector

Ghana among the few countries in SSA to avoid the recession

– reverse the rate of accumulation of public debt from positive to negative;

– invest directly and support private sector investment in the RTE and Sankofa oil fields;

– a substantial part of the highly rated budget consolidation resulted from another "illusion" – budgetary "offsets" rather than a backlog repayment program;

– bequeathing tampons – previous administration buffers left:

a. Sinking Fund: used to pay the balance of Ghana's first sovereign bond in 2007;

b. Ghana Infrastructure Investment Fund (GIIF): balanced use; VAT flow diverted to consumption; and no other allocation to the Fund;

c. Energy Sector Levy (ESLA): continuous flow of 3 billion Ghc per year for the settlement of arrears to ease the burden on national banks;

The "rebasement" of GDP has provided fiscal space and

– leeway to borrow thanks to GDP growth and the "illusory" reduction of the debt-to-GDP ratio, which is considered a success by the government; and

– postponed the impact of rising costs.

– "capping" – has not provided the necessary budgetary relief, despite the diversion of vital resources from vulnerable programs (eg, education {GETFund} and health {NHIL}, development Rural {DACF} and Institutions {IGF}

Tax signs are not favorable – in the middle of the year

– One-time cushions – the "slowdown" in GDP growth resulting from rebasing and additional crude oil production is "one-off" and will no longer dampen deteriorating indicators such as debt and budget deficits;

– arrears due to contractors and suppliers – significant amounts due to these key economic actors in various sectors, including presidential initiatives, become apparent and are now recognized by the government …

– pensions – concession to the celebrations of 1 May by HE the President;

– subcontractors and suppliers: concessions from the ministries of roads and finance and "demonstrations" of subcontractors;

– salaries – officials, nurses and employees at the presidential initiative;

– the "bailout" costs of the banking sector, despite unprecedented funding from the HALS;

F-SHS – not yet full disclosure to Parliament and the nation on actual costs and unavoidable arrears;

– increased tax burden – maintenance of temporary taxes ("nuisance") and introduction of new fiscal measures

– retention of temporary taxes (nuisances) such as ESLA, special levy on importation (SIL), national tax stabilization levy (NFSL)

– implicit increase in ESLA levies: set up at a low crude price period of US $ 40 per lb., so that consumers are paying more now at the currently higher price above US $ 60;

Implicit ESLA levy: the levy should have been 3 to 5 years, but the term of the ESLA bond has been raised to 7 to 10 years;

– new tax measures – increase in the maximum rate of personal income tax (PIT); 2.5% increase in the VAT rate (from 15% to 17.5%); luxury tax (usage fee) on vehicles; blocking of the VAT input tax credit (CTI);

– discretionary modification of the basis (valuation and clbadification) for the calculation of import duties, VAT, fees / charges; etc;

– fiscal expansion – the worsening fiscal gap may not fade or subside due to

– new subtle and non-bold tax measures (eg luxury tax, etc.)

– pursue spending programs (likely borrowing, not reallocation to support the pace of the President's election promises);

– budget deficit and borrowing – these indicators are deteriorating rapidly and corrections to offset, and lower estimates, will worsen these indicators: borrowing to support the growing budget deficit;

– loans to finance late infrastructure;

– pledging of resources (royalties from minerals, bauxite deposits, etc.) to finance the budget;

– Depreciation fund – despite three (3) oil deposits, not using the FS to reduce debt (as was the case for one (1) oil deposit for the first oilfields). 2007 sovereign bonds of nuclear power plants;

– Ghana Infrastructure Investment Fund (GIIF): transfer funds (ie VAT and ABFA) for investments in consumer infrastructure.

Looking for cautious voices

The "measured" approach is fiscally prudent – it is "measured" with

– F-SHS [e.g., alternative “progressive” approach] and other programs is consistent with the financial prudence provided for in the Financial Administration Act [PFMA] and budget accountability law [BRA];

– Benefits of being "realistic" – refreshing to hear the cautious voice emerge

– National experts – professors, experts, think tanks and the chairman of a vital constitutional commission have issued a note of caution;

– Opinion leaders: It is important that other national opinion leaders follow a realistic path (for example, clergy and leaders should reflect the situation in religious and community schools);

– IMF / World Bank – warned against government spending and debt programs; however

– removal of tax measures (eg VAT on the non-essential financial sector and commercial real estate) in the program;

– not to recognize that Ghana had avoided the recession; enabling tax expansion; and not criticize the "offsets" that underestimated the arrears and gave the impression of accelerated fiscal expansion;

– Development Partners (DPs) – countries that can be capable of free social programs (education) choose to make them "targeted" (ie programs without education, such as Ghana) and adopting alternative options (for example, student loans on concessional terms);

– The preference for the use of tax support for investments, and not for consumption, is global

– in advanced countries (quantitative easing, for example): invest in infrastructure to support the private sector and rural / urban development, and not devote limited fiscal resources to consumption;

– middle-income states – approach taken by middle-income countries (MICs) such as the UAE and Asian economies;

– Developing countries – Angola and South Africa are now showing a preference for infrastructure development through sovereign wealth funds, as in Ghana's PRMA.

Conclusion

– The current financial situation is different from the end of 2014-2016, as many sub-Saharan African countries were on the verge of collapse due to the global financial crisis, the collapse of price of crude oil and other commodities and domestic pressures such as Nigeria's non-gas supply.

– Now, three (1) oil fields, not one (1); rebound in commodity prices and, as a result, better fiscal buffers.

– The problem lies in unbridled spending due to election promises; unconventional approach to arrears management; and borrowing

– It is time for a realistic review and badessment, and national and international experts to soften their praise or hold back on Africa's "popular" but unsustainable election and budget promises.