Full Report: Databank’s analysis of 2015 Budget points to ‘significant austerity measures’

Ghana’s budget statement for 2015 reveals the GoG’s intention to employ significant austerity measures aimed at achieving a front-loaded adjustment in the fiscal deficit.

Despite the protracted negotiations with the IMF, there are strong indications that the government is committed to implementing the IMF’s proposals for the year 2015. 

The GoG’s commitment to reduce the fiscal deficit from the 9.5% projected for FY-14 to 6.5% by FY-15 is consistent with the front-loaded adjustment set forth by the IMF. The GOG’s commitment to implement proposals by the IMF should further consolidate the positive medium term outlook for the Ghanaian economy.

The fiscal measures which are expected to improve revenue mobilisation would also reduce the percentage of tax revenue committed to the payment of wages and salaries to 40.6% by FY-15 (FY-14: projected 55%).

Interest payment as a percentage of tax revenue is also expected to drop marginally by 200bps to 38% by FY-15. We interpret the marginal drop in interest expenditure as a reflection of our expectation of interest rate being sticky downwards in 2015.  

Projections for Key Macroeconomic indicators

Macroeconomic Indicators
2015 – 2017 GoG
Medium term Target
Fiscal Deficit (%)
8.5 ± 50bps
Real GDP Growth (%)
3.0 ± 50bps
Inflation Rate (%)
13.0 ± 100bps
8.0 ± 200bps
Gross Reserves (months)
Despite the planned austerity measures, the budget also provided indications about policy initiatives which would impact business operations and further deepen the capital market.

Tax Policy Initiatives
We expect the petroleum tax of 17.5% to trigger an increase in fuel prices, exerting upward pressure on headline inflation.

The upward pressure on inflation is expected to increase the operating expenses of businesses and consumption expenditure of individuals especially in the short term.

We expect yields to be sticky downwards in 2015, resulting from the inflationary pressures

The introduction of VAT on fee-based financial services including insurance is expected to discourage the use of some financial services especially in the short term.

Given that Ghana’s economy is highly cash-based and demand for insurance is price sensitive, an increase in fees for financial and insurance services could discourage demand for financial services. This would reduce the profitability of financial institutions, ultimately reducing GoG’s tax revenue.

The proposed review of the sliding scale excise duty to achieve improved efficiency should provide the stimulus for brewery companies to augment the use of local raw materials in their brewing activity. The introduction of the local raw material policy in 2012 has contributed to innovation in the brewery sector, resulting in the manufacture of Ruut Extra beer (Ghana’s first cassava brewed beer) and Stone Larger beer (Ghana’s first rice brewed beer). Other likely positive effects include; reduction in the import bill, development of strong value chain for the agricultural sector and easing demand for foreign exchange.

The expansion of the Tax Identification Number (TIN) to cover other sectors of the economy is expected to facilitate the broadening of Ghana’s tax coverage and ultimately boost tax revenue.

We anticipate growth in the pharmaceutical industry, resulting from removal of VAT on some locally produced pharmaceuticals and raw materials utilised.

Consequently, we anticipate lower production cost for selected pharmaceuticals, increasing affordability.

Given the relatively low smartphones penetration rate (15%), we expect a removal of VAT on imported smartphones to strengthen the contribution of ICT as a driver of growth in the services sector.

Given the current slowdown in real GDP growth and the expectation of a slower growth rate (3.9%) for FY-15, we do not foresee significant growth in government revenue for FY-15. Consequently, we anticipate shortfalls in GoG’s revenue (especially tax revenue). This would undermine the GoG’s ability to achieve the fiscal target of 6.5% by FY-15. We therefore forecast a fiscal deficit of 8.5% ± 50bps as more achievable.

Trade Policy Initiatives
One of the main factors undermining Ghana’s trade balance (and current account balance) is the country’s import orientation. Although Ghana’s trade deficit reduced from 5.6% of GDP in Sep-13 to 1.8% as at Sep-14, the improvement was due to the impact of a sharp cedi depreciation discouraging imports rather than any growth in export.

This reduction in the trade deficit is unsustainable in the medium to long term unless there is an export-led and value addition strategy to increase the country’s foreign exchange earnings relative to imports. We therefore view the trade initiatives proposed in the 2015 budget as a more sustainable approach, albeit a slow paced one.

We view the proposal for an Export-Import (EXIM) bank to support export-oriented activities as a laudable one given that it would provide a stronger basis for export finance especially in the area of Non-traditional exports. We expect the increased financial support from the EXIM bank to enable local companies take advantage of opportunities from accessing the European Market to the Economic Partnership Agreement (EPA).   

We expect more efficient management strategies in order to ensure that the EXIM bank maintains its core mandate of export financing to avoid the relative failures of similar initiatives.

Given the market potential for Ghana’s Non-traditional exports (NTEs) and its ability to mitigate volatility in earnings from primary commodities, we view the drive to improve earnings from NTEs as commendable.

We expect the weak demand in the Eurozone and Asia to undermine this effort as earnings from NTEs dropped by 5.1% year-on-year to $1.9 billion as at Sep-14. There is however a significant market potential in ECOWAS yet to be exploited.

Infrastructure Development
Ghana’s economic transformation would require significant improvements in the country’s infrastructure such as power supply, the road network system, health care and modernisation of agriculture. Ghana currently faces infrastructure deficits which require an annual investment of $1.5 billion to bridge the gap.

The anticipated implementation of the Ghana Infrastructure Investment Fund (GIIF) in Jan-15 would provide a wider pool of resources from the Public and private sectors, easing the financing burden on the public sector.

We expect the support from the World Bank and AfDB in the implementation of the GIIF to include technical support which would ensure efficient management processes.

Capital Market and Debt Management Initiatives

Ghana’s public debt stock ($21.73 billion) increased to the sustainability threshold of 60.8% in Sep-14. This requires stricter debt management strategies to avert extension to unsustainable levels.

Government’s decision to migrate some commercially viable projects and their associated loans to the management of the GIIF is expected to reduce the GoG’s debt stock.

The government’s plan to diversify borrowing into longer term instruments and also extend the yield curve to 10 years would reduce the upward pressure on short term yields and consequently reduce debt financing cost.

While the move to lengthen the yield curve is a plausible idea, we do not expect immediate implementation given the high interest rate regime prevailing on the market. In our view, it would be more prudent for the government to delay the implementation until macroeconomic stability is achieved and reflected in lower yields.

We welcome the initiative to set up a sinking fund for efficient debt management. We expect the $250 million cap on total transfers to the Ghana stabilisation fund to enable the use of windfalls in financing the Sinking Fund for debt servicing and repayment.

If initiatives to list GoG’s medium term securities on the Ghana Stock Exchange (GSE) materialize, we expect that this would enhance information flow and price discovery for GoG’s bonds.

We also expect this strategy to increase investor participation on the capital market, improving liquidity and deepening Ghana’s bond market.

COCOBOD has gained international credibility as a result of its syndicated loans over the years. We expect that if the proposed longer term Cocoa Bond is wholly or partly issued on the domestic capital market, the issuer credibility would attract investors and deepen activity on Ghana’s bond market.

The anticipated takeover of Ghana National Gas Company (GNGC) by the Ghana National Petroleum Company (GNPC) would provide a bigger capacity for capital market borrowing to improve the energy infrastructure, and reduce the debt burden on the GoG.

We expect the synergy to also provide the opportunity for obtaining credit ratings from international rating agencies which would positively impact on Ghana’s capital market in the long term.

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