Election blues trouble investors as fiscal deficit increases by 89%

Disappointing revenue performance and increased capital expenditure have pushed up the country’s fiscal deficit to more than GHC4.69 billion as of the end of July this year, creating uneasiness among businesses as the country heads to the polls in December.

The deficit, which is GHC1.7 billion more than what the government had planned for the period, indicates an 89 per cent rise in comparison to the same era last year.

The figure posts a worrying sign of deteriorating economy after the country recently witnessed a fallen deficit in line with the IMF expectations under the three-year Extended Credit Facility agreement.

This puts the government’s deficit target of 5.3 percent of GDP for the year in danger in the face of a slowdown in revenue collection with the economy expected to grow slower than anticipated.

According to the country’s fiscal data provided by the Finance Ministry, government’s spending for the first seven months of the year topped GHC23.28 billion, which was within the budget for the period.

This is despite of the fact that government’s spending on capital projects exceeded the target by 16.7 percent, brought about by the steady rollout of infrastructure projects as the governing NDC party seeks re-election in this year’s general elections.

However, the revenue target of GHC20.89 billion fell short of expectations by 11 percent despite the relax stance of donors, who supported the budget with an estimated GHC1 billion grant; more than the GHC976 million the government was expecting.

According to the B&FT’s analysis of the fiscal data, government expected to generate about GHC2.26 billion from personal income tax but ended up collecting GHC1.97 billion, which points to a tight job market and hold up in employment and job growth especially as taxes from the self employed also fell short of expectation by 23.4 percent.

Additionally, companies taxes between January and July this year was 15 percent below target, indicating difficulties’ in the business operating environment amidst tightening of the credit conditions in the country as banks look to cut down on non-performing loans and safeguard deteriorating assets position.

According to the IMF, the poor show in domestic revenue collection, reflects lower-than-projected oil prices, weak economic activity with lower business profits and personal incomes, as well as lower-than-expected revenue impact from several measures implemented so far.

“In particular, the ECOWAS Common External Tariff (CET) was expected to deliver about 0.5 percentage point of GDP in additional revenues, but so far the revenue impact has been marginal, while the administrative measures’ impact on direct tax collection has also been negligible,” the Fund said.

The shortfall in revenue is therefore expected to force the government to turn to the capital market to borrow more to meet its spending needs since it has been barred under the IMF programme from seeking central bank funding to finance the deficit.

However, the fiscal deficit, which has shown signs of widening, is expected to trouble policymakers and established businesses that might fear the government’s spending binge will keep interest rates at their current high levels and send negative signals to investors and rating agencies on the credibility of fiscal reforms.