Ofori-Atta to signal path to recovery

Finance Minister Ken Ofori-Atta will tomorrow deliver the 2020 mid-year budget review, which will unveil the government’s most detailed economic response yet to the COVID-19 pandemic.

Mr. Ofori-Atta has over the past three months delivered government’s response to the impact wrecked by the coronavirus in bits and pieces, as the scale of the damage became more obvious.

But when he appears before Parliament tomorrow, he will have to detail his government’s measures to salvage the faltering domestic revenues, which has been exacerbated by the hurt to businesses caused by the virus.

Government’s revenue performance in the first three months of this year fell short of its target by more than GH¢3.6bn—a period which at best could be described as the dawn of the virus and its knock-on effects.

If Mr. Ofori-Atta’s fears, as communicated to Parliament on March 30, are anything to go by, the virus’ impact may not be generous on government’s revenues, particularly in the second quarter, which saw nearly a month of restrictions on movement in Accra and Kumasi—the two most economically vibrant cities.

While the restrictions have been partially lifted, bringing some temporary relief to businesses, the Finance Minister will be expected to provide innovative measures to drive up revenue amidst the lethargic environment businesses are operating within.

Living with the virus

Although Ghana continues to record new cases of the virus—there were more than 28,000 cases as of July 21—there is a general acceptance that economic recovery must begin in earnest in order to mitigate the initial damage the virus has caused.

The Finance Minister, having concluded a protracted US$918m Extended Credit Facility programme with the International Monetary Fund (IMF) only last year, will be expected to kick into motion another plan to restore the macroeconomic fundamentals to pre-COVID-19 levels.

According to the Institute of Economic Affairs (IEA), the recovery charge must be led by fiscal policy, since it is uniquely placed to mobilise and manage the resources required.

“To be able to play this role effectively, persistent rigidities in both revenue and expenditure must be addressed,” the policy think tank said.

Just like the IMF, the policy think tank also believes that Ghana must use this pandemic to commence a path to solving its long-standing problem with revenue mobilisation.

The country’s tax revenue/GDP ratio of between 12-13 percent falls below the average of 25 percent for middle-income countries and the minimum threshold of 20 percent under the proposed eco currency system of the Economic Community of West African States (ECOWAS).

“Ghana’s situation of low tax revenues does not arise from the fact that it has low tax rates. On the contrary, Ghana’s personal income, corporate income and VAT rates are relatively high. The problem rather lies with tax losses, which experts estimate to be around 10-12 percent of GDP. In other words, we lose about as much tax revenue as we collect. Ghana’s tax revenues should be significantly scaled up to support the recovery and long-term growth,” the IEA said.

Controlling the purse

Ghana’s path to recovery is also dependent on how well the government is able to control its expenditure. Already, the virus has brought with it unplanned expenditure at a time there is little fiscal space for any maneuvering.

The first quarter fiscal performance paints a picture of rising spending, as government incurred a bill of GH¢20.8bn, representing year-on-year growth of 33 percent, in that period.

With government projecting to spend GH¢86bn in 2020, the declining revenues only point to a nemesis government is too familiar with—fiscal deficit. Prior to the COVID-19 pandemic, government was attempting an audacious feat of keeping the deficit below five percent of GDP even in an election year.

Although critics like former Finance Minister Seth Terkper have accused government of excluding the costs associated with the financial sector bailout in order to keep the deficit lower, it was the virus that threw the spanner into the works.

The deficit, which was seen at 4.7 percent of GDP, could potentially rise to nearly 10 percent, according to some forecasts. A few months ago, Mr. Ofori-Atta revealed that the five percent of GDP deficit ceiling in the Fiscal Responsibility Act would be suspended to accommodate the spike.

But government’s path to recovery, Mr. Ofori-Atta knows, will be hinged on how quickly it is able to rein in the fiscal deficit. While revenue from oil has often come in handy and timeously, the pandemic has set yet another reminder that commodities are mostly not available when needed the most.

Nevertheless, crude oil prices rising from the ruins seen in March will offer Ofori-Atta some respite in the midst of a strained environment to seek financing.

The true path to recovery, as the IEA points out, lies with boosting productivity in the real sector—that is, agriculture and industrialisation. Mr. Ofori-Atta may argue that his government is already keen on those sectors, particularly with initiatives such as Planting for Food and Jobs, and One district, One factory.

Government’s attempt to ride out the pandemic storm will largely depend on the seeds of recovery it sows in tomorrow’s mid-year budget review. Clearly, it is not a smooth journey ahead, but Mr. Ofori-Atta’s job will be to convince the country the economy is in the right hands with the December polls just around the corner