Mahama's Hammer: BUDGET BLUES

Finance Minister Osafo Marfo Presented his budget for 2004 to Parliament. This was a much-expected budget, with various political and interest groups waiting to see how Government intends to run its economic programme in a critical election year.

Immediately after the budget was presented, opinion was sharply divided, as is usually the norm. The Government side praised the budget as ?business friendly? while the Minority described it as a campaign or ?electioneering budget.?

?GHANAIANS ARE EATING WELL?

Perhaps the single statement that raised the most consternation in the house was when the finance Minister said the economy is on track and ?Ghanaians are eating well.? There was uproar on the Minority benches and the public gallery, with Minority members issuing catcalls and heckling the minister. Certainly the macro economic figures might be pointing in the right direction, but that is no justification to say that Ghanaians are eating well. Off course the Minister might be eating well at home, but for a significant majority of the populace it is quite clear that putting basic staples on the family table is an uphill struggle. Huge hikes in the cost of utilities, transport, housing, education and healthcare have eroded average family incomes. This leaves very little for the average family to afford a sumptuous meal even during important festivities like Christmas and Salah. The inflation target of single digit was thrown out of gear by the hefty hike of almost 100% in petroleum prices. This caused a revision of the expected year-end inflation target to 26%, but even that was missed by 1.6% (i.e. inflation came in at 23.6%). The target for inflation for 2004 has again been set at single digit, but with expected hikes in petroleum as a result of deregulation of the petroleum industry, it is doubtful if this target can be attained. Increases are also expected in prices of utilities, especially in electricity and water.

TOTAL NATIONAL DEBT STOCK

The finance minister deliberately omitted to mention the figure for the national debt stock. In his first year in office, Finance Minister Osafo Marfo very gleefully computed the national debt stock left by the NDC Government as 41 trillion cedis. He did this by combining both the external debt and domestic debt and denominating the entire amount in cedis. This created quite a frightening spectre and painted a picture of an irresponsible Government that had landed the nation in absolute insolvency. The catch phrase in Akan in respect to the trillions of debts was ?opi pi pi pi pi.? Three years on, despite significant debt relief under HIPC, the external debt is pushing close to $7 billion. The external debt and domestic debt combined and denominated in cedis using the ?Osafo Marfo formula? comes close to 80 trillion cedis. This represents an almost 100% increase in the national debt over a 3-year period. While it is wrong to lump external and internal debt together and denominate the total in cedis, Osafo Marfo brought this predicament upon himself by using this formula in propaganda against the NDC.

DISPUTED GDP GROWTH

Perhaps one issue that is likely to generate a lot of heat in the coming week is the GDP growth figure of 5.2%. The Minority has disputed the figure. Minority Spokesman on Finance Moses Asaga actually went as far as describing it as ?doctored.? Since then a few well known economist have expressed doubt about the figure. The more acceptable figure conservatively is estimated at 4.9%. In my discussions with one such economist, he raised a very relevant question. He said if we actually grew at 5.2%, why has Osafo Marfo put the target for next year again at the same 5.2%. Does it mean we are going to experience stagnation in GDP growth for next year? And if so, what would account for that stagnation? One would expect that with Macroeconomic indicators moving in a favourable direction and forecast continued high values for our exports, with stable world oil prices, the expectation is that there would be acceleration in GDP growth rates. Is this deliberate to allow the economy to catch up with the ?padded? GDP growth figure for an election year? It is hoped that independent economic think-thank institutes like CEPA and ISSER will help the nation verify the GDP growth figures as expeditiously as possible.

EXCHANGE RATE

The Finance Minister announced quite exuberantly, that the cedi depreciated marginally by 4.6% against the dollar. What he did not tell Ghanaians was that the dollar itself had not performed well either and fallen against all the world?s major trading currencies. This accounted for the marginal slide of the cedi against the dollar. The cedi however performed abysmally against the other major currencies. It fell in excess of 17% against the Pound Sterling and above 14% against the Euro. These are significant because the European Union is Ghana?s major trading partner and therefore the cataclysmic slide of the cedi against the euro and pound can?t fail to have an adverse effect against the Ghanaian economy. The cedi also slid dangerously against the CFA, which is the main currency for business in the ECOWAS region.

TAX BREAKS

Perhaps the high point of this year?s budget was the tax breaks announced for industry. Reduction in corporate tax rates from 32.5% to 30% and other reductions in corporate taxes in respect of location of industries were aimed at courting the business community in an election year. The AGI and PEF had continued to grumble about backbreaking taxes that were stunting the ability of the business community to reinvest. Indeed the tax breaks in the budget can be said to be a plagiarization of Professor Atta Mills? agenda for 2005. Professor Mills has stated categorically on 3 separate occasions that when he gets sworn into office as President, one of his first acts in office would be to review and rationalize the numerous taxes that are suffocating business and stifling their ability to expand and create employment. Incidentally the new corporate tax rate of 30% even though announced in this year?s budget comes into effect next fiscal year 2005.

Deferred payment of VAT by manufacturers on imported raw materials will give some respite. However, there is the risk of returning to the bad old days of the sales tax when customs officers had to be deployed at factory premises to monitor use of raw material vis-?-vis tax collections on finished products.

PETROLEUM PRICING

Petroleum pricing probably represents the Achilles heel of this Government. Pressure from IMF/World Bank to cover a 10% and growing deficit in petroleum prices is creating all kinds of nightmares for Osafo Marfo and his finance team. In the budget the finance minister announced that deregulation of the petroleum pricing policy will commence this quarter. Under this arrangement, oil-marketing companies (OMCs) will be allowed to import petroleum products or crude for refining and sell direct to the consuming public. This implies potential significant upward adjustments in petroleum prices in the course of the year, which will worsen further the plight of the disadvantaged and vulnerable in society. There will also be continued implementation of the full cost recovery policy for utilities, which could translate into tariff adjustments for electricity and water.

HIPC

The Minister announced that Ghana would likely reach the completion point of HIPC this year. At completion point, the country is expected to have a debt write-off of $3.6 billion over a 20-year period. This translates into$180 million debt forgiveness per annum. Very little recompense for the extremely austere pressures Ghanaians have been subjected to over the last 3 years. Will this make Ghana any less indebted than she has been previously? The answer is ? NO! With an 80 trillion-debt overhang and still growing, Ghana still essentially remains highly indebted and poor.

FINANCING GAP

There is a huge financing gap in this budget of close to $400 million. It is contingent on the benevolence of the donors to close this gap. At the IMF board meeting late last year, Ghana had her programme approved based on some promises made entailing implementation of tough measures such as petroleum and utility price increase, and the implementation of the 2.5% VAT increase which Government has since developed cold feet in implementing. If these conditionalities are not fully implemented, it is doubtful if the donor inflows to fill the budget gap will be forthcoming. The implications for macro economic stability in the circumstance are dire.

What accounts for the huge expansion in Government expenditure over the last 3 years? There has been a more than 300% increase in government expenditure over the last 3 years from 4.4 trillion to 13.4 trillion cedis, and all that appears to have been gobbled up in unbridled expenditure of an over-bloated government.