Optimizing Ghana’s Fiscal Rule  

The oil refinery in Warri, Nigeria, pictured in August 2015, has roared back to life after years of neglect. Nigeria and Libya have added 550,000 barrels a day of crude-oil production since October, wiping out almost half of the cuts achieve by other members of OPEC. PHOTO: PATRICK MCGROARTY/THE WALL STREET JOURNAL

Accra, October 10, 2017//-The Vice President of Ghana, Dr. Mahamudu Bawumia, recently announced his government’s plans to restore fiscal sustainability in the country. The current proposal calls for a fiscal deficit target of 3 to 5 percent from 2018 onward.

 The government plans to commit to this target through binding fiscal rules and a set of amendments to the Public Financial Management Act.

This move by the new government toward greater fiscal discipline is laudable. But the proposal’s success depends on its details and how it is implemented. This Natural Resource Governance Institute (NRGI) policy brief sets out 11 recommendations to make the fiscal rule work for Ghana.

The full briefing note on fiscal responsibility that was put together by NRGI. Legislating fiscal rules is an important step towards achieving sustainability of Ghana’s public finances. At least 96 countries have a fiscal rule(s). Prepared by the Natural Resource Governance Institute, this brief identifies five characteristics of a good fiscal rule based on international experience, and provides recommendations on how to effectively tailor them for Ghana.

 

RECOMMENDATIONS

Ghana’s upcoming fiscal responsibility law presents a unique opportunity to reform Ghana’s public financial management and put measures in place to make the national budget more credible and ensure fiscal discipline. An all-encompassing, realistic, achievable fiscal rule will go a long way to instill investor confidence in the Ghanaian economy and set the scene for accelerated economic growth. Based on this paper’s analysis of Ghana’s policy priorities, historic performance and international experience, we present the following recommendations to government and lawmakers to improve the effectiveness of Ghana’s fiscal rule:

 

  1. Review whether it is realistic to reach a 3–5 percent deficit target by next year without cutting into pro-poor or developmental spending.
  2. Avoid a pro-cyclical approach by setting a 4 percent structural deficit target, one that would allow a larger deficit in bad years while ensuring strict compliance with the rule in good years. Chile and Norway are using similar structural balanced budget rules.
  3. Set an additional rule that caps the growth rate of recurrent expenditures. This would ensure that the government uses revenue windfalls for investment rather than increasing consumption and wages. Peru and Tanzania are using similar recurrent expenditure caps.
  4. Make it difficult to circumvent the deficit target by setting limits to arrear accumulation and off-budget borrowing by various public entities. Most importantly, this should cover loans that state-owned companies take on for non-commercial activities. In Mexico, for example, a budget balance rule ensures limited borrowing by the national petroleum company.
  5. Include an escape clause for major shocks. A temporary suspension of the fiscal rule should be conditional upon a limited range of well-defined events. The escape clause should also include specifications for publishing deviations from the rule and a public plan on measures for putting the economy back on the path to recovery.
  6. Make a two-thirds majority vote in parliament necessary for invoking the escape clause. This will allow for consensus around the invocation of the clause, as well ensuring that the government follows recovery provisions after invoking the clause.
  7. Make a two-thirds majority vote in parliament necessary to enact the fiscal rule, in order to build legitimacy and consensus. In addition, leaders of all political parties in Ghana should in principle agree with the kind of rule adopted and commit to its successful implementation in their various different capacities. This will increase the likelihood of continued compliance with the rule.
  8. Strengthen budget transparency based on recommendations from the 2015 Open Budget Survey. These include publishing all relevant budget information (for example a pre-budget statement and the enacted budget) in a comprehensive format that citizens can easily understand, providing more information on expenditure classifications over the past and current medium-term expenditure frameworks in the executive’s budget proposal, and publishing detailed annual budget performance reports with information on macroeconomic projections versus actual budget turnouts.
  9. Institute punitive measures for non-compliance and arbitrary departures from the fiscal rule in any given financial year. Provisions for sanctions in the 2016 Public Financial Management Act present a good starting point for instituting punitive measures. The government must, however, enforce these punitive measures. In addition, any minister of finance who supervises such arbitrary departures should face hearings with the Finance and Public Accounts Committees of Parliament.
  10. Task an independent body with reviewing compliance with the fiscal rules. This body should carry out its own analysis to evaluate risks and credibility of government plans for fiscal consolidation. This does not need to be a new institution: The Scrutiny Office that the Parliamentary Service Act recently established is mandated to provide objective and independent analysis on all policy initiatives and proposals that are brought to parliament for approval.
  11. Ensure that the selection of the head of the independent body tasked with producing independent forecasts is apolitical and based on the candidate’s technical expertise, qualifications and work experience. The head of the independent body should have a guaranteed tenure of office and should not be subject to arbitrary removal.

By Aisha Adam and David Mihalyi

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