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Databank’s Analysis: 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 FY-15GoG

 Target

FY-15Databank

Projection

 2015 – 2017 GoG

Medium term Target

  Fiscal Deficit (%) 6.5 8.5 ± 50bps 3.5
  Real GDP Growth (%) 3.9 3.0 ± 50bps 6.8
  Inflation Rate (%) 11.5 13.0 ± 100bps 8.0 ± 200bps
  Gross Reserves (months) 3.0 3.0 4.0

 

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

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.

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.

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.

Databank Financial Services Limited

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