IMF stresses the need for fiscal consolidation
By Elorm Desewu
As the country’s public debt keeps rising, the International Monetary Fund, (IMF), has stressed that fiscal consolidation is needed to address debt sustainability and rollover risks, as Ghana continues to be classified at high risk of debt distress.
According to the IMF, to protect the most vulnerable, considerations should be given to more progressive revenue measures and a faster return to the pre-pandemic level of spending, with a shift towards social, health, and development spending.
The medium-term prospects remain favorable, driven by opportunities in digitalization, structural transformation, and the expansion of extractive industries. However, the ongoing recovery is threatened by possible new pandemic waves and rising debt vulnerabilities, including large financing needs that leave government exposed to rollover and solvency risks.
A more ambitious fiscal adjustment, centered on progressive revenue measures, a gradual return to pre-pandemic spending levels, and improved expenditure composition, is urgently needed to reduce risks to debt sustainability while protecting vulnerable households. The adjustment path could be explicitly anchored on debt targets.
The government says it would pursue the fiscal consolidation path envisaged in the 2021 budget, implying a 9 percent of GDP primary balance adjustment based on revenue measures in 2021 and expenditure cuts in 2022-24 that would result in a primary surplus by 2024.
Public debt would peak at 87.4 percent of GDP in 2024, and gross financing needs would average 22 percent of GDP. The baseline scenario assumes continued access to international markets and no further recourse to central bank financing, allowing inflation to remain close to target, while gross reserves would gradually decline below three months of imports coverage
An ambitious scenario assumes stronger fiscal consolidation, with additional revenue measures of 2.4 percent of GDP from 2021 to 2023 over the baseline, for an overall fiscal adjustment of 3.4 percent of GDP per year over the period. Public debt would peak at about 85.7 percent of GDP in 2024 and then decline decisively.
Debt-service indicators would improve, but annual gross financing needs would still remain around 20 percent of GDP. A stronger fiscal contraction would have a negative shortterm effect on growth, but would decrease bond spreads and government borrowing costs.
The current account would improve through lower import demand. The consolidation would also allow a shift in the policy mix over the medium-term, with a more relaxed monetary policy stance which would cut domestic debt service costs and spur private-sector credit growth.
In contrast, a downside scenario reflects the baseline revenue projections but assumes that the planned spending cuts would not be implemented, in line with the experience of some countries in similar fiscal situations. Public debt would reach 91 percent of GDP in 2025, with gross financing needs rising to 26 percent of GDP. The expansionary fiscal stance would push growth temporarily above the baseline, but would also lower reserves, weaken the exchange rate, increase borrowing costs, crowd out private-sector credit, and keep inflation above target
The 2021 budget starts fiscal consolidation. The budget law introduces new revenue measures yielding 1.4 percent of GDP, including VAT and NHIS rate hikes, higher fuel excises, a new bank profit levy, and more effective tax administration thanks to large taxpayer audits, especially in mining sector, and the establishment of special courts to speed up case settlements and payment collections.
The budget also reduces COVID-related spending by 1.3 percent of GDP compared to 2020, but these savings are offset by domestic arrears clearance of 0.9 percent of GDP and higher interest payments. Compared to the budget law, staff projects a 0.5 percentage point of GDP lower yield from tax administration measures, in light of the experience of past compliance efforts and the complexity and delays inherent to large taxpayer audits.
As a result, the IMF projects a budget deficit of 13.9 percent of GDP in 2021, including energy and financial sector costs.