Minister of Finance, Hon Seth Tekper, has admitted that though it will be difficult for the government to achieve its "deficit targets for this year", the "objective of reducing the fiscal deficit to lower levels over the medium terms still remains and will be pursued" vigourously nonetheless.
As outlined in the 2013 Budget, government said it will strive to achieve fiscal prudence, including sustainable debt limits and a reduction in the budget deficit from 12% of GDP in 2012 (or 11.8%, based on the revised GDP figures) to 9.0% of GDP in 2013.
But it appears this might not be achieved.
Addressing the media on Thursday on the "Performance of the Economy", Hon Seth Tekper noted that "although measures are being implemented to ensure the achievement of the deficit target for the year, there remain risks to the achievement of the fiscal deficit target for the year. These include; the huge shortfalls in revenue resulting from the slowdown in economic activity and recent global developments as well as higher spending on the wages due to the implementation of the Single Spine Pay Policy and higher interest cost".
Read the Finance Minister's full statement below.
The Performance Of The Economy And Preparation For 2014 Budget Presented By Hon Seth E. Terkper, Minister For Finance
Mr. Chairman, invited Guests, ladies and gentlemen
1. Good afternoon. We wish to brief you on performance of the economy from January to August 2013. We will also present the outlook for the rest of the year. This briefing is being done in the context of the 2013 Budget and Statement of Economic Policies and recent developments in the global and domestic economy.
REAL AND EXTERNAL SECTOR PERFORMANCE AND OUTLOOK
2. In the second quarter of 2013, the economy grew by 6.1 percent, compared to 9.1 percent in the corresponding quarter in 2012 and 6.7 percent in the first quarter of 2013. The trend of growth in the second quarter was different from that of the first quarter in which the Agriculture and Services Sectors recorded positive growth rates and Industry recorded a negative growth.
3. In the second quarter of 2013, the Services Sector once again led with a growth of 9.2 percent, compared with 12.0 percent in the first quarter. The Agriculture Sector declined by 3.9 percent in the second quarter, compared with a positive growth of 1.1 percent in the first quarter and 1.6 percent in the analogous quarter in 2012. The Industry sector grew by 2.5 percent, compared with a growth of 5.0 percent in the corresponding quarter in 2012 and a decline of 0.8 percent in the first quarter, reflecting the impact of the power crisis.
4. Given the performance of growth in the first two quarters of the year and developments in the global economy, particularly the prices of our major exports, real GDP growth is estimated to be lower than the Budget target of 8.0 percent. The Ghana Statistical Service has announced a provisional 2013 growth rate of 7.4 percent to be driven mainly by the Service and Industry sectors. The provisional growth rate for the year is the result of a downward revision of growth prospects in the Agriculture sector driven mainly by the lower than anticipated performance of the forestry and logging sub sector.
5. Inflation continued on an upward trend from January 2013, rising consistently from 10.5 percent in February to 11.8 percent in July. The rise in inflation over the first seven months of the year was driven by both food and non-food inflation underpinned by the upward price adjustments of petroleum products, demand pressures and the extended cyclical lean food season. It is worth mentioning that the National Petroleum Authority program of reducing petroleum prices when crude oil prices fall was announced this week.
6. it is important to emphasize that the Ghana Statistical Service (GSS) rebased the CPI basket and consequently released new inflation figures on 26th June 2013. Ghanaians will recall that in 2010 GSS performed a similar exercise with respect to the national output (GDP). The main characteristics of the rebased CPI series are as follows:
i. the base year has changed from 2006 to 2012
ii. the number of markets covered has increased from 40 to 42
iii. the number of items in the baskets has increased from 242 to 267
iv. the new weights of the items in the basket are based on the Ghana Living Standards Survey (GLSS 5) conducted between 2005 and 2006 and published in September 2008
v. the weight for food and non-alcoholic items has reduced from 44.9% to 43.6%
vi. the weight of transport has been revised upwards from 6.2% to 7.2%
vii. the weight of the Housing, Electricity, Water and Gas components has been revised upwards from 7.0% to 9.5
7. it is instructive to note that with the increase in the weight of transport from 6.2% to 7.2%, the pass through effect of the fuel price increases will be more pronounced in the new, rather than the old basket. The same applies to the housing, electricity, water and gas component. On the other hand, the impact of food and non-alcoholic items will be less, especially during the lean season.
8. given the trends in inflation during the first eight months of the year and the anticipated impact of the recent adjustment in utility tariffs, inflation is expected to end the year at a rate around the upper end of the target band of 7-11 percent.
9. The Cedi has remained broadly stable, recording a cumulative depreciation of 3.9% during the first eight months of the year compared with a depreciation of 18.4% during the same period in 2012. The Cedi is expected to remain stable as proceeds from the upcoming COCOBOD syndicated loan are expected to increase reserves and help calm pressures on the exchange rate in the fourth quarter of the year.
10. For the first eight months of the year, the value of merchandise exports were estimated at US$9.8 billion, improving by 4.1% over the overturn for the same period last year. As a result of the decline in international prices of our major export commodities, earning from gold fell by 12.6% to US$3.4 billion, while exports of cocoa beans also declined by 21.4% to US$1.4 billion. Oil exports, however, increased by 46.9% to US$2.8 billion, as a result of increased production.
11. the value of imports declined in the first eight months of the year, to US$11.6 billion in 2012. The decline came from a slowdown in both oil and non-oil imports. Oil imports went down by US$60.9 million to US$2.3 billion, while non-oil imports also declined by 2.4% to US$9.3 billion within the period. The trade balance for the period therefore improved to a deficit of US$1.8 billion from a deficit of US$2.5 billion in 2012.
12. gross international reserves at the end of August stood at US$5.8 billion equivalent to 3.2 months of import cover.
FISCAL PERFORMANCE AND OUTLOOK
13. The aim of fiscal policy, as outlined in the 2013 Budget, is to achieve fiscal prudence, including sustainable debt limits and a reduction in the budget deficit from 12% of GDP in 2012 (or 11.8%, based on the revised GDP figures) to 9.0% of GDP in 2013.
14. you will recall that, in presenting the 2013 Budget, we stated that the fiscal and other related targets are to be achieved through the measures that include;
i. improved revenue mobilisation (an effort being led by the Ghana Revenue Authority (GRA) under its on-going Revenue Modernisation Program)
ii. realigning the key budget items and enhancing the efficiency of public expenditures (e.g through the ongoing Public Financial Management (PFM), reforms, including GIFMIS)
iii. reviewing capital expenditures and the strategy for financing them (in collaboration with Bank of Ghana)
15. In July 2013, Cabinet and Parliament approved further tax measures with sunset provisions in 2015 to support the fiscal consolidation effort
16. Preliminary data for January to August, 2013 indicate that, both revenue and expenditure were below their respective targets for the period. However, since the shortfall in revenue exceeded the shortfall in expenditure, the resulting cash fiscal deficit of GHC 6,442.2 million or 7.3% of GDP against a target of GHC 5,876.6 million or 6.6% of GDP
17. For the first eight months of the year, there has been less fiscal pressure from subsidies due to the adjustment of petroleum prices and more recently utility prices, and corporate income taxes on petroleum, but adverse impact from compensation to employees, interest costs and grants.
18. Total revenue and grants for the period was GHC 11,902.8 million, equivalent of 13.4% of GDP, against a target of GHC 14,175.0 million, equivalent to 16.0% of GDP. In nominal terms, the provisional out-turn was 13.1% higher than the outturn for the same period in 2012. The shortfall in total revenue and grants was mainly as a result of low disbursement of grants from our development partners and partly due to lower than anticipated domestic revenue collection by GRA.
19. Total tax revenue amounted to GHC8, 887.6, 14.5% lower than the Budget target of GHC 10,391.3 million. In nominal terms tax revenue was 13.1% higher than the outturn recorded for the same period in 2012. The under-performance of tax revenue stems from low performance of almost all the tax types except petroleum revenue, reflecting lower imports, the slowdown in economic activities during the first and second quarters of the year resulting partly from the energy crisis and the decline in commodity prices on the world market.
20. Although the performance of domestic revenue from the traditional sources have been weak, oil revenue performance for the period under review has been very strong as a result of higher than expected crude oil price, higher production levels and higher corporate income taxes from the sector. Total oil revenue from January to August amounted to GHC1,150.4 million, against a target of GHC788.1 million
21. Grant disbursement from our development partners was 44.7 percent lower than the budget target 47.0 percent lower than the outturn recorded during the same period of 2012. The lower than expected outturn of grants due to the non-disbursement of budget support from our Multi Donor Budget Support (MDBS) partners – a trend that is continuing from 2012.
22. Total expenditure including payments for the clearance of arrears and outstanding commitments for January to August 2013 amounted to GH₵18,345.0 million, equivalent to 20.7 percent of GDP. The outturn was 8.5 percent lower than the budget and 18.4 percent higher than the outturn for the same period in 2012. The growth in expenditure was mainly due to the increase in interest costs and the growth in compensation of employees during the period.
23. Expenditure on Wages and Salaries totaled GH₵5,022.9 million, 2.2 percent higher than the budget target of GH₵4,905.2 million and 17.1 percent higher than the outturn for the same period in 2012. In addition to this an amount of GH₵674.8 million has been spent on the clearance of wage arrears. The trend in the wage bill for the first eight months of the year is worrying given that the 10 percent 2013 wage increment for public sector workers is not reflected in the end-August wage bill.
24. Compensation to public sector employees alone continues to take a very significant percentage of tax revenue (73.9 percent as at end-August), resulting in less revenue being available for other important expenditure items under the Goods and Services, as well as Capital components under the Budget. Together with interest payments, it has also resulted in delays in payments to statutory funds and other transfer.
25. Interest payment for January to August totaled GH₵2,972.2 million and 40.5 percent higher than the Budget target of GH₵2,115.5 million and 117.3 percent higher than the outturn for the same period in 2012. Of this amount domestic interest was 43.6 percent higher than the Budget target. On a year on-year basis, domestic interest grew by about 133 percent, reflecting very high domestic borrowing in 2012 to finance the deficit and the high interest rate associated with it.
26. The high expenditure on wages and salaries as well as interest cost has led to a crowding out of spending on other important expenditure items such as Capital and Goods and Services. For example, an amount of GH₵463.2 million was spending on Goods and Service against a budget of GH₵926.3 million for the period. Similarly, an amount of GH₵2,713.9 million was spent as capital expenditure against a target of GH₵3,209.0 million.
27. As a result of higher expenditure on Compensation to Employees and interest costs, spending on items such as provision of funds for orphanages and other social spending (i.e school feeding, school uniforms, capitation grants and LEAP) as well as payment to road contractors and other Government service providers had to be curtailed.
28. The 7.3 percent budget deficit for the first eight months of the year was financed from both domestic and foreign sources. Net Domestic Financing (NDF) of the budget was GH₵3,570.0 million (equivalent to 4.0 percent of GDP). Domestic debt constituted about 55 percent of total financing for the period, indicating an improvement in the financing mix following the recent Eurobond issue. With the substitution of more foreign financing for domestic financing, which is more costly given the high interest rates government interest cost burden is expected to reduce.
29. Foreign Financing of the budget was GH₵2,872.1 million about 75 percent of total financing.
Development in Public Debt and Outlook
30. Provisional data shows that total public debt increased to US$20,190.4 million or 43.9 percent of GDP at the end of June 2013. This represents an increase of 5.2 percent from the end-2012 public debt figure of US$19,150.8 million or 49.3 percent GDP.
31. Out of this, total external debt amounted to US$9.343.0 million, representing 46.3 percent of total public debt and domestic debt was US$10,847.4 million, representing 53.7 percent.
32. Ghana’s solvency ratios ads at end-June 2013 show that the nation’s debt is sustainable with, moderate degree of debt distress.
33. Ghana successfully issued a US$1 billion Eurobond at a coupon rate of 7.875 percent in July 2013. Out of the total amount, US$250 million has been used for the redemption of part of the Eurobond issued in 2007. This is expected to reduce the rollover risk of refinancing the entire 2007 US$750 million Eurobond when it matures in 2017.
34. The remaining US$750 million is being used to finance already approved capital projects (with priority given to self-financing projects) in the 2013 Budget and refinance maturing high interest domestic debt to reduce the cost of borrowing.
FISCAL MEASURES AND OUTLOOK
35. Given the fiscal outcomes for the fist months of the year- in particular, the shortfalls in revenue, high cost of debt service and burden of compensation of employees on the budget –additional revenue measures were proposed by the Ministry and approved by Cabinet and Parliament to improve the fiscal situation. These measures were approved almost at the end of July hence the full impact of these measures on revenue performance is expected in the last four month of the year.
36. In addition, the following expenditure measures are being pursued to contain expenditures
• Refinancing of portions of the public debt to reduce the debt service cost-mainly by substituting short term debt with high interest rates with medium-to-long term low rate debt. More five and seven year bonds have been issued to finance the capital components of the Budge. Similarly, the ten-year Eurobond issued in July is also to serve this purpose.
• Petroleum and utility prices have been adjusted to reduce the burden of subsidies on the Budget and create fiscal space. The shift to a gradual adjustments in prices, upwards or downwards will result in less distortion and volatility in household, business and government activities.
• Continuation of the moratorium on the award of new contracts by all MDAs with a view to clearing the pipeline of commitments;
• Implementation of the public financing management reform, including the shift to commitment for basis for preparing and monitoring the budget expenditures; and deploying new modules under the GIFMIS reforms,.
• Implementation of market Premium Policy approved by Cabinet, under the single spine wage policy.
• Control of allowance within provisions in the Budget and Medium Term Expenditure Framework (MTEF) provisions for all MDAs.
37. Although these measures are being implemented to ensure the achievement of the deficit target for the year, there remain risks to the achievement of the fiscal deficit target for the year. These include; the huge shortfalls in revenue resulting from the slowdown in economic activity and recent global developments as well as higher spending on the wages due to the implementation of the Single Spine Pay Policy and higher interest cost.
38. I wish to note that, medium term prospects for fiscal sustainability remains strong even as Government is on a form path to addressing our short-term fiscal challenges which are mostly structural and cannot be dealt with in a single year. It is in this context that we announced a multi-year adjustment and consolidation plan in 2013 Budget. Our objective of reducing the fiscal deficit to lower levels over the medium terms still remains and will be pursued.
39. The 2014 Budget Statement and Economic Policy is under preparation and will outline number of measures and strategies for fiscal and debt sustainability as well as macroeconomic stability whiles ensuring sustainable growth.
40. So far Budget guidelines have been issued to all Ministries, Departments and Agencies (MDAs) and Budgets hearings conducted for all the MDAs. A stakeholder consultation meeting on the Budget was held this morning. Next steps will include the briefing of Cabinet and the Budget and the dates for the presentation of the Budget to Parliament will be agreed on in consultation with the office of the President and Parliament.
41. Thank You Very Much
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