Ghana Is Broke! Top Financial Analyst’s Take on the 2018 Budget
Kenneth Thompson, Chief Executive Officer of Dalex Finance, has shared his thoughts on the 2018 Budget Statement that was read recently in Parliament by the Finance Minister, Ken Ofori Attah.
According to him the budget statement re-affirms that Ghana is financially broke, saying “It does not appear 2018 will be any better”.
He explained that even though the budget made a concerted effort at addressing some of the country’s economic issues, it unfortunately does not tackle the big-ticket risk items.
Below is the full analysis of the 2018 budget by the Financial Analyst, Ken Thompson.
Q: What is your overall assessment of 2018 Budget Statement?
Ken Thompson: Let us put the budget in context. It re-affirms what some of us have been saying for a few years now – Ghana is broke! Let us look at some indicative numbers: Interest on our debts in 2017 was 35.33% of Domestic Revenue, Compensation to Employees (Single Spine) was another 45.53% of Domestic Revenue. Combined, these two items alone make up over 80% of domestic revenue.
The current Finance Minister’s job is exceptionally difficult. He has inherited a lemon of an economy and he is trying hard to make lemonade. The budget makes a concerted effort at addressing some of our issues but unfortunately it does not tackle the big-ticket risk items. The clearest example of the budget ignoring the proverbial ‘elephant in the room’ are the issues of the Interest we pay on our debts and Compensation to Employees. Unless these are dealt with and government revenue is increased, cash for investment in the economy remains low. And without investment, there is very little economic activity. Cash is ‘tight’ and it does not appear 2018 will be any better. On the flip side, the current macro economic stability may encourage Foreign Direct Investment…hopefully… ‘they’ like that. FDI brings in cash and we need cash like yesterday.
Q: The budget spoke of positive macroeconomic performance in 2017. Would you say that this performance was below or above your expectations?
Ken Thompson: First, we observe that the overall GDP growth for 2018 is being estimated at 7.9% in 2017, up from 3.7% in 2016. While this sounds great, the heart of this issue is that the growth is being driven by the oil sector on the back of the FPSO that was launched in February 2017. Non-oil growth, the main engine of the economy, rather declined from 5.0% to 4.8%. This was because the private sector saw very little growth because capital expenditure was reduced significantly. Real private sector activity is still challenged, and industrial activity is under heavy strain. The restoration of ‘Hope’, alone, will not move the private sector to invest the massive amounts required unless the appropriate signaling and incentives are provided. This will require sacrifice of some of the interventions that are primarily for consumption e.g. Nation Builders Corps, in order to provide the means (investment in education, energy, infrastructure) and incentives that will accelerate the transformation of the private sector. In this respect, the budget fails to meet my expectations. Looking at our own operations, Dalex Finance, in 2017 witnessed a significant reduction in demand for loans from SMEs. Although this may be anecdotal evidence, I strongly believe that this could signal a broader trend in the industry and may be symptomatic of the challenges confronting the SME sector. The sector that is supposed to be the main driver of economic activity and engine of growth. I do not believe that there are enough reliefs for the real sector. I also believe that 2018 could be a year of low demand and challenged turnover for local businesses. I will urge local businesses to err on the side of caution with their business projections for 2018.
Q: What about inflation?
Ken Thompson: This budget seems to be shifting the inflation goal-post. The Bank of Ghana has consistently indicated that its center point target for inflation in 2018 would be 8 percent. This budget now seems to be saying that we are headed for close to 9 percent. Is this an indication that we should expect some laxity in policy in the coming year and what conclusions can we draw from these inconsistencies? How will these influence price expectations in the economy for 2018 and how will the exchange rate adjust?. Despite these questions, I am optimistic that between the new regime at the Bank of Ghana and the instincts of the Minister of Finance, inflation will still be kept in the single digit range even if not exactly hitting 8.00%. Practically expect prices to remain relatively stable in 2018.
Q: You have said earlier that the Government showed admirable fiscal restraint in 2017. What are your expectations of the budget deficit in 2018?
Ken Thompson: Unfortunately, my biggest confusion is on the budget deficit. In going through the IMF ECF program, the understanding was that by the end of the program in December 2018, the budget deficit would have comfortably settled at 3.8 percent of GDP. We now see a shift away from that target to 4.5 percent of GDP. Is this an indication of more loose fiscal policy in 2018 and a relaxation of the consolidation process that was initiated in 2015? What are the implications? Did the IMF agree to loosen its own fiscal consolidation process? If this was done with the consent of the IMF, what concessions were made? Should we read this as an indication of a tighter fiscal policy in the year ahead? We all know the linkage between the deficit and debt. Should we also read this as a sign of more government borrowing in 2018 and therefore what could be the implications for Ghana’s debt stock as we move into 2018. What could be the implications for domestic and external borrowing? Will interest rates rise in 2018? I expect more domestic borrowing in 2018 and hence pressure on the falling interest rates. Most local economic analysts are expecting us to go into a low interest rate regime in 2018, but we may be in for a disappointment in this regard.
Q: Your views on the cedi are well known. You have continuously advocated for a controlled ‘devaluation’ of the cedi? What does this budget say to you in respect of the value of the cedi?
Ken Thompson: The “Adwuma” budget did not provide a major drive towards export promotion and import substitution. Ghana exports ‘air’, over 70% of the containers laden with goods that come to Ghana go back empty. The cedi is overvalued causing us to experience low growth, low productivity and high unemployment. Every so often, our governments launch ‘half hearted’ programs to promote Made in Ghana goods. Buying Made in Ghana is a financial decision, not an emotional one. We must start to address the major imbalances in the economy with regards to our ’addiction’ to foreign goods and services. Part of the reason why the cedi has been relatively stable in 2017, is due to reduced demand in the real economy. Unless the combined issue, of export promotion and import substitution, is tackled, the country could be facing the ever-continuing threat of an overvalued currency and its consequential ills. “Faith” will not fix this. Expect the cedi to go into a slide in value in 2018. My expectation is a minimum GH¢ 5.50 to USD 1.00 by end-of-year. The cedi’s value will be harder to defend in 2018.
Q: What areas of the budget particularly give you reason to pause?
Ken Thompson: It’s the area of our Tax Revenue: The revenue target seems overly ambitious. The budget is seeking to increase revenues by 25 percent without any commensurate effort to increase the tax base of the economy. Revenue from the ambitious tax targets is targeted at spending on the pet politician projects that will strain the admirable fiscal discipline that has been exhibited in 2017. Our inability to raise these revenues could threaten the pet politician programs and credibility issues for government could begin to creep in. What we need to do is to increase the tax base. Let us find ways to tax the informal sector in a meaningful way through appropriate incentives which will encourage them to pay. As an example, the government, could at the very least prevent the registration of any asset of significant value without showing evidence of tax payments e.g. vehicles, real estate, companies, etc. If the tax base is not expanded, expect the GRA to find new ‘creative’ ways of extracting more tax from the same sources. Expect to pay relatively more tax whatever your business, even if it is because of ‘inflexible’ GRA officials who are less understanding of your ‘inventive’ tax avoidance excuses.
Q: You have always indicated that Ghana’s development will be predicated on the agricultural sector, even lambasting previous budgets for inattention to the Agricultural sector. What do you make of the Agric sector in the 2018 Budget statement?
Ken Thompson: The agricultural sector saw a return to growth from 3% in 2016 to 4.3% in 2017. The conception of “Plant for Food and Jobs” program is exciting. We are happy with the several initiatives announced for the Agricultural sector.
Unfortunately, the ‘Army Worm’ infestation still poses significant danger to agricultural output. The Government’s response has not been strong enough and victory is being prematurely declared whiles experts in the field are being ignored. What we need to understand is that the army worm intensity is naturally attenuated in the dry season and we need to be cautious. The intensity of the infection of the army-worm, could possibly rise in next year’s rainy season and this time round it could be a “biblical style plague” with massive destruction.
Q: You have referred to populist political projects. What are these projects and why do you refer to them as such.
Ken Thompson: There are two projects that fit this bill; they are the new National Development Bank (NDB) and the Nation Builders Corps (NBC).
What will the NDB offer in the long term that NIB and ADB could not achieve. The tacked-on idea of a merger between NIB and ADB is an even worse idea. These banks have failed to adhere to their developmental agenda and worse still have mismanaged their affairs. Why would we want to still assign them the task of mobilizing funds for the critical Agricultural and Industrial sectors? We are better off with a scheme that offers Credit Guarantees, Credit Insurance, Risk-Sharing facilities, Credit Rate Capping, Technical Assistance, Financial Institution Rating scheme, etc. through the private sector financial institutions. This will get our existing financial institutions to lend to the businesses engaged in the targeted sectors at reasonable rates. Credit Risk would be shared but not neglected since institutions would still face ‘pain’ on default. This would be the best method to ensure long-term sustainability of the scheme to mobilize credit for the critical areas of the economy.
The Nation Builders Corps is the second populist political initiative. Why do we want to add 100,000 graduates to a public-sector wage bill that already consumes over 45% of our domestic revenue? It recycles discredited unsustainable interventions from a previous dispensation, provides a potential for corruption, duplicates existing institutions, and, will consume scarce resources setting up parallel infrastructure e.g. vehicles, office premises, office equipment, salaries, etc. Precious little will end up in the pocket of graduate. Please, please let us scrap the NBC. Unemployment in Ghana is too important to be treated as an afterthought. Address the private sector growth opportunities and set up a fund to reward SMEs who employ graduates in rural and peri-urban areas. This will be a credible alternative to the NBC.