DEPTH OF COVID-19 FISCAL PRESSURES REVEALED

Economic performance data provided by Finance Minister Ken Ofori Atta in his midyear budget review presentation to Parliament has given the first quantitative revelations as to the sheer intensity of the effect of the COVID 19 outbreak on government’s finances. The latest data, although not unexpected is still nevertheless disturbing; the fiscal deficit for the first half of this year was 6.3% of Gross Domestic Product which is slightly more than twice the 3.1% targeted for the period.

As expected, both revenue shortfalls and higher than originally expected expenditures contributed to the sharp rise in the fiscal deficit.

Conversely, total public expenditures were 11.5% higher than programmed, at GH¢46,350 million, compared with a target of GH¢41,554 million. Most expenditure categories exceeded their targets with the public wage bill 13% above planned and expenditure on goods and services 17.7% above target. Instructively capital expenditure was 7.0% higher than planned as GH¢4,812 million in contrast to the previous three years – during which there were no extraordinary fiscal circumstances – when capital project spending was cut sharply to reign in the fiscal deficit. The new tack can be ascribed to 2020 being an election year.

The fiscal deficit, measured on cash basis for the first half of 2020 amounted to GH¢24,345 million, compared with an original target of GH¢11,794 million. Instructively, the effects of the global pandemic on the international investment community forced government to look overwhelmingly to domestic financing of its deficit, which, at GH¢21,786 million accounted for 89.5¢ of the total financing requirement. Instructively more than half of this was in the form of unorthodox emergency financing such as direct lending to government by the Bank of Ghana and the sale of non-marketable securities, financing modes used in part to keep a lid on domestic interest rates.

Conversely, because of the inevitable reticence of foreign portfolio investors in the face of the uncertainties created by the global pandemic, foreign financing of the half year deficit amounted to just GH¢2,560 million, against a target of GH¢15,100 million.

However the external sector performance for the first half of the year has been far more encouraging under the circumstances. The trade surplus remained positive although it experienced a minor fall, from US$1,178.26 million for the first five months of 2019 to US$1,043.29 million for the corresponding period of this year.

Importantly though both exports and imports declined in value enabling gross international reserves to actually provide more cover of the import bill than the situation a year ago. Exports fell by 8.1% during the period January to May this year, to US$6,205.42 million, this resulting from lower receipts from oil, non-traditional exports, timber and aluminium. Similarly imports fell to US$5,162.13 million, from US$5,576.24 million, occasioned by both lower oil and non-oil imports. Oil imports declined by 21.22% to US$815.44 million while non-oil imports fell to US$4,346.69 million – from US$4,541.20 million in 2019 – on account of lower demand for capital and intermediate goods due to a drop in local production levels.

The current account surplus actually increased by 12.4% during the first quarter of this year, although the capital account surplus declined. However, all this occurred before the full onset of the COIVID 19 outbreak and both accounts are likely to have deteriorated during the second quarter of the year.

Nevertheless, gross international reserves of US$9,171.36 million as at mid-year was enough to cover 4.3 months of imports, an improvement over the 4.0 months import cover as at December last year, provided by US$8,418.08 million in gross reserves.

This suggests that Ghana can possibly still navigate this election year without a sharp depreciation of the cedi, even with the impact of COVID 19, especially if government can slow the growth in its fiscal deficit.

 

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