About a month ago, I presented a mid-year review of the 2015 Budget and Supplementary estimates for 2015. Since then, there have been new developments both domestically and externally which has necessitated this briefing. The Mid-Year Review was also based on end-May 2015 performance of the economy. This media brief updates the performance to June, 2015.
I also wish to take the opportunity to provide an update on major activities the Ministry is embarking on as well as the World Bank’s approval of a Policy Based Guarantee (PBG) in June 2015 and the decision of the International Monetary Fund (IMF) Executive Board’s meeting on Ghana’s first Extended Credit Facility (ECF) review in August 2015.
2. Update on Global Developments
The update to the IMF’s World Economic Outlook (July, 2015), projects a slower growth in emerging and developing economies and a gradual pickup in advanced economies. Global growth is, therefore, projected at 3.3 percent in 2015, marginally lower than in 2014. It is important to note, however, that in view of major shifts in economic trends during August, 2015 such as the devaluation of the Chinese Yuan observed in Mid-August coupled with the slowing Chinese economy and the FEDs interest rate increase will in due course, necessitate another update to the IMF’s WEO to reflect these significant economic changes.
A setback to activity in the first quarter of 2015, mostly in North America, has resulted in a small downward revision to global growth for 2015 relative to the April 2015 World Economic Outlook (WEO). Nevertheless, the underlying drivers for a gradual acceleration in economic activity in advanced economies—easy financial conditions, more neutral fiscal policy in the euro area, lower fuel prices, and improving confidence and labor market conditions—remain intact.
Oil prices which begun to rebound at the start of the second quarter have suddenly begun to plunge due to excess supply. Other commodities prices such as gold and cocoa continue to decline due to soft global growth which is hurting the demand for these commodities. Oil price shocks for net importer countries have already started experiencing terms of trade shocks, decline in growth, exchange rate instability and declining domestic revenue collection among others.
In emerging market economies, the continued growth slowdown reflects several factors, including lower commodity prices and tighter external financial conditions, structural bottlenecks, rebalancing in China and economic distress related to geopolitical factors. According to The Economist (15th August Edition), no single factor can explain what is going on. However with the World’s biggest economies setting the tone for interest rates and currencies via different directions, is causing significant troubles for emerging economies such as Brazil. India on the other hand, is showing signs of gradual recovery. A rebound in activity in a number of distressed economies is, however, expected to result in a pickup in growth in 2016.
The Sub-Saharan Africa region is expected to remain weak throughout this year, reflecting the negative impact of falling commodity prices, rising fiscal constraints and instability in the financial and foreign exchange markets.
These global developments have implications for us as a country, particularly with regards to our output (GDP), reserves, and foreign exchange earnings – contributing to the weakening of the Cedi that we are experiencing. Being mindful of this Government has been implementing a number of short to long term measures to address the situation.
3. Developments in the Domestic Economy
Developments during the first half of 2015, particularly with regards to fiscal performance, indicate that Government policies and reform measures implemented since 2013 are taking hold and yielding results. Although fiscal performance shows significant improvement, the economy experienced some challenges during the first half of 2015, mainly due to lingering energy sector problems, depreciation of the local currency and softening commodity prices. Inflationary pressures remained elevated, while increase in foreign exchange demand as against limited supply sources largely underpinned the weakening of the cedi against the major currencies.
Hence the situation would have been much better but for the impact of these setbacks notably commodity (gold, cocoa, crude oil) prices and disruption in gas supply between 2013 and now.
Headline inflation rose to 17.9 per cent in July 2015 after easing to 16.4 per cent in January 2015 from 17.0 per cent in December 2014. The increases in inflation was driven more by cost-push pressures emanating from increasing input costs associated with the energy sector challenges and depreciation of the cedi. On a month-on-month basis, the rate of change in CPI was 2.3 percent in July.
The increase in inflation was reflected in both food and non-food inflation. Food inflation rose from 6.9 per cent in January 2015 to 7.6 per cent in July 2015, while the non-food inflation also rose from 23.0 per cent in January 2015 to 24.6 per cent in July 2015.
Exchange Rate Developments
Developments in foreign exchange market in the first half of the year indicated that the Ghana cedi traded weak against its major trading partners as demand continued to outweigh supply sources. In the inter-bank market, the Ghana cedi cumulatively depreciated by 26.05 per cent, 27.00 per cent and 19.55 per cent against the US dollar, the pound sterling and the euro respectively. Conditions were similar in the forex bureau market where the cedi recorded cumulative depreciations of 25.89 per cent, 23.59 per cent and 13.78 per cent against the US dollar, the pound sterling and the euro respectively. During the corresponding period in 2014, the Ghana cedi cumulatively depreciated by 26.71 per cent, 28.12 per cent and 24.31 per cent against the US dollar, the pound sterling and the euro in the interbank market.
As noted in the Mid-Year Review, a number of short and medium term measures are being implemented to boost forex inflows and curb the demand for forex in order to address the depreciation of the Cedi. The short term measures include:
o Liberalization and competitive use of forex in the petroleum sector;
o Tightening of customs operations including tariff classification and valuation;
o Smoothening the seasonal cocoa forex inflows;
o 2015 Eurobond inflows (refinancing and capital expenditure management);
o Intensification of the monitoring and audit of the source and use of forex, including retention; and
o Disbursements from development partners.
Over the medium term, the following measures will be implemented to address the depreciation of the Cedi:
o Embark on export-led growth strategy in accordance with the GSGDA II;
o Incentives for public and private sector to support export led strategy;
o Protection policy for local industries by strengthening the tariff structure, countering damaging activities and unfair trade;
o Establishment of EXIM Bank to provide credit and trade guarantees that initially target SMEs and non-traditional exports among others;
o Update forex transactions to electronic platform
Fiscal Developments from January to June 2015
Fiscal policy as outlined in the 2015 Budget aims at implementing a strong fiscal consolidation programme to put public debt on a more sustainable path. This is to be achieved by improving revenue mobilisation, strictly containing current and capital expenditures with budget ceilings as well as the implementation of debt management and structural reforms.
Consequently, the 2015 Budget, aims at reducing the fiscal deficit from 10.2 percent of GDP in 2014 to 7.3 percent of GDP in 2015. There has been two adjustments of the budget deficit mainly on account of crude oil price developments.
Preliminary data for the first half of the year indicate that, total revenue and grants was higher than the target for the period. At the same time, total expenditure including the clearance of arrears was lower than target. As a result the cash fiscal deficit for the period was 2.3 percent of GDP against a target of 3.4 percent. This compares to a deficit of 4.3 percent of GDP for the same period in 2014.
Total revenue and grants for the period was 11.2 percent of GDP, against a target of 10.6 percent of GDP. In nominal terms, the outturn was 5.4 percent higher than target and 32.9 percent higher than the outturn for the same period in 2014. The good performance in total revenue and grants was mainly due to a strong growth in domestic revenue.
Tax revenue amounted to GH¢11,403.9 million, 8.4 percent higher than the Budget target of GH¢10,516.3 million. In nominal terms tax revenue was 32.1 percent higher than the outturn recorded for the same period in 2014. The strong performance in tax revenue was mainly due to the good performance of petroleum taxes, VAT and trade taxes resulting from the imposition of the Special Petroleum Tax and exchange rate depreciation as well as improved revenue administration and efficiency.
Total expenditure, including payments for the clearance of arrears for the first half of 2015 amounted to GH¢18,068.5 million (13.5 percent of GDP) against a target of GH¢18,805.7 million (equivalent to 14.0 percent of GDP). The outturn was 3.9 percent lower than the budget target but 14.1 percent higher than the outturn for the same period in 2014. The growth in expenditure was mainly due to higher spending on goods and services and foreign financed capital expenditure.
The cash fiscal deficit of 2.3 percent of GDP for the period under review was financed mainly from domestic sources, resulting in a Net Domestic Financing (NDF) of the budget of GH¢1,875.4 million (1.4 percent of GDP). The NDF for the period was 57.3 percent lower than the budget target of GH¢4,395.1 million and 48.6 percent lower than the outturn for the same period in 2014. Foreign Financing of the budget was GH¢1,218.0 million representing 39.4 percent of total financing, against a target of GH¢206.1 million. Thus domestic financing constituted about 60.6 percent of the total financing of the deficit for the first six months of the year.
4. Fiscal impact of declining world crude oil prices
As mentioned in the mid-year review and Supplementary Estimates I presented to Parliament last month, the oil price assumption for the revised Budget estimates was revised down to US$57.0 per barrel following the decline in crude oil prices. Since the presentation to Parliament last month, we have witnessed a continuous decline in crude oil prices. As at Thursday, 27th August 2015, Brent crude price had fallen to US$45.70 per barrel.
With the continuous decline in crude oil prices the original and revised estimate of Petroleum Benchmark Revenue for 2015 may not be achieved and this can have negative implications for the Budget execution.
The Ministry of Finance is taking necessary steps to control spending to ensure that the continuous fall in the crude oil prices does not derail the achievement of our fiscal deficit target for the year as well as our medium term fiscal consolidation objectives. In this regard, MDAs that are funded from the Annual Budget Funding Amount (ABFA) are to control their expenditure within the Budget allotments provided by the Ministry of Finance.
5. Update on IMF Programme
The Executive Board of the IMF completed the first review of Ghana’s economic performance under the Extended Credit Facility (ECF) Programme. Following the completion of the review, a total amount of SDR 83.025 million (about US$116.6 million) will be disbursed in the coming days.
In spite of the unfavourable global developments our performance under the Programme has been remarkable with the achievement of almost all the Performance Criteria and Structural Benchmarks. Government remains committed to the implementation of the Programme and achievement of the objectives of the Programme.
The second review of the programme will be based on performance under the programme as at the end of August 2015. In this regard the IMF will field a mission to Ghana in October 2015 to assess the performance criteria targets for end-August 2015 and the status of implementation of the structural reforms.
An IMF Board meeting to complete the second review is expected to be held in December 2015 after which the disbursement of the third tranche of the amount due Ghana under the ECF arrangement will be made.
In conclusion, I wish to reiterate Government’s commitment to ensuring a sound and stable macroeconomic environment that will spur our return to high growth and job creation whiles paving the way for the nation to benefit from the bright prospects envisaged for the medium term. A few months from now Government will be presenting the 2016 Budget Statement and Economic Policy which will outline Government’s economic policy direction for 2016 and the medium term.