Ghana’s economy and public finances have been hard hit by the dual shocks of the coronavirus pandemic and the oil price crash.
Despite the downturn, the government has managed the pandemic better than most countries. Ghana's early response to the pandemic means the country is expected to be one of the world’s few economies that may continue to grow this year in nominal terms.
Importantly for public finances, the Ghanaian government is becoming more dependent on extractive production. Just four years ago, in 2016, extractive revenues represented just 5 percent of fiscal revenues. In 2018, mineral revenues represented more than 3 percent of non-aid fiscal revenues. In 2019, oil revenues represented nearly 10 percent of non-aid fiscal revenues. The government expects oil, gas and mineral receipts to double between now and 2022, which would constitute a five-fold increase in resource dependence in six years unless other sources of revenue can be mobilized.
Revenue mobilization is essential since Ghana remains a country at high risk of debt distress. Any further economic or financial shock could draw the government into a debt spiral and default.
The Ghanaian government has responded in three ways: committing to macroeconomic stability and fiscal discipline, debt monetization and working to mobilize revenues. In this briefing, the authors discuss each of these strategies and offer recommendations for the government's current debt management policy.
Ghana’s economy grew by less than 1 percent in 2020, the lowest in nearly four decades as the impact of the coronavirus pandemic manifests in key sectors of the economy.
Petroleum revenue is expected to create a revenue gap of GHS 5.2 billion (USD 907 million) as part of an overall fiscal revenue gap of 20 percent of GDP. This calls for intensified domestic revenue mobilization efforts, such as taxes on emissions of greenhouse gases or fossil fuel energy production, a new sliding-scale royalty or resource rent tax in the mining sector or punitive sanctions on oil and mining companies found to have avoided taxes.
The government spends more than a quarter of total expenditure and 49 percent of tax revenue on debt servicing. Between 2011 and 2019, about 87 percent (USD 808.86 million) of all transfers into the Ghana Stabilization Fund have been drawn down in line with provisions in the Petroleum Revenue Management Act. The government has continued to borrow despite increasing petroleum revenues accruing to the Sinking Fund. The government may wish to consider immediate debt restructuring.
The government estimated a 6.3 percent fiscal deficit following the suspension of the Fiscal Responsibility Law (FRL) to create fiscal space for increased spending. Ghana should consider adopting an expenditure-based fiscal rule to address the procyclicality of the FRL. We also recommend that deficit calculations be outsourced to independent analysts, as Canada and Chile have done, supporting the fiscal advisory council with research and logistics as well as a legal review of Ghana’s macro-fiscal regime.