Terkper battles election year headwinds

Maxwell Adombila Akalaare Business News Nov - 16 - 2015 , 22:46

The Finance Minister, Mr Seth Terkper, has expectantly shrugged off fears of excessive spending in 2016 in an austere budget pledge that is akin to the fiscal discipline that is habitually emphasised but later ignored in all election year budgets.

With a deficit target of 5.3 per cent of gross domestic product (GDP) in 2016, Mr Terkper will be making history unconsciously, by being one of two finance ministers under the Fourth Republic to have been able to resist election year expenditure pressures and guide the economy to record a deficit that will be the healthiest election-year deficit since 2004.

Apart from 2004, when Ghana's budget deficit in an election year dropped to 3.2 per cent from 3.4 per cent in 2003 under Mr Yaw Osafo-Maafo, large budget deficits have virtually become synonymous with election years, with the 2012 figure of 11.5 per cent, a jump from the 2011 close of four per cent, being the worst so far recorded.

The overspending is always the outcome of a combination of push and pull factors, majority of which bother on excessive demands from public sector workers for improved conditions of service, an urge to please the electorate with new projects and subsidies on utilities, the intermittent slump in commodity prices and the resulting impact on budgeted revenues.

Already, the three main causes of the country's expenditure overruns – labour demands, subsidies on utilities and a drop in commodity prices – have surfaced, with labour serving notice that it would not hesitate to agitate for increased compensation should the Public Utilities Regulatory Commission (PURC) go ahead with its proposed over 100 per cent increase in prices of electricity and water.

This leaves the government with a choice between two devils – increase utility prices and compensate workers through increased wages or absorb the utility price increments through subsidies. Either of them has dire consequences on the 2016 budget targets unveiled on November 13. Fortunately, however, the tripartite committee has already negotiated a 10 per cent increment in public wages, effective 2016.

It also adds to maturing political commitments such as the president's pledge to construct 200 new senior high schools, 125 of which are already under construction, expanding roads and other infrastructure, which are expected to feature prominently in next year's campaign

Historical headwinds

From 2000 through to 2012, the governments of the day, as is the case now, had pledged strict adherence to budgeted expenditures in election years only for them to turn around and do the opposite – overspend.

The result has been budget overruns and the subsequent erosion of the macroeconomic gains chalked up in years preceding those elections.

In 1999 for instance, the then Finance Minister, Mr Kwame Peprah, said in the election year 2000 budget that the President, Jerry John Rawlings, had asked the ministry to remain focused and not to allow the elections to distract it from maintaining fiscal discipline.

“Indeed, we must resist the temptation to play political football with the economy in this election year. Populist demands, populist rhetoric, blackmail threats, wildcat strikes all combined to wreak havoc on the progress of our economic forward march during the two previous elections in 1992 and 1996.

"Let us all take note, however, that when the economy goes off course in an election year, it takes years of belt-tightening and further harsh fiscal measures to bring it back on course,” Mr Peprah said in a tone that resonates well with the current November 13 pledge of the incumbent finance minister Terkper.

But contrary to that pledge, Mr Peprah looked on as public expenditures overshot their targets, resulting in a year-end deficit of 8.5 per cent, against a target of 6.1 per cent.

The same applied in 2008, when the then Finance Minister, the late Kwadwo Baah-Wiredu, pledged to rein-in expenditures for the deficit to drop from the 2007 close of 8.1 per cent.

Although the 2008 budget targeted a deficit of 5.7 per cent of that year's total economic output, the deficit jumped to 11.3 per cent at the end of that year, partly forcing the new administration, then led by Professor John Evans Atta Mills, to turn to the International Monetary Fund (IMF) in 2009 for financial and technical support.

Will 2016 be different?

With these developments in mind, many wonder if 2016 will be anything different, as the main opposition New Patriotic Party (NPP) is set to take on the ruling National Democratic Congress (NDC) in a contest that will define the political careers of the two leaders – President John Mahama and his contender, Nana Akufo-Addo.

Already, some economists and policy analysts have dismissed Mr Terkper's pledge to resist overspending as a mere rhetoric meant to assuage the fears of the investor and business community and calm the nerves of the IMF, which has a keen interest in the performance of the economy between now and 2017, due to a three-year extended credit facility (ECF) programme it has with the country.

“My personal feeling is that come what may, they will exceed that target,” one of the economists said on condition of anonymity.

“In 2000, we were also under a fund programme but the deficit was exceeded. All that the IMF could do was to caution us," the source added.

Under the current ECF, the fund only has the right to withhold the periodic disbursement of the funds, totaling US$918 million, until the agreed targets have been met.

Three reviews and disbursements are due between December this year and December 2016.

Consequences

Dr Eric Osei Asibey of the Economics Department of the University of Ghana (UG) told the GRAPHIC BUSINESS on November 15, that much as the presence of the IMF would make the government mindful of its expenses, it does not entirely prevent it from overspending in a bid to retain power.

"I do not expect the government to be populist and play to the gallery next year but if it does, then we will be in for trouble again," he said.

With economic recovery still fragile, Dr Asibey and the source said the economy risked reverting to its knees should the government ignore complaints and overspend.

The situation, they said, could be worsened by the sluggish nature of revenues, which play a critical role in the deficit position.

“I think we also need to know that revenues can underperform such that even if you are able to keep a grip on the expenditure, you will still have a bigger deficit,” the economists, who spoke on condition of anonymity, said.

The two, however, explained that the government needed to muster the political will to practically resist the temptation to please workers by authorising increments in wages or compensation, absorbing utility price hikes and starting new projects while ensuring that revenue collections are improved.

“Another thing that government should look at is the recommendations of the committee sitting on the request for a new voters' register. Assuming the committee recommends that the current register should be replaced, it will require a lot of money to procure the equipment, do the registration and replace the entire register and that could throw the budget off guard,” Dr Asibey said.