2025 Budget must face reality — IFS calls for realistic revenue targets

The Institute of Fiscal Studies (IFS) has advised the government to set realistic targets in its maiden budget, which is expected to be presented to Parliament on March 11.

In an era where Ghana's fiscal credibility hangs in the balance, the IFS cautioned the government against the chronic pattern of overestimating revenue projections.

At a press conference in Accra, the Executive Director of the institute, Dr Said Boakye, said the over-estimation of revenues threatened the very foundation of effective fiscal policy implementation.

For over a decade, Ghana has consistently missed its revenue targets, with actual revenue falling below projections every year from 2013 to 2023. 

This persistent optimism bias has resulted in an average revenue deviation of -7.4%, more than twice the acceptable international standard of -3% under the Public Expenditure and Accountability framework.

"Setting realistic revenue targets isn't about wishful thinking—it's about honest forecasting based on what the government can actually collect, given economic realities," Dr Boakye said.

He pointed out that only in two out of 11 years did Ghana's revenue projections fall within globally accepted standards.

The consequences of this unrealistic budgeting extend beyond mere accounting discrepancies.

When revenue falls short, the government is forced to either cut planned expenditures or increase borrowing, creating a dangerous cycle that contributed to Ghana's recent debt crisis.

Particularly troubling was the case of the electronic levy (e-levy), where in 2022, actual collections amounted to a mere 8.5% of projected revenue. 

Dr Boakye said such dramatic miscalculations undermined public trust in fiscal management and created volatility in government operations.

The executive director proposed concrete measures to address this problem, including a comprehensive review of the Ministry of Finance's macro-fiscal forecasting framework to eliminate inherent biases in revenue projections. 

Additionally, he recommended improving the data analysis for new tax policies, involving independent experts in the forecasting process, and adopting a more conservative approach to revenue estimation.

Return to capital market 

Dr Boakye also highlighted the country’s vulnerability to external debt, indicating how the country has suffered two major debt crises since 2000. 

The most recent crisis in 2022 was triggered by Ghana's loss of access to international bond markets after its credit rating was downgraded to junk status.

With macroeconomic stability and confidence re-emerging, the renowned economist cautioned against rushing back to the international bond market, urging the government to maintain the fiscal discipline it was forced to adopt during the recent crisis period. 

"The government should learn lessons from the past three years in which the country has carried on without borrowing from the international bond market," he said.

Instead of foreign borrowing, he suggested greater self-reliance through leveraging Ghana's natural resources, citing the Gold Purchase Programme as an example of non-debt-creating approaches to increasing international reserves.

Reset of external sector 

Dr Boakye also called for a reset of the country’s external sector by changing the ownership structure of the two major merchandise exports (gold and oil), which had been the main driver of merchandise trade and current account balances.

He said the country must, therefore, change the ownership structure, with the government taking commanding interests through joint venture arrangements.

An alternative approach suggested by Dr Boakye involves implementing production-sharing agreements in these critical sectors. 

He said either model would ensure that a larger share of export revenues returned to Ghana in hard currencies, providing sustainable support for the cedi without accumulating unsustainable external debt.

Despite Ghana consistently registering trade surpluses between 2017 and 2023, the cedi has continued to depreciate against major foreign currencies, highlighting a fundamental disconnect in the nation's external sector.

An IFS study, which covers the period from 2017 to 2023, divides Ghana's recent economic history into three distinct phases: pre-COVID (2017-2019), the pandemic period (2020-2021), and the economic crisis years (2022-2023). 

Dr Boakye said the most striking was the finding that during 2022-2023, when Ghana's merchandise exports impressively increased by an average of US$2,499 million to reach US$17,099 million and significantly improved the trade balance, the cedi paradoxically suffered its worst performance—depreciating at a crisis rate of 28.9% against the US dollar. 

He said this contradicted conventional economic wisdom that robust exports should strengthen a nation's currency.

The IFS study further identifies a critical structural issue at the heart of this paradox: the ownership structure of Ghana's two primary export commodities—gold and oil.

Together, these resources account for nearly 70% of Ghana's total merchandise exports and drove 95% of export growth in the 2022-2023 period.

However, the current concession agreements with multinational companies operating in these sectors allow these foreign entities to retain control over a significant portion of export revenues. 

Consequently, while these exports appear as large entries in Ghana's balance of payments statistics, a substantial share of the foreign currency earnings never actually flows back into the Ghanaian economy or reaches the Bank of Ghana's reserves where it could help stabilise the cedi.

In the absence of significant foreign exchange inflows from exports, successive Ghanaian governments have resorted to international borrowing as the primary mechanism for defending the cedi. 

Dr Boakye cautioned that this dependence on external borrowing had been at the root of Ghana's recurring exchange rate crises, which typically triggered broader macroeconomic instability.