Give us full picture of arrears -- IFS urges govt

Economic think tank Institute for Fiscal Studies (IFS) has said details of the government’s stock of arrears, its evolution and liquidation payments need to be disclosed to improve budget transparency, as it is difficult to “make sense” of the continuing huge expenditure on arrears clearance.

The IFS indicated in a statement on the 2016 supplementary budget that payments of arrears have become a major driver of government expenditure in recent years, and that despite successive budgets allocating substantial sums for arrears clearance, huge payments continue to recur.

It noted that for 2016, GH¢2.3 billion has been budgeted for payments of arrears, after payments of GH¢4.1 billion in 2014 and GH¢2.4 billion in 2015. 

“Given that information on the stock of arrears is not provided in the budget, it is difficult to make sense of these numbers,” the IFS observed. 

“Thus, to make this aspect of the budget more transparent, and also help monitor compliance by the government with its commitment to zero arrears creation in the IMF programme, details of the stock of 

arrears, its evolution, and the liquidation payments need to be disclosed,” it added.

In the mid-year review and supplementary budget for 2016, the Finance Minister, Mr Seth Terkper, said he would stick to the earlier projected fiscal deficit of GH₵8.4 billion, while also requesting Parliament to approve extra spending of GH₵1.89 billion for debt amortisation.

According to the IFS, although the supplementary budget for amortisation would be deficit-neutral, it entailed an increase in the gross budget financing requirements and would thus require more borrowing, on a gross basis, by the government. 

“In the present context of high domestic and external borrowing costs facing the government, the risk in borrowing for amortisation or to refinance maturing debt is that the new debt could be procured at a higher interest rate than the one being replaced, leading to a net increase in interest payments on the debt stock.”

Commenting on the public debt, the Institute described as “inaccurate” the statement in the supplementary budget that the public debt-to-GDP ratio has reversed course. 

It said the main reason for the fall in the ratio from 71.6 per cent in December 2015 to 63.1 per cent in May 2016 was the effect of the projected large 2016 nominal GDP of GH₵166.8 billion used to derive the ratio. 

“The upward revision in the nominal GDP figure to this level itself raises some doubts in view of the fact that the projected real GDP growth for the year has been cut down from 5.4 per cent to 4.1 per cent and there has been no revision to projected inflation. 

“More importantly, it has to be noted that as more borrowing takes place in the remaining period of the year, the debt-to-GDP ratio will certainly rise. A more substantive reduction in the debt burden can thus only be achieved if fiscal consolidation continues, the exchange rate is kept stable, and economic growth strengthens,” the Institute stated.

Further on the debt, it said the concerns did not only have to do with the ratio to GDP but also the interest payments on the debt. It pointed out that interest cost to government has risen from GH₵2.4 billion (3.2 per cent of GDP) in 2012 to an estimated GH₵10.5 billion (6.3 per cent of GDP) in 2016. 

“Relative to total government expenditure, interest cost has jumped from 9.6 per cent in 2012 to a projected 22.7 per cent in 2016. In addition, whereas traditionally the budget for debt interest has not exceeded the capital budget in Ghana, the reverse has been occurring since 2014. 

“We do not think this situation is tenable. The need to reduce the public debt burden therefore is also to cut back on debt interest payments, which are crowding out public investment and other critical expenditure.”

The government’s decision to reduce the cap on the Ghana Stabilisation Fund to US$100 million was also criticised by the think tank, as it warned that the continued depletion of the Stabilisation Fund, whose closing book value at the end of 2015 was US$177.4 million, weakens its capacity to help sustain critical public expenditure when oil prices decline and has the propensity to cause more borrowing by the government to plug revenue shortfalls. 

Given that information on the stock of arrears is not provided in the budget, it is difficult to make sense of these numbers.