20% Expenditure Cut: Fiscal tightening unprecedented; implementation to be challenging – Moody’s
Moody’s Investors Services has described as unprecedented fiscal tightening, the government’s decision to cut 20% of its expenditure for the 2022 fiscal year.
In its downgrade of the country’s credit rating from B3 to Caa1, Moody’s applauding the government for its strong indication of fiscal consolidation by way of the 20% cut in its expenditure, however, stated that the implementation of the policy will be economically and politically challenging to implement.
“The government has announced a 20% cut in primary spending, equivalent to a 4% cut on a yearon-year basis or 16% in real terms, to compensate for any shortcoming in the government’s revenue measures package. Such an unprecedented fiscal tightening will be socially, economically, and politically challenging to implement,” the rating agency averred.
The Minister for Finance, Ken Ofori-Atta, a little over 3 weeks ago, announced government’s decision to cut approved expenditure by 20%.
Making the assertion at a press briefing on Wednesday, January 19, the Finance Minister noted the move implies government’s fiscal consolidation agenda is not going to be only revenue-led but also expenditure-focused.
“We are also strengthening expenditure management in 2022 and beyond. To ensure that we match all expenditures to revenue inflows, all expenditure commitments in 2022 will be adjusted to match revenue collection.
“Therefore, in accordance with Section 25 of the Public Financial Management Act (PFMA) law, the quarterly expenditure ceilings of the approved budget will include up to a 20% downward adjustment, beginning in the first quarter of 2022, in commitments across board for all covered entities benefiting from the 2022 Budget, subject to revenue performance,” he remarked.
“This means that our fiscal consolidation agenda is not going to be only revenue-led but also expenditure focused,” he added.
Read: Africa: Over $1 trillion lost through Illicit Financial Flows
Government’s projected expenditure for 2022, which has already been approved by Parliament is GHS 135.6 billion.
Moody’s downgrading of Ghana’s long-term issuer and senior unsecured debt ratings to Caa1 implies that the country’s debt obligations to investors or creditors is of poor standing and subject to high credit risk.
According to Moody’s, the downgrade to Caa1 reflects the increasingly difficult task the government faces addressing its intertwined liquidity and debt challenges.
It says weak revenue generation constrains government’s budget flexibility and tight funding conditions on international markets have forced the government to rely on costly debt with shorter maturity.
“Moody’s estimates that interest payments will absorb more than half the government’s revenue over the foreseeable future, which is exceptionally high compared to peers at all rating levels. As a remedy, the government has proposed sharp fiscal consolidation and a switch to borrowings from external partners on more favourable terms.
“However, the strategy comes with sizeable implementation risks, especially in a still fragile post-pandemic environment and while international market creditors price in very wide risk premia.
“While Ghana’s external buffers and moderate external debt amortization schedule in the next few years afford the government a window of opportunity to deliver on its strategy, balance of payments pressures will build up the longer government’s large financing requirements have to rely on domestic sources,” the rating agency said in its report.
It added that, “The stable outlook balances Ghana’s significant fiscal challenges, large refinancing needs and constraints on access to funding against the government’s pre-pandemic track record of relatively effective policy delivery and maintenance of a variety of funding sources. Ghana’s institutional framework and dynamic economy remain key credit supports, with economic growth forecasts of around 5% over the medium term.”
Meanwhile, the Finance Ministry has noted that it will appeal against Moody’s downgrade of the country’s credit rating.
According to the Ministry, Moody’s did not factor into its rating action some concerns and data it had presented to the rating agency.
Touching on the rating action by Moody’s, the Ministry furthered that, “We are at odds to understand Moody assertion of the deterioration of Ghana’s institutional strength given Ghana’s reputation as a beacon of democracy in Africa.”
“In a clearly contradictory manner, Moody’s justifies the ‘Stable outlook’ despite the downgrade to ‘Caa1’ by acknowledging government’s strong track record in delivering effective fiscal policies and the maintenance of a variety of funding sources.”
“The Government of Ghana is therefore completely puzzled by the decision to downgrade Ghana’s credit rating to Caa1 despite the medium-term economic and fiscal focus of the government underpinned by key fiscal consolidation reforms such as the policy decision to cut expenditure by 20% as recently announced by the Finance Ministry,” it added.
Read the press statement issued by the Finance Ministry on Moody’s rating:
Press Release on Moody’… by Fuaad Dodoo
