Ghana’s fiscal adjustment gains traction as primary deficit falls short of target in Q1 2023
In a recent report, IC Research, the analytical arm of IC Securities, has highlighted that Ghana’s fiscal adjustment is underway, with the country recording a lower-than-targeted primary deficit in the first quarter of 2023. This positive development reflects the government’s efforts to contain expenditure and bring the fiscal situation back on track.
According to the report, Ghana recorded a primary deficit of ¢596 million (0.1% of Gross Domestic Product) in Q1 2023, significantly below the target deficit of ¢4.6 billion (0.6% of GDP). This outcome indicates that fiscal consolidation measures are beginning to take effect, albeit through expenditure controls rather than the revenue-based consolidation envisioned in the 2023 budget.
The Treasury’s budget execution for the first three months of 2023 revealed a lower overall fiscal deficit of ¢6.7 billion (0.8% of GDP), surpassing the target of 2.3% for Q1 2023. This achievement was mainly driven by the government’s successful containment of expenditure, which contributed to a faster-than-expected compression in the budget deficit.
In terms of revenue dynamics, total revenue and grants in Q1 2023 amounted to ¢26.0 billion (3.3% of GDP), falling short of the target by 0.9% of GDP. The report highlights that this revenue shortfall can be attributed to ongoing challenges with tax administration and compliance, as well as a softening of economic activity.
IC Research further suggests that the adverse impact of the Domestic Debt Exchange (DDE) and the suspension of external debt service has exerted a negative spillover effect on banks’ financial results and tax obligations toward the Treasury. The DDE, implemented to address the country’s domestic debt structure, appears to have had unintended consequences on revenue generation.
Moreover, the weakening economic activity and the medium-term impact of the DDE on banks’ financial position pose potential risks to the Treasury’s plan for a revenue-based fiscal adjustment. These factors may impede the government’s ability to meet its revenue targets and further challenge the ongoing fiscal consolidation efforts.
While the reduction in the primary deficit indicates progress, it is crucial for Ghana to address the underlying issues affecting revenue generation. This includes tackling tax administration challenges, enhancing compliance, and reviving economic activity. A comprehensive and sustainable approach is needed to ensure the government’s revenue-based fiscal adjustment remains on track and can support long-term fiscal stability.
Looking ahead, Ghana’s fiscal adjustment journey is likely to face additional challenges, particularly as the impact of the DDE continues to reverberate through the banking sector and the broader economy. The government must carefully navigate these obstacles to maintain its fiscal discipline and promote a conducive environment for economic growth and stability.
While Ghana’s fiscal adjustment in Q1 2023 shows promising signs with a lower-than-targeted primary deficit, revenue challenges persist due to tax administration issues and economic softening. The government’s continued focus on expenditure containment and the implementation of comprehensive reforms are essential to address these challenges and ensure sustained fiscal stability in the future.
