Impose new taxes or cut expenditure to boost revenue – Fitch Solutions tells Gov’t
Fitch Solutions has advised government to significantly cut capital expenditure or impose new taxes to boost revenue in order to address the financial challenges in the economy, stating that this will help narrow the country’s financial gap and create fiscal space going forward..
According to Fitch Solutions, failure to do so by government will result in the Ghanaian economy facing tougher times in 2023.
“Expenditure has risen and this is driven by interest expenditure. Ghana took a lot of expensive debt and continue to borrow during the pandemic and this means interest payment are very elevated now”.
“They account for about 55% of total government fiscal intake, keeping expenditure elevated. Given the rigid nature of the Ghana’s expenditure profile, the government cannot easily reform spending resulting in those wide fiscal deficit”.
“The government has really two option at the moment to improve fiscal position; either capital expenditure or significantly increasing the countries tax base, so they are no easy choices for the government”, it said.
“As part of an IMF deal, however, we expect that the government will have to implement fiscal consolidation measures in 2023 including the widening of the tax base. We expect that the commitment to fiscal consolidation will lead to gradually improvement in public finances.”
“And we also expect the government to be quiet eager to meet the IMF target as the authorities will aim to restore investor sentiments and so regain access to international capital markets”, it added.
Gov’t projects debt-to-GDP ratio reduction to 55% by 2028
Meanwhile, President Akufo-Addo has revealed plans to reduce the country’s public debt stock to 55% of GDP by 2028.
In addition to reducing the country’s public debt stock, government further intends to reduce external debt servicing to 18% of total revenue by 2028.
The projected debt to GDP ratio indicates a 13% percentage points decrease in the country’s public debt from the current 68% debt-to-GDP – this is per official data by the BoG. The IMF however, pegs the country’s public debt at 94% of GDP.
Speaking in a televised address on Sunday, October 29, 2022, the President noted that government is committed to increasing tax revenue from the current 13% of GDP to between 18% to 20% by 2028.
“To restore and sustain debt sustainability, we plan to reduce our total public debt to GDP ratio to some fifty-five percent (55%) in present value terms by 2028, with the servicing of our external debt pegged at not more than eighteen percent (18%) of our annual revenue also by 2028.
“We are committed to improving the revenue collection effort, from the current tax-revenue to GDP ratio of thirteen (13%) to between eighteen and twenty percent (18-20%), to be competitive with our peers in the West Africa Region. The GRA is rolling out an extensive set of measures to support this enhanced revenue mobilisation. All of us must do our patriotic duty, and support the GRA in this exercise.
“We are aiming to restore and sustain macroeconomic stability within the next three (3) to six (6) years, with a focus on ensuring debt sustainability to promote durable and inclusive growth while protecting the poor,” the President remarked.
Moody’s projects 26% increase in debt as debt-to-GDP to hit 104% at end 2022
Credit rating agency, Moody’s, has forecasted Ghana’s debt to increase by some 2,600 basis points (26%) by the end of 2022.
According to the rating agency, Ghana’s debt will rise to 104% of GDP by the end of this year.
Accounting for significant rise in the country’s debt, Moody’s asserts, will be the depreciation of the cedi which has so far declined in value by some 4,000 basis points (40%) to the dollar.
“The local currency, the cedi, has depreciated by around 40% against the US dollar since the start of the year, exacerbating the challenges from an already high debt burden. Because foreign currency-denominated debt accounted for 37% of GDP at end of 2021, Moody’s forecasts that the currency depreciation over 2022 will be the main contributor to the rise in the debt-to-GDP ratio this year to more than 100% of GDP (104%, 26 percentage points higher than in 2021),” Moody’s stated in its downgrade of the country’s credit rating from Caa1 to Caa2.
