S&P Global Ratings believes the Ghanaian parliament's approval of the 2022 budget without amendments, on Nov. 30, 2021, is a positive development--given the minority rejected it during a ruling party walkout two weeks ago. While there is still a possibility that authorities will have to compromise with the opposition about some measures, including the new e-levy, we understand that the budget's passage is assured. After analyzing Ghana's budget:

• We think fiscal policy for 2022 will continue to be expansionary, with primary expenditure (excluding arrears, interest, and transfers to the energy and financial sectors) set to increase about 1.4 percentage points next year, according to our forecasts.
• We project that the overall 2022 cash deficit--including arrears clearance of 0.4% of GDP and energy sector payments of 1.0% of GDP--will total 10.4% of GDP versus the government's 7.4% of GDP deficit target.
• Ghana's interest burden as a percentage of government revenues will remain the second highest of all rated sovereigns after Sri Lanka's at 46%.
• While our headline overall 2022 deficit forecast of 10.4% of GDP does not differ from the projections we published in September 2020, we believe this remains a large deficit to finance for a government with rising debt and elevated debt-servicing costs.

Ghana's other credit strengths, including its solid institutional framework, underpin its 'B-' rating long-term local and foreign currency ratings. Nevertheless, as we noted in September 2020, under our downside scenario, we could lower the rating over the next six to 12 months if we saw further deterioration of Ghana's fiscal metrics beyond our current projections, either due to recurring wide fiscal deficits or the materialization of contingent liabilities in the financial or energy sectors. Here, we explore frequently asked questions about Ghana's budget.

Frequently Asked Questions

How realistic are Ghana's budgetary assumptions?

Next year's fiscal plan continues with last year's high post-pandemic expenditure levels, while focusing on ways to boost revenue collection further. The good news is that while targeted spending for 2022 is high, there is considerable flexibility to reduce outlays, given very generous allocations for both grant spending and capital expenditure. The bad news is that revenue projections appear very aggressive against a backdrop of prolonged economic uncertainty. This means that the final 2022 fiscal outcome is highly contingent on the strength of the domestic recovery, and the success of the collection of a new round of taxes.

What has attracted most attention so far is the government's introduction of a new 1.75% levy on electronic transactions (e-levy), which will apply to mobile money payments, bank transfers, merchant payments, and remittances. Authorities estimate this will contribute 1.4 percentage points of GDP in additional revenue to state coffers next year. That estimate looks optimistic, given this is not a tax that the ministry has imposed before, and the proposed 1.75% level of the tax may encourage evasion (and moreover, the government may still need to make adjustments to the e-levy--including lowering the rate--to accommodate the opposition). One of the benefits of financial transaction taxes (FTTs) is their relative ease of collection, particularly compared to income taxes. One of the potential disadvantages of FTTs is that while the originators of the transaction and not the banks will pay the e-levy, it is essentially a tax on financial intermediation, raising the cost of transactions through the commercial banks upon whom the government will rely to finance the lion's share of the deficit next year. It also comes on top of last year's 5% tax on banks' gross profit margins, intended to offset the cost of the financial sector cleanup.

How realistic are the rest of the revenue assumptions?

Excluding the e-levy, overall tax and grant receipts are projected to increase 29.1% in 2022 versus projected nominal GDP growth of 13.9%, as authorities plan to further tighten tax administration and fight evasion. On the face of it, this assumption appears to be very aggressive given that domestic demand, while recovering, will remain sensitive to the situation with the latest COVID-19 variant--around 3% of the population is fully vaccinated. What's more, the government has recently conceded to cut fuel taxes, eliminate road tolls, and reduce fiscal pressure on smaller mining companies. Over the decade to 2019, during a period of relatively higher inflation and growth than the present, revenues increased only 22% a year on average.

While the new revenue measures introduced in 2021 did not generate as much revenue as originally assumed, they did push up tax revenue and grants by 1.6 points of GDP during a difficult year for the economy. For 2021, full-year revenue growth looks set to be as high as 28%, given the hike in the VAT and the introduction of a new health levy, among other measures. That is a considerable achievement.

Nevertheless, the target of 20% of GDP in revenue and grants next year appears to us to be excessively aggressive. Our own estimate is that revenue from tax and grants for 2022 will improve to 18% of GDP from 16.0% in 2021, which is still a major increase that few other sovereigns have managed in so short a period.

Where will expenditures deviate from the government's projections?

With new entrants into the labor market at over 300,000 per year, and employment opportunities worsened by the lingering pandemic, the electorate continues to pressure policymakers to boost job creation and social transfers. This—amid lingering economic uncertainty around the pandemic--explains the reluctance of authorities to embark on large spending cuts. Even assuming lower-than-budgeted spending on grants and investment, next year's budget looks to push primary spending levels (excluding arrears, interest, and transfers to the energy and financial sectors) to 18.6% of GDP versus 17.2% of GDP in 2021, and pre-pandemic levels (2019) of 15.8% of GDP.

Our expenditure projections mirror those of the authorities, with three exceptions:

Total grants may be lower than budgeted.  The government has budgeted a 1.3 points of GDP increase in grants to other government units for a total of 5.4% of GDP next year versus a projected 4.1% of GDP in 2021. We think that because revenues are likely to underperform, the government may withhold a portion of these projected transfers, and grants will total closer to 4.4% of GDP.

We also expect that capital expenditure will be cut back.   Capital expenditure is budgeted to increase to 3.3% of GDP next year versus 2.8% of GDP projected for 2021, but we think it will be cut back to remain at around 2.8% of GDP as authorities look for ways to offset any disappointment on the revenue side next year.

Interest expenditure on domestic debt to GDP is likely to be higher than projected.  The government projects that interest expenditure barely increases in nominal terms next year. On the contrary, we calculate an increase of about 1 point of GDP next year to 6.7% of GDP, given rising public debt and rising domestic rates on the back of the Bank of Ghana's tightening cycle launched in November. The only way the government might be able to refinance its debt at lower-than-projected nominal rates would be to seek financing from the Bank of Ghana in large figures exceeding our 1.8% of GDP projection (with negative implications for exchange rate stability), or to step up the issuance of external debt, or both. Neither seems probable, in our opinion.

Table 1

Will Ghana face difficulties in financing the deficit?

There are reasons to question whether Ghana can finance an overall cash deficit of above 10% of GDP this year. The plan is to raise 78% of the financing in domestic markets next year despite very large exposures of domestic banks and nonbanks. Data published by the Bank of Ghana for June 2021 estimates that claims on the government represent 31% of total assets in the commercial banking system, though lending to the government in nominal terms has been considerably below its original targets, with nonbanks stepping in to make up the difference. Like many Sub-Saharan African economies, Ghana's banking system is modestly sized, with total assets equivalent to just over 30% of GDP, and may not be able to meet the government's assumptions for net domestic financing for 2022, also reflecting increasing tax pressure on its profitability. There are some other financing options, but these all come with significant disadvantages:

• Arrears to suppliers: Rather than paying down 0.4% of GDP in arrears, the government could delay payment or even accumulate new arrears on current spending to suppliers.
• Subject to parliamentary approval, the state could increase net external borrowing during 2022 via the issuance of debt from a special purpose vehicle under the control of Jersey-incorporated Agyapa Royalties Ltd., a subsidiary of the Mineral Income Investment Fund. The 2022 budget includes a proposal to list a minority stake in Agyapa. There are doubts about the political and financial market feasibility of this source of financing. Perhaps more probable, should external financing conditions improve, would be larger Eurobond issuance. External debt amortization for 2022 is very low: at an estimated $1.3bn or 1.6% of GDP.
• The Bank of Ghana estimates there are $3.1 billion or 4.2% of GDP of currency deposits outside the banking system. In theory the government could consider creative ways of attracting these into domestic debt, such as stepping up the issuance of dollar-denominated domestic securities. Ghana receives over 4% of GDP per year in remittances inflows. The new e-levy will tax these flows, but authorities might consider studying how to attract them into domestic financing vehicles.
• An IMF Program: A fallback option would involve the government negotiating a standby arrangement with the IMF. We believe authorities are reluctant to go down this path, given their preference for a more gradual consolidation path and the political consequences of implementing fiscal tightening, which the IMF is likely to recommend.

Table 2

To conclude, the strongest argument in favor of a lower general government cash deficit for next year is the risk of rising financing constraints, both domestic and external. Perhaps the most realistic scenario is that the government reigns in cash spending on grants and investment for 2022, delays scheduled arrears payments, and continues to rely on domestic markets for net financing. This would imply a cash deficit below our projection of 10.4% of GDP. In what appears to us to be a warning, the Bank of Ghana (BoG) on Nov. 22 boosted its key policy rate 100 basis points to 14.50%, signaling its priority to tighten domestic liquidity. As a consequence, we think the BoG will be reluctant to provide net financing to the state next year at levels exceeding 2% of GDP, given this will likely feed into more pressure on the Ghanaian cedi and pass through into higher inflation. The other key uncertainty is the pace of FED tapering, and what this implies for non-residents' willingness to hold roughly 10% of GDP of domestic government bonds. Our expectation is that in the face of such risks, authorities would reign in expenditure beyond our current projections.