Kwesi Amissah Arthur (2nd L), Governor of Bank of Ghana, Mr. Fiifi Kwetey, Dep. Minister of Finance and Dr. Kwabena Duffour all admire the briefcase containing the 2012 Budget statement

In the coming year, the government’s fiscal policy will be put to the test as the country goes into elections. By Daniel Nonor

Being the largest single expenditure item in the 2012 budget, the public sector wage bill constitutes a major challenge to public spending. With oil flowing below projections, analysts are closely watching how the government continues its much touted policy of fiscal prudence while fulfilling its numerous election campaign promises.

The government insists that its key priority will be to maintain tight spending while scaling up investment in infrastructure. This will be achieved through continued mobilisation of revenues through tax administration and controlling other recurrent expenditures.

To this end, the government will increase the corporate tax rate on miners to 35 per cent from 25 per cent in addition to another 10 per cent tax on windfall profits. There will also be an increase in VAT threshold from an annual turnover of GH¢90,000 in 2011 to GH¢120,000.00 in the 2012 fiscal year.

Also, businesses with a turnover of less than GH¢120,000.00 over a 12-month period will pay a presumptive tax of six per cent of turnover. Petro-dollars, which were projected to significantly boost government revenue ahead of the 2012 elections, might not make the expected impact due to shortfalls in production.

Presenting the 2012 budget on the theme Infrastructure Development for Accelerated Growth and Job Creation, Finance Minister Kwabena Duffour said the government’s share of oil from the Jubilee Field amounted to 2,980,720 barrels, which realised a total of $337.3 million (GH¢506.0 million). This figure is against an earlier projection of about 120,000 barrels per day bringing in revenue of about $1 billion a year.

Out of the realised amount, a total of $112 million (GH¢168 million) has been transferred into the Consolidated Fund as the Annual Budget Funding Account and is being utilised in the four priority areas as set out in the 2011 Supplementary Budget in accordance with regulations on the disbursement of oil revenue.

The Finance Minister delivering the 2012 budget in parliament

Sums of $54.8 million and $14.4 million have also been transferred into the Stabilisation and Heritage Fund accounts respectively. Another $156.1 million has also been transferred to the Ghana National Petroleum Corporation (GNPC) as equity financing costs and the GNPC’s share of net carried and participating interest.

The mining firms have criticised the proposed increase in their taxes. The chief executive of the Ghana Chamber of Mines, Tony Aubyn, has expressed concerns that they could have dire consequences because the industry is currently over taxed.

“You must be careful not to confuse the fact that gold prices have gone up to mean that profits have necessarily gone up because other input prices have also gone up; some of them have even gone up higher than the rate at which gold prices have gone up,” he said. In addition to this, mining companies were also investing heavily in host communities through their corporate social responsibility programmes.

In his budget statement to parliament, Duffuor projected a growth rate of 9.4 per cent and average annual inflation of 8.7 per cent. The thrust of the government’s monetary policy in the medium-term is maintaining low inflation while responding to any volatility in the foreign exchange market. To this end, the Bank of Ghana will continue to deploy its instruments within the inflation-targeting framework aimed at preserving the gains of macroeconomic stabilisation.

But the Centre for Policy Analysis (CEPA) is sceptical about the projected growth. According to a CEPA study, the country’s growth potential could be knocked off course by oil failing to flow at projected volumes. The Jubilee partners have announced that the 120,000 barrels of oil per day target would not be achieved until the first quarter of next year.

Razia Kahn, Standard Chartered Head of Africa Research, is among those financial analysts who reckon that, with oil not expected to contribute significantly to overall revenue for some time, efforts to raise revenue through measures like the 10 per cent tax increase for miners is a move in the right direction.

Close watchers of Ghana’s economy are also sceptical of government’s ability to maintain a tight reign on spending in the upcoming election year, despite government assurance.

The past few elections years saw an increase in fiscal deficit as successive governments increased spending in order to stoke up their popularity. Duffour admits that the country’s determination to maintain a lean budget and steady growth will not be without its difficulties. He noted in his budget statement that Ghana’s macroeconomic stability had been threatened in the past by external commodity price shocks, the key one being the price of crude oil.

Expressing concern about rising crude oil prices, he said any increase on the world market meant that the government has had to subsidise ex-pump price of petroleum products to the tune of GH¢267.61 million as at September 30, 2011.

The Finance Minister, Dr. Kwabena Duffour explaining a point in the budget to parliamentarians

He said the entire under-recovery of petroleum pricing for the year was estimated to be GH¢364.94 million based on the assumption of a crude oil price of US$110.23 per barrel. The government has, therefore, put in place a simple hedging mechanism to mitigate the impact of price

“The call option is adopted to manage oil import prices whilst the put option is adopted to smoothen fluctuations in crude oil export receipts,” he said, explaining that the hedging has contributed significantly to the stability of the economy in 2011.

Duffuor pointed out that the start of oil production had created a new price risk exposure for government revenue and in order to protect it, the scope of the hedging programme was expanded in May to include petroleum revenues. “The option has been adopted under a situation which Ghana has the option to sell crude oil at a price of $107.00 per barrel,” he stated.

Currently, 100 per cent of anticipated receipts of crude oil sales have been hedged to the end of 2011.

He announced that the government’s hedging programme had worked well, reducing fluctuations in oil export revenues and expenditures on imports.

The public’s reaction to the government’s expenditure plan is, unsurprisingly, influenced by whether they support the ruling National Democratic Congress (NDC) or the main opposition New Patriotic Party (NPP). The Convention People’s Party (CPP) presidential hopeful, Paa Kwesi Ndoum, observed that given the robust promises of action, the facts on the ground point to the lack of delivery.

“Indeed, the growth achieved cannot be deemed to be the type to touch the lives of ordinary people who form the majority of our population,” he remarked.

He also made the point that despite Ghana being hailed as the fastest growing economy in world this year, this growth has mainly been spurred by foreign-owned entities. “We must ask ourselves, ‘growth for whom?’’ he said.

“It is clear that the sectors of high growth, mining, construction and natural resources do not employ many people – the owners who take the profit and utilise the revenues are foreign- based. On the other hand, the sectors that employ many Ghanaians, agriculture, manufacturing in particular are experiencing lower than expected growth, even when the expected results were low to begin with.”

The Unemployed Graduates Association of Ghana denounced the budget for its failure to create jobs for the estimated half a million out of work university leavers. “The high unemployment rate is a major economic problem for the nation as a whole, reaching far beyond the suffering of the jobless.,” it said in a statement. “In actual fact, having large numbers of unemployed people is a huge waste of human resources. Ghana's workforce is one of her greatest assets, and leaving it unused is like keeping large sums of money sitting on a tarmac instead of earning interest in the bank.”