Institute of Economic Affairs

Accra, Ghana

16th June, 2015

6/16/2015

IMPROVING FISCAL MANAGEMENT IN

GHANA: THE ROLE OF FISCAL POLICY RULES

Introduction

Ghana has a long record of poor fiscal management

with attendant macroeconomic instability and rising

debt.

This paper discusses the role that “fiscal policy

rules” can play in improving fiscal management in

Ghana.

Specifically, the paper addresses the following issues:

How fiscal rules can help to improve fiscal

management in Ghana

Fiscal rule options and an illustrative rule for

Ghana

The importance of supporting institutions and

arrangements

Ghana’s Fiscal Management in Context

But before we delve fully into the issue of fiscal rules,

let us take a brief look at Ghana’s fiscal policy record.

Fiscal deficits have been generally high

--and they tend to escalate in election years

High fiscal deficits are common in Ghana

and tend to worsen in election years…

-13.0

-11.0

-9.0

-7.0

-5.0

-3.0

-1.0

1.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Fisc

al d

efic

it (

per

cen

t o

f G

DP

)

Figure 2. Ghana: Fiscal performance (1990-2013)

Red shaded bars represent

election years

Borrowing to finance the high deficits has led to a

mounting public debt, currently running at about

GHc88 billion or close to 70% of GDP.

…rising public debt

0

20

40

60

80

100

120

140

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Cen

tral

gov

ernm

ent g

ross

deb

t (p

erce

nt o

f GD

P)

Figure 3. Ghana: Total Government debt (1990-2013)

Red shaded bars represent election years

Revenue and Expenditure Trends

The high deficits emanate from revenue and

expenditure gaps.

It is standard practice, especially in debt analysis, to

focus on the primary fiscal balance. This measure

excludes interest payments on existing debt.

The primary fiscal balance is then defined as domestic

revenue less primary expenditure (which excludes

interest payments)

Revenue performance has improved but

primary spending has also increased

Composition of Government Spending

0

5

10

15

20

25

30

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Figure 5. Ghana: Composition of Total Expenditure

(Percent of GDP)

capital spending

wages and salaries

Interest payments

Subsidies

Goods and services

Achieving fiscal and debt sustainability

An ambitious fiscal consolidation strategy will

be required to rein in the debt

This paper argues that adopting some kind of

fiscal rule can be an important tool in achieving

fiscal consolidation and debt sustainability

Fiscal Rule and Types

A fiscal rule is a permanent constraint on fiscal

policy through simple numerical limits on

budgetary aggregates.

Four types of rules can be identified—fiscal target

rule, debt rule, expenditure rule, and revenue rule.

Types of fiscal rules

Fiscal deficit rules set limits on the deficit geared

to ensuring that the debt-to-GDP ratio converges to

a finite level.

Debt rules normally set explicit limits or targets

for public debt as a percentage of GDP.

Expenditure rules usually set permanent

limits on spending.

Revenue rules usually set floors on revenues

and are aimed at boosting revenue collection. In

unusual cases, the rule may set a revenue ceiling

if this is needed to prevent excessive tax burden.

Several countries around the world have adopted

fiscal policy rules.

There are currently 76 countries with fiscal

rules, up from only 5 in 1990.

The Literature on Fiscal Policy Rules

Fiscal policy rules are statistically known to be

associated with better fiscal performance.

Marneffe et al (2011) examined the impact of fiscal

rules on public finances in the Euro Area

They found that fiscal rules have in most cases a

significant positive effect on the fiscal balance

Fiscal rules have been identified as an important factor

accounting for the success of fiscal consolidation.

An Illustrative Fiscal Rule for Ghana

Given the problem of rising debt in Ghana, an

illustrative simple fiscal was calibrated for Ghana based

on the debt sustainability approach, targeting a debt-to-

GDP ratio of 50% by 2020.

The baseline scenario, based on gradual fiscal

consolidation, with the fiscal deficit declining from

10.2% in 2014 to reach 4.1% in 2020, shows that

Ghana’s debt-to-GDP ratio increasing from 51% in

2012 to peak at 70% in 2016 and fall to 60% in 2020.

Using a debt-rule targeting the debt-to-GDP ratio in

2020 at a “sustainable” level of 50%, on the other hand,

and requiring a front loaded fiscal adjustment—with

the deficit decreasing from 10.2% in 2014 to 1.2% in

2020—on the other hand, shows the debt rising to

51% in 2012, peaking at 68% in 2015 and falling to

the target of 50% in 2020.

On average, a fiscal deficit of 4% per annum will

deliver the debt target in 2020.

An illustrative fiscal rule for Ghana

19

The Debt Sustainability Framework (DSF) determines a floor on the

path of overall balances that could achieve the debt ceiling by a given

target date.

2012 2013 2014 2015 2016 2017 2018 2019 2020

Baseline

Fiscal balance -12.0 -10.9 -10.2 -9.2 -7.6 -5.3 -4.6 -4.3 -4.1

Adjustment … 1.0 0.7 1.0 1.6 2.3 0.7 0.3 0.2

Central government gross debt 51 60 67 69 70 66 63 61 60

Central government net debt 49 58 64 67 68 63 59 57 55

Debt rule

Fiscal balance -12.0 -10.9 -10.2 -8.5 -5.4 -3.2 -2.1 -1.6 -1.2

Adjustment 0.0 1.1 0.7 1.8 3.0 2.3 1.0 0.5 0.4

Central government gross debt 51 60 67 68 67 61 56 53 50

Central government net debt 49 58 64 66 65 58 52 49 44

Table 5. Ghana: Illustrative Fiscal Rule and Baseline Compared (Percent of GDP)

An illustrative fiscal rule for Ghana

0

2

4

6

8

10

12

14

2012 2013 2014 2015 2016 2017 2018 2019 2020

Figure 8. Ghana: Fiscal Balance under Illustrative Debt Rule

Baseline Debt rule

An illustrative fiscal rule for Ghana

45

50

55

60

65

70

75

2012 2013 2014 2015 2016 2017 2018 2019 2020

Figure 9. Ghana: Public Debt under Illustrative Debt Rule

Baseline Debt rule

For purposes of comparison, under the current Ghana-

IMF programme, the debt-to-GDP ratio is forecast to

peak at 72% in 2015 and to fall to 58% by 2019 and

further to 39% by 2034.

These forecasts are based on progressive fiscal

consolidation and continued decline in the fiscal

deficit.

Additional Supporting Rules and Procedures

23

For the fiscal rule to be effective, there is a need for

additional supporting rules and procedures.

There is a need for periodic reviews of the numerical

targets and economic assumptions.

Mechanisms are needed to encourage compliance

with the annual fiscal targets

Appropriate coverage of the fiscal rule is needed to ensure transparency and capture government and quasi-government activities: i.e. central government, local government, public -owned enterprises and corporations.

An “Escape Clause” may be included to allow deviations from the fiscal targets in exceptional situations

25

Strengthening the sanctions regime would also

enhance credibility.

A “Fiscal Policy Council,” defined as a publicly-

funded, non-partisan institution, may be required to

perform, among others, the following functions:

To evaluate fiscal policy,

To monitor fiscal performance, and/or

To advise policymakers on policy options

In some jurisdictions, the FPC takes the form of a Parliamentary Budget Office (PBO), manned by preferably independent budget experts.

The PBO essentially monitors and oversees the budget from preparation through implementation.

IEA has suggested formation of a PBO in our earlier work

In contrast to audit institutions, FPC/PBOs analyze

public finances ex-ante.

An independent FC/PBO could have a key role in

assessing the reliability of the macroeconomic

and budget assumptions

Forecasts produced by FCs/BBOs can serve as a

neutral baseline to assess the fiscal cost and

macroeconomic impact of policy proposals.

In some countries, FCs/PBOs also play a “watchdog”

role by monitoring compliance with fiscal rules

Embedding Fiscal Rule in Legislation

For the FR rule to be effective, it may have to be

embedded in legislation—a kind of Fiscal Responsibility

Law (FRL)—as Chile did.

The FRL will back the FR by providing for enforcement

and sanctions provisions, among others.

Many of the existing Ghanaian public finance

legislations are weakened by lack of sanctions

provisions.

The Chilean Experience with Fiscal Rules

Chile has successfully used fiscal rules and its

experience is a useful blueprint.

Chile adopted a fiscal rule after reducing its debt from

165% in 1985 to 20 % of GDP in 2000.

The rule requires that the cyclically adjusted

primary balance be in surplus and was written

into law in 2006.

The ceiling under the budget balance was

originally set as 1 percent of GDP.

The calculation of ex-ante revenues is the lynchpin of

the rule.

The computation takes into account cyclical factors

and copper price fluctuations.

The fiscal surplus rule adopted implies that eventually

the government must be a net creditor.

Every country is different though and appropriate rule

will be necessary in each case.

Some of the Reasons for the Chilean Success

The existence of a Committee of Independent

Experts to oversee the budget process:

They are responsible for providing the Government

with assumptions regarding GDP and long run copper

prices.

They are involved in the budget process and produce

cyclically-adjusted figures.

The transparency of the process:

The calculation of the cyclically adjusted balance is presented and explained to the public.

The special relationship and roles of the Legislature and the Executive:

The power to set the budget is entirely in the hands of the Executive.

The Legislature is not allowed to reduce taxes or raise spending.

Summing -UP

Weak fiscal management has worked to

undermine Ghana’s economic progress by

exacerbating macroeconomic instability, creating a

looming debt crisis and crowding out the private

sector

Adoption of a fiscal rule would enhance

transparency and improve fiscal performance

To be effective, the Fiscal Rule will require a number of

supporting arrangements and mechanisms, including:

1. Strengthened budget preparation

2. An independent Fiscal Council or Parliamentary

Budget Office to provide independent assessment

and monitoring of the budget

3. Legislative changes, including enactment of a

Fiscal Responsibility Law to give legal backing

to the rule binding

4 Escape clauses to ensure flexibility in dealing with

unanticipated shocks

The Final Message of the Paper

Discretionary fiscal policy has failed us.

The incessant resort to IMF bailouts is a reminder of

this failure.

Adopting a fiscal policy rule embedded in

legislation will help to entrench much-needed fiscal

discipline in Ghana

THANK YOU