Gracefully, 2015 has come to an end and we are in the early days of theNew Year, 2016. Characteristic of every New Year, individuals, families and businesses get fired up with positive resolutions expecting nothing but the best in the year. Likewise, countries make projections too. The purpose of this piece is to look into the economic crystal ball and summarize what the country’s standing will be by the end of the year so that you can adjust appropriately and leverage on the advantages of prior knowledge. However, the caveat is No SPIRIT has whispered anything into my ears. The germane issues to be looked at are discussed in the subsequent paragraphs.
I start with the agricultural sector. Last year was a very challenging year for this sector and this year may not be any different. Until rebasing of the economy, this sector was the largest contributor to the country’s GDP and it remains the sector employing about 55% of the citizens. In 2015, the sector is said to have grown by a dismal 0.04%. it is sad to note that the sub-sector that positively contributed to its growth was forestry and logging (highest performing sub sector).This sector’s contribution to GDP stood at only 26.9% (poor, relative to the number of people it employs). The services sector appears to have outperformed the agricultural sector, by contributing 54.1% to GDP; despite the fact that it creates employment for a lesser fraction of graduates (relative to the agricultural and industrial sectors). The crop sub-sector grew at -1.7%. Juxtaposing the negligible growth (0%) in the sector, with 2.5% annual population growth, it is apt to foresee a food shortage especially of some staples (maize shortage is imminent by June) in 2016. Insipid policies coupled with weather forecast uncertainties affected yield from this sector in 2015 going into 2016.The consequences of a food shortage are very clear. They include increase in food imports, fall in farmers income, fall in employment in the agricultural sector, fall in Per Capita Income (all other things being equal), high food inflation which may cause general inflation to rise. Food inflation’s increase (by 1 percentage point margin) from 6.8% in December 2014 to 7.8% in October 2015 largely contributed to the 17.9% general inflation rate in October considering the fact that non-food inflation fell from 23.9 to 23% for the same periods. If food shortage becomes a reality, there would be a rise in food imports leading to high imported inflation which will make it extremely impossible for the country to achieve its 10.1% inflation target for 2016.
The Banking Sector
It is refreshing to hear that the Finance Minister has written to parliament to review taxes that were levied on interest from savings and other investments under the new Income Tax Act 2015 (Act 896). Parliament should expedite action on jettisoning the aspect of the Act that sought to levy savings’ interest because this policy has the potential to cripple the burgeoning banking set up in the country. This is a country where over 60% of the populace do not have bank accounts. It should be the objective of regulators and government to ensure financial deepening or inclusion by instituting policies that are positive in creating public confidence in mainstream banking activities. Now on the substantive issue, many banks closed the 2015 financial year on a positive note despite the challenges in the economy. However, many of these banks did not undertake the core banking objective i.e. lending to the deficit sector (borrowing public), to boost development by instigating growth sectors. This was so for obvious reason; the general economic architecture in the year was extremely risky for lending. It is not surprising that non-performing loans stood between 25-31% for commercial banks and between 55-70% for microfinance institutions. This made commercial banks resort to “lazy banking strategy” i.e. lending to government (buying T bills and highly profitable government bonds) instead of the public. Events will not be better this year because there is no audacious plan in the 2016 budget to put the financial sector on a sound footing to propel economic growth/development.
Now on the private sector, Ghana’s budget deficit stood at 6.7449 billion of which 4.68 billion was financed through domestic borrowing and 2.905 billion through foreign sources as at the third quarter of last year. Banks therefore starving the private sector of loanable funds did not come as a surprise. In 2016, the government envisages to fund about 52% of its deficit domestically. This means that there is little likelihood T- bills and market lending rates will experience a southward growth. With this in mind, coupled with huge taxes and our notorious dumsor crises, cost of operating businesses will remain high hence increasing risk profile of entities. This will further compel banks to largely finance government activities hence crowding out the private sector.
As at the third quarter of 2015, total revenue including grants stood at 22.7 billion as against the projected 21.9 billion. This good performance was largely due to tax reforms. With the emergence of the Income Tax Law 2015 (Act 896), more tax reforms will be rolled out starting January. 76% (32% from direct tax and 44% from indirect tax) of government revenue is to be sourced from taxation. The reforms include petroleum tax, increase in capital gains tax (from 15% to 25%), increase in withholding tax (from 5% to 15%) et al. This will obviously have an effect on the private sector and the level of its success will depend on how the private sector will be capable of circumventing this challenge. On Oil revenues, last year the country was forced to review its budget because of continued southward movement in global market price. In 2016, the budget was drawn pegging the international oil price at $53. This $53 figure represents about 48% drop in government oil price projection under the 7 year Petroleum Revenue Management Act (PRMA). In January, the price is $37 (30% lower than the country’s annual projection) and there is strong indication that at least for the next few months, oil prices will be heading towards south.This has a higher probability of throwing government projections out of gear and may necessitate a budget review.
Budget Deficit and Government borrowing
Usually during the election years, the deficit position of the country deepens. With IMF on board, many believe the fiscal position will be monitored. However, the 2016 election dynamics will make it difficult for government to heed to the IMF’s instructions on fiscal discipline. There is a trend that has been established in the political arena since 1992, i.e. the major political parties enjoy an 8 year tenure of office. The twist in this case however is that, the NDC as a party has enjoyed an 8 year tenure while their current candidate (who doubles as the sitting president) has been in power for only 4 years. Their major contender, the NPP, has a candidate whoseems to be having his last shot towards his presidential ambition. This increases the stakes in this election. The recent by- election at Amenfi West (undertaking unplanned developmental projects just to sway voters) gives an indication that it may not entirely be the case that this year will be a better year relative to excessive government spending (fiscal indiscipline), as compared to 2012. The usual tokenism and economic patronage will continue. Again, the performance of the smaller parties will also go along way in determining the deficit position of the country. If these smaller parties are able to cumulatively garner about 5% of the total votes cast, the likelihood of the election entering a run-off is sure. This will mean that the 827 million (1.5% of the total budget) budgetary allocation to the Electoral Commission will be insufficient. There will also be the need to beef up allocations made to the Ministries of Defence and Interior, hence the likelihood of overspending the 760 million and 1.6 billion respectively allocated to them in the 2016 budget. All these, coupled with labor agitations/unrest (because of tax increases, utilities price hikes, high cost of living) and communal pressures (threats of voting out the incumbent government from extremely deprived communities)under the pretext ‘NO … NO VOTE’ is likely to thwart government’s plans of meeting the 5.3% budget deficit target.
The needed economic transformation may not take place as expected. Government has made a dismal commitment (1.419 billion) to infrastructural development and has placed reliance on the magnanimity of development partners (i.e.to raise 846 million) to cater for its infrastructural development. This is so because grants and donations across the globe is going to fall due to threats of migration and other complicated dynamics developed economies are faced with.
The strength of the cedi will not be entirely different from last year since nothing dramatic has taken place to revert the cedi’s depreciation i.e. capital flight, large imports, large external debt servicing component, poor performing industrial sector et al. Lastly, on employment, the expansive capacity for private sector is bleak, hence it will be difficult to experience hikes in employment. Again, the shrinking of the agricultural and manufacturing sectors make the employment prospects in the country gloomy outlook.
Bernard Owusu Mensah
Founding President NEW ERA AFRICA (NERA)