Ghana: Fiscal risks to return - Capital Economics
Africa Economics

Ghana: Fiscal risks to return

Africa Economics Update
Written by Virag Forizs

Given the government’s tendency to overspend in election years, we think that Ghana’s budget deficit will rise to about 8% of GDP next year. This will heighten investor concerns and put pressure on the currency and sovereign bonds.

  • Given the government’s tendency to overspend in election years, we think that Ghana’s budget deficit will rise to about 8% of GDP next year. This will heighten investor concerns and put pressure on the currency and sovereign bonds.
  • After narrowing as part of an IMF programme, Ghana’s budget deficit will probably widen to 7.1% of GDP this year due to one-off costs associated with cleaning up the banking sector. The government has announced ambitious plans to cut the deficit to 4.7% of GDP in 2020, below the 5% legal limit.
  • We doubt that the authorities will meet this target. Over the past 10 years, revenue collection was on average 18% below target. And crucially, expenditure tends to overshoot the target by 15-35% in election years. (See Chart 1.) With elections due in December 2020, we think that fiscal slippage is almost certain.
  • Our central view is that the budget deficit will widen to 8% of GDP next year. (See Chart 2.) This assumes that revenue collection will be stable at 16% of GDP (rather than the 17% that the government projects), and that spending will be about 10% above target (which would actually be a modest overspend by the standard of recent elections).
  • A deficit of 8% of GDP would be the widest shortfall among Sub-Saharan Africa’s larger economies, and would match the deficit seen in 2014, just before Ghana last turned to the IMF. A shortfall of this size would push the debt-to-GDP ratio to about 65%. Most analysts, by contrast, expect that the government will meet its deficit target, and that the public debt burden will decrease.
  • If we’re right, news of a wider deficit could re-ignite investor concerns, putting pressure on the currency and government bonds. The cedi has weakened against the US dollar by 16% so far this year; we now expect that the currency will fall from GHS5.7/$ to GHS7.0/$ by the end of 2020.
  • Investors are likely to demand higher returns on sovereign bonds, pushing up yields. This could be especially painful given the government’s plans to tap international bond markets in Q1 2020 by issuing up to $3bn worth of Eurobonds.
  • Even with the prospect of fiscal slippage next year, we doubt that Ghana will have to return to the IMF. The external position has improved markedly since the last IMF programme. The country’s current account deficit stood at just 2.7% of GDP in Q2 2019, down from 7.0% in 2014.

Chart 1: Government Spending
(Outturn against Budget, %)

Chart 2: Government Budget Deficit (% of GDP)

Sources: MoF, IMF, Refinitiv, Capital Economics

Sources: MoF, IMF, Refinitiv, Capital Economics


Virág Fórizs, Emerging Markets Economist, +44 20 7808 4079, virag.forizs@capitaleconomics.com