IMPROVING FISCAL MANAGEMENT IN GHANA: THE ROLE OF FISCAL...
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Transcript of IMPROVING FISCAL MANAGEMENT IN GHANA: THE ROLE OF FISCAL...
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)
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