On 29th July, 2019, the Honorable Minister for Finance presented the Mid-Year Fiscal Review of the 2019 Budget Statement and Economic Policy to Parliament. As usual, TUC followed the Budget Review with keen interest because of the implications it has for workers and their families.
The following are our comments on the Budget Review. The key areas covered by this submission include macroeconomic management, employment, revenue and expenditure performance, agriculture, the crisis in the energy sector, public sector pay, housing, and African Continental Free Trade Area.
First, we acknowledge the consistent improvement in some key macroeconomic indicators. In 2018, real GDP (non-oil) grew by 6.5 percent; the end-of-period inflation dropped to 9.4 percent; overall budget balance was -3.9 percent of GDP; primary balance was 1.4 percent of GDP; and gross international reserves was 3.6 months of imports of goods and services.
There have been further improvements in some of the indicators this year. At the end of the first quarter overall GDP had grown by over 6.7 percent; inflation had dropped further to 9.1 percent; overall budget balance was -3.3 percent; and gross international reserves had increased to 4.3 months of imports of goods and services. This is a remarkable achievement in macroeconomic management.
The sector level performance was also good in 2018 and in the first half of 2019. Industry and services sectors grew by 8.4 and 7.2 percent respectively in the first quarter of 2019. Growth in industry sector in particular is quite remarkable because of its potential to create more decent jobs.
The clean-up exercise in the banking sector has also been successful. There are indications that the sector is regaining public confidence. The economy of Ghana is expanding at a higher rate. A solid banking sector is required to support even faster growth of the economy. We commend the Governor of Bank of Ghana and his team for the courage to implement these difficult but necessary measures.
One area that needs special attention is the management of exchange rate of the Ghana Cedi, in terms of the major international currencies. The cumulative depreciation of the Ghana Cedi by 8.4 percent against the US dollar between June 2018 and June 2019 was too high. A more prudent management of the exchange rate is important not only because it affects the price of imports of essential commodities such as medicines and food but it also impacts adversely on payment of interests on our huge foreign debt in terms of revaluation losses.
In the last two years we have witnessed a very significant decline in interest rates. The 91-day Treasury bill rate has stabilized around 14.8 percent. Commercial banks are lending to each other at an average rate of 15.2 percent. We are, therefore, wondering why lending rates are still hovering around 28 percent. We are told that private sector credit expanded by 16.8 percent at the end of June 2019 but this was achieved at a high cost to the private sector. The relatively high cost of capital in Ghana compared to our trading partners makes our private sector less competitive and significantly reduces the ability of private sector firms to pay back loans, hence the high rate of Non-Performing Loans (NPL) facing our banks. Business people who borrow from our banks must either be geniuses who can make profit in a very challenging environment or they must be willing to default. No wonder that nearly a fifth of the loans borrowed from banks in Ghana are not recovered. This situation has persisted for a long time. But, strangely, we do not see any concrete measures in the Budget Review that deal with this major problem. Until we manage to bring lending rates down to reasonable levels our quest for industrialization and private sector development will continue to elude us.
The statement the Honorable Minister presented to Parliament did not contain any robust analysis of the impact of the positive developments in macroeconomic management on job creation. The economy is growing and wealth is being created so it may be assumed that these positive developments at the macro level would translate into job creation. The theory that economic growth automatically leads to employment growth has been debunked many years ago. Countries that have translated economic growth into more decent jobs have done so deliberately. That is what we should do in Ghana. Otherwise, it will never happen. We do appreciate the effort being made under the NABCO and all the other initiatives to create jobs. Given the enormity of the employment problem in Ghana, we need a an Akufo-Addo Plan similar to the Marshall Plan in order to make a significant impact on the employment situation in the country. This requires that all development efforts, policies and programmes must focus on job creation. Our trade policies, investment policies, procurement policies, industrial policies, agricultural policies, financial policies and most importantly, macroeconomic policies must all aim at creating decent jobs.
Tax revenue is still stuck far below 20 percent of GDP despite some gains in recent years. In the first half of 2019, expected total revenues fell short by 15.5 percent. A total tax revenue of 12.9 percent of GDP in a country where GDP is growing at the rate of over 6 percent is problematic. Ghana is underperforming in terms of tax revenue collection, compared to Togo, Senegal, Kenya, Burkina Faso and Cabo Verde.
Government is now relying disproportionately on personal income taxes, corporate taxes, and petroleum taxes as revenue sources. But higher income taxes and petroleum taxes are adversely affecting disposal incomes and living standards of workers and their families. Similarly, higher corporate taxes are negatively affecting the ability of businesses to be more competitive and to create more decent jobs.
The Honorable Minister identified the “key reasons” for the shortfall in revenue, including “lower recorded CIF values of imports and admittance of large volumes of imports into exempt or low tariff (zero-rated) categories”.
In the 2019 Budget Statement, the Finance Minister announced that government has completed a draft policy on tax exemptions, which was to be passed into law. What is the status of that policy? Has it been passed into law? Why should we allow tax exemptions to deprive us of much needed revenue for development?
We think another factor that has contributed to the revenue shortfall has to do with the reduction in the benchmark import values which form the basis for the assessment of customs duties, tariffs, fees and levies at the ports. Government should have undertaken a more detailed cost-benefit analysis of these measures, in terms of revenue loss and revenue gains before the implementation of such a policy. The reduction in the benchmark values is now costing the nation billions of Ghana Cedis. The few privileged and well-connected importers are benefiting at the expense of the public.
We urge government to take all necessary measures to reduce tax exemptions and to review the benchmark import values.
DECLINING CAPITAL EXPENDITURE
We note with grave concern the declining capital expenditure. According to the Honorable Minister, Capital Expenditure fell short by 25.9 percent from GHË6.4 billion to GHË4.7 billion (from 2.1% to 1.6% of GDP). Out of the total expenditure of GHË59 billion only GHË4.7 billion (or 8%) was spent on developing the capital base of the economy. It seems any time there is pressure on the budget the capital expenditure item suffers. The result is the poor infrastructure base of our economy. We are happily eating our eggs today. There will be no chickens for us tomorrow. Countries that have experienced rapid economic development have devoted a sizeable portion of their GDP to capital investment. We should emulate the good example of China and others who commit over 40 percent of their GDP to capital investments.
UNDERPERFORMANCE OF AGRICULTURE SECTOR
Agriculture sector needs further attention because it is underperforming. In the last 5 years agriculture sector has grown by an average of 3.4 percent which is below overall GDP growth rate. In the first quarter of 2019, agriculture growth was only 2.2 percent compared to overall growth rate of 6.7 percent. Agriculture is the basis for industrialization, job creation, and export drive. It can also help to reduce the amount of foreign exchange spent on imports. According to the Finance Minister, these are being delivered through government’s “flagship initiatives” including the Planting for Food and Jobs Programme; the Rearing for Food and Jobs Programme; and Planting for Food and Exports; among others. We were also told that domestic food production has increased significantly. For example, maize yields increased by 72 percent; rice production increased by 24 percent, soya bean increased by 39 percent and sorghum production increased by 100 percent. In spite of these statistics, agriculture sector grew by only 2.2 percent in the first quarter of 2019 and food inflation is actually increasing.
Agriculture sector employs more than one-third of the total workforce. It is, therefore, important that we address the challenges that are keeping agriculture growth below industry and services, in spite of the huge resources being invested in the sector. Given the role government has assigned to agriculture in our socio-economic development, the sector should grow at a much faster rate than industry and services.
PUBLIC SECTOR PAY
The Honorable Minister announced that government has broadly contained compensation of public sector employees during the period under review. But it is important to keep in mind that this might have been achieved at a higher cost, in terms losses in quality of service delivery in the Public Service generally and in particular important social sectors such as health, education, and security.
Currently, the National Daily Minimum Wage is GHË10.65 or GHË287.55 per month. The median salary for public sector employees on the Single Spine Salary Structure (SSSS) is just about GHË1000 per month (or US$183 per month). The base pay for public sector workers on the SSSS increased nominally by 70 percent from GHË1,569 to GHË2,679 per annum between 2012 and 2018. But the real value of the base pay for public sector workers declined by approximately 22 percent during the same period because the rate of increase of the base pay has lagged behind inflation (as measured by the Consumer Price Index).
The Honorable Minister for Finance announced in the Mid- Year Budget review that “Entities that are not on the Single Spine Salary Structure (SSSS) and already having higher salaries, continue to enjoy higher salary adjustment annually than their counterparts on the SSSS.”
He concluded that “government will ensure that salary on the SSSS enjoy higher salary increases than those outside the single spine.”
This is long overdue. Therefore, we would like to assure government that TUC will support this policy. Such pay inequalities in the public sector serve as great disincentive to public sectors workers who are currently placed on the SSSS including health workers, teachers, civil service workers, local government workers, and workers in the judiciary. Pay inequality in favour of those who are not placed on the SSSS further undermines the principle of equal pay for equal work that underpinned the single spine pay policy. Government should, therefore, address the pay inequality without further delay to avoid any agitations from those who are affected.
ENERGY SECTOR CRISIS
We agree with the Minister of Finance that the Power Purchase Agreements (PPAs) pose a grave financial risk to the whole economy and that at the heart of these risks is the “Take-or-Pay” contracts which force Ghana to pay millions of US dollars every year for capacity we do not use. We support Government’s policy to renegotiate the deals to convert all Take-or-Pay contracts to Take-and-Pay contracts immediately. After a successful negotiation we expect to see a meaningful reduction in electricity tariffs.
In the meantime, we should take advantage of the excess generation capacity to extend electricity to every part of the country. Currently, over 5 million Ghanaians do not have access electricity. We cannot continue to pay for excess capacity when millions of Ghanaians are in darkness. We urge government to do whatever it takes and in the shortest possible time, to ensure that all Ghanaians enjoy the privilege offered by access to electricity.
Suspension of PDS
On 30th July, 2019, government announced the suspension of the Electricity Distribution License and Electricity Retail Sale License issued to PDS by the Energy Commission. ECG has been authorized by the Energy Commission to take over the distribution and retail of electricity.
We understand that government’s decision was based on allegations of fraud which relates to demand guarantees for Lease Assignment Agreement (LAA) and Bulk Supply Agreement (BSA) of the PDS concession.
Even though this is self-inflicted, we commend government for acting swiftly to protect a strategic national asset of a very high value when government had cause to suspect wrong doing in the acquisition of demand guarantees for the LAA and BSA. We expect government to expedite action on the investigations because if the impasse persists it could affect the efficient delivery of electricity.
A transaction of this nature, which affects such a sensitive sector, should have been treated with highest level of care and tact. The alleged failure of MiDA to verify and ascertain the authenticity of the guarantees submitted by PDS before handing over the assets and business of ECG to PDS will be shocking if it turns out to be true. The role of International Finance Corporation (IFC) of the World Bank, as a transaction advisor in this deal, needs to be properly appraised. The ownership of the consortium of domestic firms or individuals that are holding 51 percent share in PDS must also be examined properly. Ghanaians need to know all those who were responsible for this botched deal.
We wish to remind Government that these developments should not affect the rights of workers of PDS and ECG.
Meridian Port Services (MPS)
We urge government to extend these investigations into other Concessionaire Agreements particularly the Agreement between the Ghana Ports and Harbours Authority (GPHA) and Meridian Port Services (MPS). The MPS agreement is probably worse than the PDS agreement. Again, we note the dominant role played by the IFC of the World Bank in the MPS deal.
We think the MPS Terminal 3 concession agreement is not in the interest of Ghana and government must have the courage to review it. That agreement has the potential to collapse viable public companies such as Ghana Ports and Harbours Authority (GPHA), terminal operators, Inland Container Depots (ICDs), Ghana Dock Labour Company, stevedore companies and others. Ghana cannot afford to mortgage the most lucrative areas of the maritime industry in the hands of foreign companies. We, therefore, call on government to continue to act in the best interest of Ghana.
It is now clear that foreign companies have no superior advantage in the management of our assets and in the delivery of public services. We urge government to endeavour to keep public assets in public hands. In this regard, we are calling on government to review all plans to sell our Thermal Assets. These are strategic assets and so they should not be privatized.
Government has announced some initiatives to offer affordable housing to workers. The initiatives include the establishment of national mortgage and housing finance scheme, National Housing and Mortgage Fund, Ghana Housing Authority, rent-a-bed scheme for socially marginalized manual workers, mostly female porters in urban centres, and accelerated affordable housing scheme through the development of 600 acres of serviced plots near Dawa in the Greater Accra Region.
In the mid-year review, the Minister for Finance announced that the National Housing and Mortgage Scheme and the Affordable Housing and Real Estate Investment Trusts (REITs) have commenced and that funds have been released to three participating banks for the pilot phase of the project.
We commend government for these initiatives. However, we are worried about the unilateral approach government has adopted in the implementation of these laudable initiatives. It is instructive that in a period when Government has signed a landmark Social Partnership Agreement with Organised Labour and Ghana Employers’ Association, in which housing delivery is listed as one of the priority issues for the social partners, government alone could go as far as releasing funds for housing mortgage scheme without the involvement of its social partners. Previous housing initiatives have followed a similar top-down approach and they failed. Even the housing projects that were successfully completed, it turned out that the prices of the houses were beyond the pocket of the ordinary worker.
We do not think this is a good approach for delivering housing for workers. We suggest that the proposed housing schemes should be discussed before the Social Partnership Council before they are implemented. The Council can consider other ways of delivering affordable housing to workers including providing housing loans to workers to build their own houses at their preferred locations.
AFRICAN CONTINENTAL FREE TRADE AREA (AfCFTA)
Earlier this month, TUC hosted an international conference in Accra which was attended by 70 trade union leaders from Ghana, Nigeria, Kenya and South Africa. The African Continental Free Trade Area (AfCFTA) was on the agenda of the conference. The Conference observed that the AfCFTA has the potential to increase intra-African trade and investment, with positive implications for economic growth and employment creation. But the Conference drew attention to the risks associated with the AfCFTA which has to do with the potential for advanced countries, especially the European Union, to capture the African market through the existing trade agreements EU has with some African countries. The Conference, therefore advocated the adoption of tighter rules of origin to safeguard African markets for African products.
The Minister for Finance has assured us that Ghana is ready to host the AfCTA Secretariat and that Ghana is well positioned to take advantage of the Free Trade Area. We are ready to work with government and other stakeholders on the National Strategy and Action Plan to boost industrial production and exports to ensure that Ghana derives maximum benefits from the AfCFTA.
The macroeconomic performance in the last couple of years has been very encouraging. The continuous growth of the economy, the falling inflation and interest rates, the relatively stable exchange rate, the trade and current account surpluses are all good indications that a solid foundation is being built for further economic growth and prosperity.
We should now work together to ensure that the macroeconomic reflect sufficiently in the lives of all Ghanaians. We need to work together to bridge the gap between the rich and poor through the creation of decent jobs and provision of social services. We must also pay more attention to agriculture and manufacturing.
Government must implement practical measures to strengthen revenue generation. The focus should be on making the existing tax regime effective rather than imposing additional taxes. The tax exemption regime must be overhauled without any further delay.
The housing situation in the country requires urgent intervention. It is important that government involves its social partners in the new initiatives. A unilateral, top-down, and business-as-usual approach to delivering housing could seriously undermine trust in public interventions. We must work together to ensure that the housing schemes deliver houses that are truly affordable.
We expect that the Social Partnership Council will be allowed to participate in all major decisions that affect the economy including taxes, revenues, expenditure, employment, housing, energy, and wages. The TUC is prepared to work with government, employers and other stakeholders in these and other areas to achieve the President’s vision of Ghana Beyond Aid which also means Ghana without the International Monetary Fund (IMF).