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The international rating agency, Fitch, forecasts a fiscal deficit of Gross Domestic Product of 10.5% for Ghana in 2020.
This will be more than double the 2019 pledge base deficit of 4.7 percent.
The government had reduced the pledge base deficit below 5.0% in 2017-2019, following the explosion of the 2016 election year.
The rating agency said cash deficits remained high as the government paid domestic arrears and realized the cost of contingent liabilities in the banking and energy sectors.
The cost of bank recapitalization added an estimated GHS18 billion (5.5% of 2020 GDP) to cash deficits during 2018-2020.
Arrears settlement in the energy sector also added 1.6% of GDP to the 2019 deficit and Fitch assumed it will add an additional 1.0% annually through 2023.
Electoral spending in deficit
Fitch predicted that the cash deficit will narrow to 7.1% of GDP in 2021 and 6.0% in 2022, but the lack of consolidation after the December 2020 presidential election is a key risk to its projections.
Those risks, he said, were illustrated by the Mid-Year Budget Review and the 2021-2024 Budget Preparation Guide, released in August 2020. Both indicate a very gradual path to deficit reduction after the fiscal expansion of 2020, but Fitch believes that only after the elections is there more clarity around the medium-term fiscal framework.
Fitch’s baseline fiscal scenario assumes that the government continues to under-execute its capital budget and that most of the COVID-related spending is removed from the budget by 2022, while revenues return to pre-2020 levels.
“Evidence that Ghana’s post-election fiscal strategy would lead to a higher public debt trajectory could be a source of downward pressure on the ratings. In addition, the election itself brings an additional risk in the form of extra-budgetary spending or accumulation of internal arrears, which has led to fiscal crises in previous electoral cycles, ”he said.
World Bank Fiscal Deficit Projection
The World Bank had previously projected a much smaller fiscal deficit of 7.2% of Gross Domestic Product for Ghana this year, lower than the government’s revised forecast of 12.2%, according to its Africa Pulse Report.
The government had previously projected a fiscal balance of -4.4% of GDP, but COVID-19 forced it to revise the target by a wider margin.
However, the recent rebound in economic activities, which is expected to generate some necessary revenue, may have led to this adjustment. However, the country’s fiscal deficit, that is, the deficit in income compared to spending, is expected to be second to South Africa in sub-Saharan Africa.
