Debt burden strains public spending

Ghana’s public coffers are caught in a troubling squeeze as mounting debt payments and rigid wage bills consume nearly every cedi the government collects in revenue, a new report by the World Bank has indicated.

This financial straitjacket has left the country struggling to invest in critical infrastructure, from aging power grids to much-needed roads. 

The numbers indicate that government spending has doubled since 2010, far outpacing economic growth. During this period, the country has been spending two to four times more on interest payments than comparable nations, reflecting an increasingly expensive addiction to borrowing that has alerted economic observers.

While public sector wages – consuming a third of all spending and 7% of GDP – align with regional standards, they represent Ghana's budget's single largest expenditure item. 

Combined with debt servicing, these fixed costs have created a rigid spending structure that leaves little room for developmental investments.

Ghana’s economy has been battling unsustainable debts, which have prompted the need to restructure both its domestic and external debts.

A domestic debt exchange programme saw the government swap old bonds worth over GH₵82 billion for 12 new ones at reduced coupon rates and longer tenors. The country has also concluded agreements with its bilateral creditors and Eurobond holders to restructure debts of $5.1 billion and $13 billion respectively.

Consequences 

The World Bank Report titled ‘Ghana’s Public Finance Review Report’, said the consequences of the country’s debt were becoming visible across the country. 

Power distribution networks are showing their age and the northern regions remain disconnected from economic opportunities due to inadequate road infrastructure. 

These gaps in basic infrastructure threaten to undermine Ghana's long-term economic prospects.

Election-year spending sprees were also cited as a major issue that has compounded the problem. 

The government's tendency to open the spending taps during political campaigns, coupled with unexpected costs in the financial and energy sectors, has created a pattern of fiscal volatility that makes long-term planning difficult.

The COVID-19 pandemic added another layer of stress to an already strained system. While the government's response to the health crisis was necessary, it further stretched the country's fiscal resources, pushing spending to unprecedented levels.

A particularly worrying trend emerges in capital expenditure, which has consistently fallen below both budgeted amounts and regional standards. 

While peer nations typically invest about 20% of their spending and 5% of GDP in infrastructure, Ghana manages only 16% and 3.5% respectively – a shortfall that threatens to hamper future growth.

Perhaps, most troubling is the disclosure that 70% of total expenditure between 2010 and 2023 was locked into just three categories: wages, interest payments and statutory fund transfers. 

This rigid allocation has severely limited the government's ability to respond to changing economic conditions or invest in development priorities.

Fiscal measures 

Speaking at the launch of the report, the World Bank Country Director for Ghana, Liberia and Sierra Leone, Robert Taliercio, called on the government to pursue fiscal measures that support economic growth and protect the poor and vulnerable in society.

He said as the government stayed on cause to stabilise the economy through fiscal consolidation and debt restructuring in the aftermath of the 2022 economic crisis, it was critical to ensure that fiscal adjustments were fair and efficient.

"It is crucial to protect pro-poor and pro-growth investment, while enhancing domestic revenue mobilisation. Additionally, Ghana must address the increasing fiscal liabilities stemming from the energy and cocoa sector," he stated.

Tax exemption 

The report further highlighted that Ghana's tax exemption system, while providing relief to various sectors, is eating away the nation's fiscal health to the tune of 3.9% of GDP, raising urgent questions about sustainability and reform. 

The report indicates that the cost comes primarily from exemptions on Value Added Tax (VAT), Personal Income Tax (PIT) and import duties, creating a complex web of financial concessions that may be doing more harm than good.

At the heart of this fiscal challenge lies the housing sector, where VAT exemptions on land and dwelling supplies alone account for a staggering third of all tax expenditures. 

This single category represents the largest drain on potential government revenue, highlighting the delicate balance between promoting housing accessibility and maintaining fiscal responsibility.

Despite the introduction of the Tax Exemptions Act in 2022, which aimed to streamline and clarify tax incentives, the system remains fragmented. 

Various pieces of legislation continue to introduce additional tax breaks, creating a web of exemptions that deviate from standard tax benchmarks and complicate administration.

The cocoa sector, long considered the backbone of Ghana's agricultural economy, benefits from one of the most significant tax breaks. 

PIT exemptions for cocoa farmers cost the government 0.42% of GDP in 2021, raising questions about whether such broad-based relief is the most effective way to support this crucial sector.

For context, the scale of these exemptions is remarkable – VAT exemptions alone in 2021 amounted to more than 72% of actual VAT revenue collected, while PIT exemptions represented 62% of PIT revenues. 

These figures suggest that Ghana is effectively foregoing nearly as much revenue as it collects in some categories.

Import duty exemptions, while smaller in absolute terms at 0.2% of GDP, reveal an interesting pattern. The majority of these exemptions were granted through parliamentary approval to specific taxpayers, suggesting a potentially problematic system of discretionary relief that could benefit from more standardisation.