Fiscal ‘offsets’ or ‘consolidation’ - Seth Terkper asks [Part 2]

BY: Seth Terkper


Introduction—a recapitulation

Part 1 uses a simple fiscal table to explain that the accelerated fiscal consolidation is being achieved through fiscal “offsets”, not actual payments, of arrears.

The payments may be taking place at a slower pace outside the fiscal framework. The “offsets” were explicit in 2016 but more subtle in FY2017 and 2018 by not showing the budget deficit line in the fiscal model, thus equating fiscal balance (commitment), not the fiscal balance (cash), with financing.

We cited figures given in public by government officials who acknowledge that MOF is owing over GH¢3 billion to SSNIT and an unspecified amount to NPRA to show that the provision for arrears in 2017-2019 are low and inadequate.

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This short-term scenario does not fit into the MTEF assumptions on arrears, which stand at GH¢30 million (2017), GH¢1.55 billion (2020 election year), and zero (0) in 2021 and 2022.

This part starts with a discussion of the unrealistic provisions made in the MTEF for settling liabilities in the near term.

It continues by reiterating the point that the “offsets” are not new and that they started in FY2016, with an alleged GH¢7 billion arrears “overrun” that the previous administration was supposed to have bequeathed.

Zero arrears in MTEF

The FY2020-22 MTEF provisions in the 2019 Budget raise the bar on “offsets” further, with ambitious nominal or paper fiscal consolidation targets that include zero arrears in 2021-22.

As shown in Table 1, another “first” for the administration, this implies that there will be no pipeline expenditures feeding the short-term definition of arrears from MDA/MMDAs. Alternatively, it implies that Ghana’s turnaround in domestic revenue mobilisation could change current revenue shortfalls to surpluses to clear current expenses and arrears in 2021-2022.  

Table 1: Budget and MTEF projections for arrears

Removing “offsets” from FY2016 fiscal data

The ensuing Tables 5 and 6 to repeat and show the origin of fiscal “offsets” from FY2016 (in the 2017 Budget), involving the so-called “arrears” of GH¢7.3 billion.

  • It shows an “offset” amount of GH5 billion arrears (Other Outstanding Claims—non-cash “liability”), awkwardly in the “cash” portion of the fiscal tables (line [c]).
  • Since this large amount stands alone, we presume that the GH¢3 billion or GH¢5.0 billion “arrears” forms part of the total GH¢51.1 billion [line [b].
  • A second crude “offsets” below-the-line (GH¢4,292.3m plus GH¢3m exactly equal to Ghc5,035.6m) appear as “positive” arrears that are usually “negative” [h] and [i].

Table 5: Reworked Fiscal Situation for 2016 as in 2017 Budget

Source: 2017 Budget, Fiscal Tables & own calculations

Hence, “net arrears” carried forward from 2016 to 2017 is only GH¢2.3 billion since the “offsets” instantly reduced the GH¢7.3 billion inflated fiscal deficits.

  • As we argued in the past, it is absurd that in a Budget that Parliament was yet to approve for implementation, the deficit/GDP ratios reduced sharply—fiscal deficit (commitment) of 10.5 or 7.9 percent (cash) in 2016 to 4.6 percent (commitment) or 6.5 percent (cash) in the 2017.
  • As Table 6 shows, if an amount of GH¢5 billion reduces the end-2016 “arrears”, then it should have resulted in a reduction of the deficit/GDP ratios to about 6.5 and 6.9 percent of GDP—and making the FY2017 targets of 4.6 percent (commitment) and 6.5 percent 9cash much “softer” than the authorities have been portraying.

The points in the article that attempt to show a true picture of the fiscal situation do not cover other controversial changes in the nation’s fiscal rules at end-2016. These include the use of the exchange rate of end-March 2017, instead of end-December 2016, to convert the foreign debt into local currency (cedis); and reversal of payments that were due in 2017 to add to 2016 arrears.

Table 6: Memorandum items [percent of GDP]

The premise for adjustment is that the fiscal “offset” of (a) GH¢7 billion arrears falls outside the definition of “arrears” and, (b) that of GH¢5,035 million is “standalone” because it is embedded in total expenditure of GH¢51,125 million to make the offset effective. Other vital observations from Tables 5 and 6, relating to 2016 and 2017, include:

  • the 2017 Budget reverted to “conventional” mode, with a higher overall balance (cash) than overall balance (commitment) but changed to include “offsets” in the Debt Report as well as 2018 and 2019 Budgets;
  • the fiscal “identities” show in the original 2017 Budget (Table 4, lines [e] and [f] as well as lines [m] and [n]; and
  • the provisional 2016 expenditure includes the reversal of legitimate FY2017 transactions to 2016, thus violating the “cut-off”, “holiday”, and “next working day” rules.

Taking into account the sharp fall in crude oil prices in 2015 and 2016 (election year) and consequent fall in revenues that drove some SSA countries into recession, the fiscal deficits of 6.3 percent (commitment) and 6.9 (cash) are reasonable (lines [o] and [p].

Without the “offsets” the GH¢7 billion “arrears” would have increased the fiscal targets for FY2017 and made the performance less impressive.


We must reclassify the 2016 “explicit offsets” that reduced GH¢7 billion “arrears” by GH¢5 billion in 2016 to give a better view of the fiscal balance. As explained in the 2017 Budget Guidelines and, as reproduced in the Auditor-General’s Report, it was a shift to semi-accrual accounting, with entries in the GIFMIS Accounts Payable Module, to gain firmer control of budget overruns.

The enactment of the Energy Sector Levies Act (ESLA) to take care of energy and road arrears makes the hiding of arrears unnecessary except it was to rationalise the ambitious electoral promises that made the fiscal outlook frightening to the authorities.

The structural move to accrual rules has suffered a major setback with a more subtle or “implicit offset” approach to “taking care” of arrears in 2017 and 2018. It gives an artificially good account of the fiscal and primary balances but is inconsistent with, and postpones, the fiscal pain that comes with liability and debt management. The sudden shift to low and zero (0) MTEF arrears provision from 2020 to 2022 will worsen the fiscal situation and likely lead to more efforts at manipulation, as we move forward with our “Ghana-exit IMF” and the era of “Beyond Aid” agenda.

In reversing course, we must follow the PFM reform approach of putting the arrears that have been put below radar in the multi-year GIFMIS “Contract Database” and Accounts Payable Module.

To complement this, we must shift to preparing the Budget and Public Accounts in line with “semi-accrual” rules under IPSAS standards.

The practice of “offsetting” arrears explicitly or subtly may win short-term applause but will ultimately force us into a painful “arrears” clearance or liquidation plan, as was the case with the subsidies and wage overruns under the Single Spine Pay Policy (SSPP).

The probable alternative to handling “hidden” arrears is to engage in “off-balance sheet” methods with third parties such as the recent hints about “factoring”—involving discounting or loss to suppliers and contractors.

The management of hidden arrears is made worse by high public expenditures based on unfunded political promises that have diverted the use of oil revenues from development projects into consumption.

The combination of high debt levels, also from the banking sector bailout, and depreciating currency, is not consistent with the fiscal consolidation.

The sharp reduction in budget and primary balances should have led to less borrowing and panic among non-resident investors that exited Ghanaian bonds late last year and early this year.

The fiscal situation described in the article is a pity, given the significant buffers that inform the true state of the end-2016 fiscal year.

These included oil and gas investments that guaranteed increased crude oil output from about 73,000 barrels per day (bpd) to about 180,000 bpd instantly upon take over in 2017; beefing up revenue as crude oil prices rose from sub-US$40 pbl to average US$65 pbl; ESLA revenues of about GH¢3 billion annually; Sinking Fund balances and three year inflows that should reduce the level of debt—including the US$500 million that was used to redeem a substantial part of the US$750 million debt on Ghana’s first sovereign bond; and budget buffers in the Stabilization, Heritage and Budget Funds.

The mandatory 2019 Mid-Year Review under the Public Financial Management Act (PFMA) must be used to make the necessary adjustments and plan for liquidating the arrears that keep accumulating under the yoke of explicit and subtle “offsets”.