Budget Responsibility Act not original; It weakens PFM and petroleum laws

BY: Seth Terkper
Seth Terkper
Seth Terkper

The new Budget Responsibility Act (BRA), 2018 (Act 982) passed by Parliament is not original, since it only reproduces and modifies Sections 12 to 18 (Macroeconomic and Fiscal Policies component) of the Public Financial Management Act (PFMA), 2016 (Act 921).

In fact, some of the BRA changes rather minimise the overall effectiveness or impact of the PFMA and Petroleum Revenue Management Act (PRMA), 2011 (Act 851).

As noted earlier, the two substantive changes to Sections 12 to 18 below warrant a debatable amendment by Parliament, but certainly not an entire law.

These are: (a) the only quantitative indicator (s2), a maximum of five per cent of budget deficit or fiscal balance to GDP (note: the positive primary balance indicator is non-quantitative); and  (b) where the Minister decides to suspend the fiscal rules (s3), he is obliged to report to Parliament, not Cabinet, within 30 days - although, unlike the PFMA, the BRA omits the prior approval of Cabinet in suspending the rules.

The first substantive BRA quantitative criterion focuses on the fiscal deficit and reinforces the sub-optimal stance in our annual budgets that define deficits as “fiscal anchor” for PFM practice in Ghana.

This is narrow and not helpful to a comprehensive coverage of fiscal management.

It is only similar in substance to BoG’s equally narrow stance on “inflation targeting” in relation to monetary and financial policy.

These MoF and BoG fiscal and monetary positions continue to minimise the wider breadth of macroeconomic policy objectives under the 1992 Constitution (Articles 36 (1) and 183(2b).  These  explain why the PFMA has more fiscal indicators on fiscal sustainability.

 The passage of the more comprehensive draft PFMA regulations, in abeyance now for two years - despite the undertaking in paragraph 829 of the 2017 Budget - would have better served the nation’s fiscal policy, rules, and management.

The BRA does not repeal the PFMA or PRMA but, particularly, makes explicit changes to PFMA Section 16.

 In general, as tables one and two show, the BRA excludes and modifies major parts of Sections  2 to 18 without being specific on rational, relevance and application.

Also, while the BRA Memorandum and Objectives to the Act (s1) mention fiscal and debt sustainability, as done in the PFMA (s16), they are explicitly excluded from the critical BRA sections on fiscal rules and indicators.  

Object of BRL (s1)

The BRA’s fiscal responsibility rules are designed to (a) correct distorted incentives; (b) ensure fiscal discipline; (c) prevent fiscal slippages; and  (d) improve fiscal and debt sustainability.

The Act omits a key objective from the bill presented to Parliament:  achieving “a better match of revenues with expenditures, particularly in good times”.

This statement is about buffers,  which is not born out by the investments in energy and, since 2017, visible signs of recovery from the global economic crisis.

The global crisis since 2008, and as intensified by emerging market crisis in 2015 that led to a BRIC meltdown, had a negative impact on Ghana’s economy.

 This resulted in low global demand and growth, as well as drastic fall in crude oil prices and the resultant domestic stress from falling commodity prices and misaligned policies (e.g., disruption in gas supply from Nigeria, subsidies and single spine).

In contrast, since 2017, Ghana has tripled and significantly increased its crude oil and gas output from further investments in three oil fields (not one, with “turret bearing” issues); and benefited from increases in crude oil price.  

The government also inherited fiscal buffers under PRMA and ESLA; and repairs to the damaged West Africa Gas Pipeline (WAGPL), as well as emergency power plants initiative that resolved the power crisis substantially.

Despite these good fortunes, an economic policy that focuses on consumption and relied on “offsets” instead of the payment of arrears has led to sluggish non-oil real GDP growth, increased public debt, high levels of arrears and unrealistic decline in fiscal deficit.

Contrary to the fiscal benefits stricter budget responsibility practices, we have seen some depletion and relatively slow rebuilding of PRMA buffers, as well as recession in a previously vibrant services sector.

PRMA (s12-18) omissions from BRA

Table one shows that the BRA excludes critical rules on fiscal policy that are embedded in the PFMA, such as application to sub-national governments (s12); Principles of fiscal policy (s13), Cabinet oversight (s17), and mandatory submission of a Fiscal Strategy Document to Cabinet (s15) to operationalise the principles.

While these omissions are not summarised or specified in the BRA, presumably, they will continue to apply because they are not repealed.  

On the other hand,  in relation to Section 16 and others, there is uncertainty where the BRA appears to modify the PFMA without being specific.

Finally, the setting up of a Fiscal Advisory Council announced recently is administrative since there is no statutory backing in the BRA or through a PFMA amendment.

The author former Finance Minister from 2013 to 2016
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