Go to content

4. Fiscal Management Challenges

World Bank (2017) and IMF (2017) both illustrate and stress how Ghana’s recent macroeconomic challenges can be traced to increases in public spending. Figure 2 illustrates how total public expenditures grew from 23 percent of GDP in 2010 to almost 30 percent in 2012, and only decreased slightly to 26 percent of GDP in 2016. Considering the growth rate of GDP in the period, this represents a risky and clearly unsustainable expansion of the public sector. Throughout, total revenues (including grants) remained below expenditures and were 15 percent of GDP in 2010 rising to 19 percent in 2015 only to decline to 17 percent in 2016. As a result, budget deficits have been persistent the last 10 years, annually in a range of 4 percent to 10 percent of GDP. As mentioned, significant political budget cycles have exacerbated the problem.

Public expenditures can be decomposed into four main components, as illustrated in Figure 3. Personnel spending covers salaries and social contributions to public employees. During the last 10 years a combination of increased public sector employment and higher salaries exerted a strong upward pressure on the wage bill. In 2013, the government shut down all non-essential hiring, resulting in a fairly rapid decrease in expenditures on salaries. (Social contributions continued to increase, though).

Figure 2: Fiscal revenue, expenditures and balance in percent of GDP, 2008-2016

Figure 2 Source: World Bank (2017).

Figure 3: Public spending components in percent of GDP, 2008-2016

Figure 3 Source: World Bank (2017).

The permanent budget deficit has induced government borrowing and this has resulted in a tripling of interest payments, such that from 2015 they have been the second largest expenditure component. The increase in interest payments was accompanied by a decline in capital expenditures from around 7 percent of GDP pre-graduation to less than 5 percent in 2015 and 2016. Such a rapid decline in government investments is likely to have significant consequences for the future development process.

Figure 4: Public revenue components as percent of GDP, 2008-2016

Figure 4 Source: World Bank (2017).

Turning to the public revenue components depicted in Figure 4, an implication of Ghana’s graduation into lower middle-income status is clearly visible from the decline in the ‘Foreign grants’ share of GDP. ‘Foreign grants’ went from an average of 17 percent of total government revenues in the period 2008-2012 to an average of 5 percent in the period 2013-2016. Despite the decline in foreign grants, Figures 2 and 4 illustrate that this has not had any detrimental impact on total public revenues as share of GDP, documenting that domestic revenues grew faster than GDP (see also Appendix Table 2). The increase in domestic revenue collection has come both from increasing tax revenues and non-tax revenues. However, a slight decrease in total revenue as share of GDP is observed in 2016 – an election year - which raises concern about whether the government is able to keep up this positive and necessary trend in revenue collection[12].

Even with improving domestic revenue collection, the large fiscal deficits, driven by the increasing expenditures, have added to significant increases in public debt over the last decade, even before talks about potential negative spillovers from graduation. This period of fiscal mismanagement has according to IMF (2017) and World Bank (2017) eroded the fiscal buffers created by grants and earlier given debt relief. Figure 5 illustrates the change in public and publicly guaranteed external debt stocks and debt service from 2004 onwards. The sharp drop in debt stocks and debt service from 2005 to 2006 was the outcome of the HIPC and MDRI initiatives. Since the completion of the initiatives, Ghana had a period of steady public debt service on external debt until 2012. Subsequently, both debt stocks and debt service increased rapidly. In 2016 the public and publicly guaranteed external debt stocks had more than doubled as a share of GDP compared to the years after the debt forgiveness. The debt service increased relatively more because a larger part of the external debt is now on market terms compared to the early 2000s. In addition, the external debt is serviced in foreign currencies increasing Ghana’s vulnerability to exchange-rate risks.

Figure 5: Public and publicly guaranteed external debt stocks and debt service, 2004-2016

Table 3 presents details about government deficit financing for 2014-2016. The first thing to note is the sharp increase in the amortization share, which has accompanied the increase in the use of domestic funding sources. The reason is the government’s issuance of sovereign bonds. Second, the government has also relied on central bank financing. This has resulted in spillovers to inflation, a weaker exchange rate, and even higher funding costs (IMF, 2017). Moreover, although private sector credit availability has significantly improved, the banking sector has experienced a sharp increase in non-performing loans. Realizing these challenges facing the government, the IMF in 2015 approved a three-year arrangement under the so-called Extended Credit Facility (ECF) of USD 918 million in support of the medium-term economic reform program.

Finally, it must be noted that Ghana is an oil producer and a projected increase in oil production is expected to increase public sector revenue in the near future. Specifically, both IMF (2017) and World Bank (2017) emphasize that oil revenues will peak in the coming years (2019-2023), which provides a window of opportunity if accompanied by improvements in fiscal management. However, the Government of Ghana should be aware that the oil sector will only bring temporary increases in public revenue.[13]

Table 3: Government Financing 2014-2016 (million Cedi)
  2014 % of
2015 % of
2016 % of
Financing need 10128 100 9772 100 8408 100
Foreign (net) 5936 59 4794 49 2237 27
Borrowing 8610 85 9427 96 7938 94
Project Loans 3838 38 3502 36 3324 40
Program Loans 108 1 818 8 1689 20
Sovereign Bond 4665 46 5107 52 2925 35
Amortization (due) -2674 -26 -4633 -47 -5701 -68
Domestic (net) 3965 39 5064 52 6406 76
Banking 1312 13 741 8 3052 36
Bank of Ghana 1312 13 0 0 1445 17
Comm. Banks 0 0 741 8 1606 19
Non-banks 3411 34 4323 44 3355 40
Other Domestic -757 -7 0 0 0 0
Other Financing -109 -1 -86 -1 -86 -1
Ghana Petroleum Funds 385 4 0 0 72 1
Sinking Fund 0 0 0 0 -110 -1
Contingency Fund -50 0 0 0 -112 -1

Source: Authors’ calculations based on annual accounts from the Ministry of Finance, Government of Ghana.

On balance, the current fiscal management challenges facing the Government of Ghana seem to be more related to fiscal mismanagement than the IDA graduation. However, graduation has led to an increase in debt service as well as a reduction in official development assistance and sectoral reallocations. This has increased the pressure for speeding up the implementation of fiscal expenditure and revenue reforms.

[12] Recently published figures for 2017 indicate that public revenues in 2017 were lower than programmed (IMF, 2018).

[13] The oil sector will generate an additional USD 23 billion in public revenue between 2016 and 2036, with a peak in 2023. Around 70 percent of oil revenue must finance public investment in priority sectors according to World Bank (2017).


This page forms part of the publication "Evaluation Study – Graduation and Development Finance in the SDG Era – A Case Study of Ghana, May 2018" as chapter 4 of 9.
Version no. 1.0, 2018-06-27
Publication may be found at the address http://www.netpublikationer.dk/um/evaluation_case_study_ghana_may_2018/index.html