Ghana will target a budget deficit of less than 9 percent of gross domestic product next year after rising government worker wages and falling gold prices made that goal unreachable in 2013, Finance Minister Seth Terkper said.
The gap will be 10 percent this year, before narrowing to below 9 percent in 2014, Terkper said by phone on Oct. 19. He declined to provide an exact number because the budget details haven’t been completed.
Fitch Ratings last week cut Ghana’s sovereign credit rating to B, five levels below investment grade, because public worker wages and a drop in revenue from gold will prevent the government from meeting budget goals after posting a 12.1 percent deficit last year. A 21 percent drop in the price of gold, Ghana’s biggest foreign-exchange earner, sapped government revenue and made it harder to meet the target. The country also exports cocoa and oil.
“Ghana is still credible,” Terkper said. “We have a second oil field coming up and are confident of our medium-term growth prospects. We will bounce back to even more improved ratings.”
The cedi strengthened as much as 0.6 percent before trading unchanged at 2.19 per dollar by 2:38 p.m. in Accra. Yields on the West African nation’s Eurobonds due August 2023 rose five basis points, or 0.05 percentage point, to 7.91, the first increase in six days.
Terkper’s targets are “making some price the yields higher,” Sampson Akligoh, head of research at Accra-based Databank Financial Services Ltd., said by phone. “This is the first time the government has admitted that savings on the removal of fuel and utility subsidies are not enough to cap the deficit due to the wage bill burden.”
While the government’s cutting of subsidies for fuel, water and electricity have reduced spending, it has been unable to adequately curb public salary increases, Fitch said. The wage bill accounts for about 70 percent of tax revenue. The rate of increases will slow next year after surging this year because of one-time payments, Terkper said.
“The current wage trajectory is not sustainable,” he said. “That is why we need a more moderate stance.”
The nation cut subsidies for utilities and fuel, introduced new taxes and will start selling more five- and seven-year bonds to lock in lower borrowing costs. A committee is reviewing salary increases, Terkper said. The debt to GDP ratio of 49 percent is within “sustainable limits,” he said.
The cedi, which has dropped 13 percent this year against the dollar, may weaken further to as much as 2.2 cedis, Angus Downie, head of economic research at Ecobank Transnational Inc, said in an e-mailed response to questions.
“The market is reacting to this worse than expected news,” he said.