Ghana to Narrow 12.1% Deficit With Tax, Fuel-Subsidy Cuts

Ghana will narrow its budget deficit this year by reducing fuel subsidies and earning more taxes from oil companies as crude production in the West African nation increases, Finance Minister Seth Terkper said.

“We will reduce the subsidies on fuel to free resources for the budget,” he told reporters in Accra, the capital, yesterday. “We are currently discussing the level by which we should cut them.”

Ghana’s fiscal gap widened to 12.1 percent of gross domestic product in 2012, almost double the government’s 6.7 percent target, the Bank of Ghana said on Feb. 13. Tax revenue was 3.7 percent lower than expected mainly because of fewer payments from oil producers as crude output targets were missed, according to the central bank.

The government has been curbing the deficit since 2008, when overspending during an election year widened the shortfall to 14.5 percent of GDP and sparked a sell-off in the currency. Ghana held a vote in December, with John Dramani Mahama winning the presidency and his ruling National Democratic Congress party retaining its majority in Parliament.

The cedi has gained 2.6 percent against the dollar in the past six months. It added 0.5 percent to 1.895 per dollar as of 1:40 p.m. in Accra, the biggest gain in more than two weeks.

Fuel subsidies will jump to 2.4 billion cedis ($1.3 billion) this year from about 1 billion cedis, the National Petroleum Authority said on Feb. 11. A liter of premium gasoline sells for 1.708 cedis, according to the NPA’s website. The rate has been held since February 2012, when it was cut by 2.7 percent.

Spending Restraint

The deficit may be reduced to 6.5 percent of GDP “as more restraint materializes on the expenditure side,” Samir Gadio, an emerging-markets strategist at Standard Bank Plc in London, said in an e-mailed response to questions today. More taxes from oil companies and subsidy cuts will help narrow the gap, he said. “We also expect a positive non-oil tax base performance.”

Higher production at the Jubilee oil field, operated by Tullow Oil Plc, and government savings from the subsidy reductions will boost state revenue and avert the need for an austerity budget, Terkper said.

“Some of the policies are not necessarily going to be painful,” he said. The 2013 plan will be presented later this month or early in March.

Jubilee output is currently at about 110,000 barrels of oil a day, Tullow Chief Executive Officer Aidan Heavey said on Jan. 11. Problems at the site which curbed production last year have been resolved, he said.

Salary Arrears

Almost all government employees have been moved onto a new salary plan that saw excess payments of 1.9 billion cedis last year, according to the Bank of Ghana.

“The salary arrears will be less” as the last workers are put on the plan, Terkper said.

“It is good that the government is signalling its intent to cut the budget deficit by proceeding with subsidy reforms as well as revenue raising measures,” Razia Khan, London-based head of Africa research at Standard Chartered Bank Plc said in an e-mailed comment today. “While this may not erode the entire budget deficit, it should go some way towards contributing to fiscal consolidation.”

Inflation Pressure

While cutting the fuel subsidies will offer room to narrow the deficit, Terkper said the policy will put pressure on inflation “because transport fares and food items will be impacted.”

Still, higher prices are not expected to drive up interest rates because the government will curb its use of local borrowing to finance the deficit, he said.

“Any borrowing we do this year from the domestic market will be for capital expenditure that is planned for, not for projects that have short funds or are not planned for.”

Ghanaian inflation was unchanged at 8.8 percent in January from the previous month, the Ghana Statistical Service said on Feb. 13. The central bank held its policy rate at 15 percent for a third time the same day, citing the higher-than-forecast deficit.

The gap last year was mainly financed with 7.1 billion cedis of domestic borrowing, which helped to push the benchmark 91-day Treasury-bill yield to 23.1 percent at the end of the year from 10.7 percent in December 2011, according to the Bank of Ghana.

“The debt-service element of spending is still substantial and will continue to play a disproportionate role in influencing public finances,” Khan said. “Measures to raise the revenue take from elsewhere are long overdue.”

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