Ghana Budget Gap Said to Exceed 2013 Target on Tax Shortfall

Ghana’s budget deficit last year was wider than the government originally forecast because of a decline in tax revenue and higher spending on wages, a Finance Ministry document shows.

The gap was 10.8 percent of gross domestic product, wider than the 10.2 percent estimate presented in the November budget, the document obtained by Bloomberg News showed. Minister of Finance Seth Terkper didn’t immediately answer a call or return a text message to his mobile phone seeking comment.

“The undershoot of tax revenues indicates the economy is in a cyclical slowdown phase,” Chris Becker, a Johannesburg-based strategist at ETM Analytics, said in an e-mail. “This means the government will have to raise even more debt funding to plug the deficit, which heightens upside interest rate risks from here. Another credit downgrade is certainly possible in 2014.”

West Africa’s largest economy after Nigeria is struggling to contain a government wage bill that consumes 70 percent of tax revenue as the price of gold, the country’s biggest export, dropped last year for the first time in more than a decade. The government removed fuel subsidies and raised utility prices last year in a bid to curb spending.

Credit Outlook

Ghana’s fiscal gap will probably remain above 10 percent for a third year in 2014, putting pressure on the nation’s rating, Moody’s Investors Service said in a note on Feb. 14. Fitch Ratings cut Ghana’s credit rating by one level to B, five below investment grade, in October.

“Any negative news out of Ghana is going to add pressure on any Ghana security traded out there,” Elvis Darku, head of fixed-income trading at the Ghana unit of Access Bank Plc, said by phone. The revised gap “shows that the risk on Ghana at the moment is very high, therefore investors are asking for more to compensate.”

Yields on Ghana’s dollar bond due August 2023 rose 3 basis points, or 0.03 percentage point, to a record 9.8 percent at 2:13 p.m. in Accra. The yields have increased 131 basis points this year.

The government missed its target of narrowing the gap to 9 percent last year after it ballooned to 12.1 percent in 2012 before elections. Soaring consumer prices have prevented the central bank from lowering borrowing costs to stimulate economic growth and boost tax revenue in the world’s second-largest producer of cocoa.

Borrowing Costs

The Bank of Ghana this month raised its key lending rate to a four-year high of 18 percent to stem the slide of the cedi and contain inflation. The economy expanded 0.3 percent in the third quarter, the slowest pace in almost seven years, as earnings from gold mining plunged and power outages hurt manufacturing. Inflation accelerated to 13.8 percent in January.

The cedi was unchanged at 2.53. The currency has plunged 6.1 percent against the dollar this year, making it the worst performer in Africa after Mozambique’s metical.

“It looks as if the Ghana economy is set for a hard landing,” ETM’s Becker said.

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