Seth Terkper asks: Was FY2018 budget deficit higher at 4.4%, not 3.7%?

Paragraph 25 of the FY2019 Budget notes that the government was on course to meet its “fiscal deficit target of 4.5 percent for the year (3.7 percent in the rebased series)” and that “this will be the second consecutive year this Government has achieved its fiscal deficit target”.

We have been disputing this claim and remain skeptical—as in two previous articles where we disputed the use of “offsets” to neutralize part of Ghc7 billion arrears in the 2017 Budget.

Exceptional treatment of arrears

As shown in Table 1, MOF uses an unusual approach to project the deficit of 3.7 percent for FY2018, by adding Ghc2.2 billion “banking sector (bailout) costs” to “footnotes”. Given progress with the public financial management (PFM) reforms, these should be passed through the Accounts Payable module in GIFMIS, our electronic “book of record”. The footnote treatment has a similar effect as the “offset” of Ghc7 billion arrears in FY2016/2017.

Table 1: FY2019 Budget Extracts (Ghc million)

Budget Items (Ghc million)

2018 Budget Original

2018 Revised Budget (Mid-Yr)

2018 Projected Outturn

2018 Program Q1-Q3

2018      Prov        Q1-Q3

I. ABOVE THE LINE

   

 

   

Total Revenue & Grants

49,401

49,059

46,808

35,599

32,201

Total Expenditure

59,514

59,172

56,965

42,714

41,493

Overall Balance (Commitment)

(10,113)

(10,113)

(10,157)

(7,115)

(9,292)

     

 

   

II. BELOW THE LINE

   

 

   

Overall Balance (Commitment)

(10,113)

(10,113)

(10,157)

(7,115)

(9,292)

Net change in arrears  i/

(858)

(858)

(858)

(670)

(856)

Overall Balance (Cash)

(10,971)

(10,971)

(11,015)

(7,784)

(10,148)

Discrepancy   ii/

0

(0)

0

(0)

1,098

Overall balance (incl. Divestiture & Discrepancy)   iii/

(10,971)

(10,971)

(11,015)

(7,784)

(9,050)

Note (i) is arrears brought forward (b/f) plus accumulation less payments; (ii) is discrepancy while (iii) adds both.

Source: Appendix 2A: SUMMARY OF CENTRAL GOVT OPERATIONS (2018)

Since the discrepancy at end-Q3 of FY2018 is positive and unusual it makes the Overall Balance (cash basis) lower than the Overall balance (commitment basis), eliminates it the end-December 2018 provisional outturn, and increases the fiscal deficit.

 Table 2: Budget 2019 Memorandum [Footnote] Items (Appendix 2A)

 

 

III] Nominal Budget Items (Ghc mill.)

2018 Orig

2018 Rev

2018 Prov

2018 Prog

2018 Prov

Budget

Budget

Outturn

Q1-Q3

Q1-Q3

Overall Balance (cash, discrepancy)

(10,971)

(10,971)

(11,015)

(7,784)

(9,050)

Balancing item: Financial sector cost  iv/

0

(2,201)

(2,201)

(2,201)

0

Overall Balance (cash, discrepancy, and financial sector cost)

0

(13,172)

(13,217)

(9,985)

(9,050)

GDP Nominal (GDP)

   

 

   

Overall GDP

298,699

298,699

298,699

298,699

298,699

Non-oil GDP

285,921

285,921

285,921

285,921

285,921

 

            Table 2 (note iv) is a significant footnote since it shows it omits tje Ghc2.2 million from total arrears “below-the-line” in Table 1. This is exceptional since it should increase “net change” in arrears to Ghc3,060 million, overall balance (cash, discrepancy, and financial sector costs) to Ghc13,217 and the fiscal deficit of 3.7 percent to 4.4 percent of GDP.

 

Table 3: Budget or fiscal deficit (percent of GDP)

 

IV. BUDGET DEFICIT (% of GDP)

2018 Original

2018 Rev

2018 Prov

2018 Prog

2018 Prov

2018 Prov

a) Above the line (cash basis)

Budget

Budget

Outturn

Q1-Q3

Q1-Q3

Non-oil

Overall balance (commitment)

(3.4)

(3.4)

(3.4)

(2.4)

(3.1)

(3.6)

b) Below the line (cash plus arrears)

   

 

   

 

Overall balance (cash)

(3.7)

(3.7)

(3.7)

(2.6)

(3.4)

(3.9)

Overall balance (cash + discrepancy)

(3.7)

(3.7)

(3.7)

(2.6)

(3.0)

(3.9)

c) Footnote (overall plus financial cost)

   

 

   

 

Discrepancy

0.0

(0.0)

0.0

(0.0)

0.4

0.0

Overall balance (cash + discrepancy + financial cost)

0.0

(4.4)

(4.4)

(3.3)

(3.0)

(4.6)

 

Treatment of past exceptional arrears

 

The Gh2.2 billion is large bit its exceptional treatment offends the consistency rule or convention in financial and fiscal accounting. Some past examples buttress the point:

Single-spine salary scheme (SSSS) arrears: Between 2011 and 2014, the Mahama and Mills governments were saddled with huge SSSS arrears. After the Ho Forum, about Ghc4 billion, over 70 percent of tax revenues, were disclosed and paid over several years under the current IMF ECF Program.

Subsidy arrears: A recurring utility, petroleum and other subsidy arrears that resulted in liberalizing prices in 2015 were huge but added routinely to commitments by successive PNDC, NDC and NPP administrations. The alternative to budgetary allocation was 

passage of the Energy Sector Levy Act (ESLA) to clear the huge VRA and energy sector debt that weighed heavily on our banks.

Financial sector costs: Similarly, past arrears of foreign exchange losses and bailouts were added to arrears or public debt. Hence, the current “bailout” costs are fiscal and monetary policy choices that should not dilute our fiscal rules on arrears or public debt.                         

The inclusion of “bailout costs” in Appendix Tables (2019 Budget) to make material and unusual changes to our fiscal rules is new, from fiscal records available since FY2000. The unusual approaches started in the FY2017 Budget, presumably on the blind side of domestic and foreign fiscal oversight institutions.

 

Recap of FY 2016 “Offset” of Ghc 7 billion Arrears

 

The other breach of fiscal rules uses “offsets” to neutralize part of the Ghc7 billion “arrears” that the 2017 Budget (par. 7/8) stated as unpaid in FY2016. As Table 4 shows, this offset—and change in end-period “cut-off” rules discussed later—increased the deficit to 10.3 percent of GDP—about 6.4 % (without a setoff it would be 4.1%).

Table 4: Cash Accounting Portion of Fiscal Table

Budget Items (Ghc mill.)

FY2016 BUDGET

FY 2016 (2017 BUDGET)

Prov 2016

Budget 2017

Budget [Original]

Budget [Supplmt]

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