Donors have withheld direct budgetary support worth US$700million in the past two years in response to the government’s large spending overruns and the inability of some ministries to meet conditions for disbursement.
The situation has increased pressure on the government’s domestic revenues, which have to be supplemented by more borrowing to plug the hole created in the budget by suspension of the grants, said Minister of Finance Seth Terkper.
According to Finance Ministry data issued last week, government exceeded its borrowing target in 2013, adding GHc1.5billion more debt to its initially projected GHc 8 billion budget deficit.
“Part of the problem we are facing is that the development partners have not disbursed some grants – around US$700million in the past two years. Losing US$700 million over two years is not a small amount in the context of our budget,” said Mr. Terkper.
Ghana’s domestic budget has for decades been supported by donors – which include the World Bank, African Development Bank, the European Union and other foreign governments whose agencies fund a wide range of initiatives from infrastructure projects, technical assistance to state departments and programmes to tackle poverty and diseases.
But as the country became a middle-income economy, which many donors see as a kind of coming-of-age for nations happened to an extent to Ghana, the biggest factor accounting for donors holding back pledged assistance is the worsened fiscal situation since 2012 — characterised by hefty deficits and rising debt ratios.
One group of donors delayed the release of around US$200million in early 2013 after receiving “shocking news” of the government’s 2012 budget deficit. The funds continued to be withheld throughout the year because the donors were not convinced about measures to correct the situation.
Last year, only 35 percent of the expected Ghc 1.26 billion grants- from donors was received. The- practical impact of this is accentuated by the structure of government finance whereby domestic revenues are dedicated to pay salaries and interest, while grants help to shore-up capital expenditure.
The suspension of disbursement therefore strikes at the heart of the capital and development social intervention programmes are financed. In 2013, the capital budget registered a shortfall of GHc800million.
“Donors were not sure of the reforms that we were undertaking,” said the Finance Minister last week. “But part of it, also, is that some of the ministries were not meeting certain targets,” he added.
To give the donors further assurances, the Ministry of Finance invited them to participate in the International Monetary Fund (IMF)’s review of the economy last month – where, according to Mr. Terkper, all the parties concluded that government’s current efforts to restore macroeconomic stability surpass similar measures that were taken in the past, even when the country was under an IMF programme.
But that aside, the concessional-financing constraints of being middle- income are also real, Mr. Terkper said. “After we became a middle-income country we were notified that we can’t borrow for 40 years; we can borrow for up to 25 years. We also can’t borrow from IDA [the World Bank’s fund for the poorest nations]; we can borrow from IBRD, [the Bank’s fund for middle-income countries], which is a commercial window”.
Mr. Terkper also believes a certain misrepresentation of the country’s debt indicators may be unsettling donors.
In June 2013, the World Bank and IMF warned in a report that Ghana’s public debt situation had deteriorated since 2012, with the stock swelling from 42.5% of GDP to 51.4% in 2013.
But Mr. Terkper said the Bank, contrary to how it treats other countries, did not separate direct government borrowing from debt guaranteed by the state in arriving at that conclusion.
“When government guarantees a loan for a public institution such as the VRA or Ghana Gas, we don’t think it should be lumped together with the public debt; and we are in discussions with the .Bank over this issue. The Minister of Finance of Kenya raised the same concern at the last meetings of the Bank and the Fund in Washington, and we think it is not fair because that is not what they do with countries such as South Africa.”