On 29 July, Finance Minister Ken Ofori-Atta presented the mid-year budget review – an annual exercise mandated by law – in parliament. Unlike in previous years, Ofori-Atta did not introduce additional taxes to make up for a revenue shortfall incurred in H1, nor did he request a supplementary budget. While the government's promise to stay within the limits of the original targets is a positive sign, the outlook is naturally subject to a high degree of pandemic-induced uncertainty. Besides, the most important signposts ahead are linked to slow-burning pre-pandemic issues, most notably the settlement of energy sector legacy debt.
Similar to previous years, revenue remained 12.5% below projections, which Ofori-Atta blamed on subdued economic growth due to the pandemic. The shortfall was partly offset by lower-than-expected expenditure, mainly due to a reduction in the cost of borrowing (16% below projections). As capital expenditure overperformed (28% above target), government stimulus is likely to recede in H2, as Ofori-Atta promised to stay within the means of the original 2021 budget. Projections for H2 are underpinned by an all-year GDP growth projection of “at least” 5%, which is only marginally above the International Monetary Fund (IMF)'s latest 4.7% forecast. However, while the government clings to its 9.5% deficit target for 2021 and renewed its promise to abide by the 5% fiscal responsibility threshold again by 2024, the IMF arrives at a 13.9% deficit projection this year by adding arrears clearance and support for the financial and energy sectors.
How the government goes about settling legacy debt in the energy sector will indeed be a key risk to watch. As far back as 2019, the government had announced to renegotiate costly take-or-pay agreements signed by the previous government with Independent Power Producers (IPPs). The costs of unilaterally terminating such contracts became evident earlier this year, when the International Court of Arbitration awarded USD 164mn in costs and interests to an IPP whose contracted got canceled.
The government is currently renegotiating seven of 32 such agreements, which could reduce costs by 30% in 2022, according to the IMF. According to Ofori- Atta, these negotiations are in their final stages and are supposed to be concluded before the end of the year. In reaching a settlement, the Ghana Infrastructure Investment Fund (GIIF), a 100% government-owned investment vehicle, is set to play a prominent part and thereby add to the government- guaranteed debt load. According to Ofori-Atta, the GIIF “will be used as the vehicle to restructure and refinance expensive debt of the [IPPs] in the energy sector as well as take equity positions in some cases to help reduce the fiscal burden of overcapacity charges.” However, while such a settlement may ease the immediate cashflow burden, the finance minister remained silent on when a major electricity tariff review – current tariffs represent merely 73% of cost recovery levels – is due. Instead, tariff subsidies introduced to soften the pandemic's impact will partly continue.