House on behalf of the Hon Minister for Finance by the Hon Minister for Foreign Affairs and Regional Integration, Ms Hannah Serwaah Tetteh, on Thursday 9th July, 2015 while the Identity Agreement between the Government of the Republic of Ghana and the International Development Association (IDA) for a Policy-based Guarantee of four hundred million United states dollars ($400 million) in respect of the First Macroeconomic Stability for Competitiveness and Growth Develop- ment Policy Financing was presented by the Hon Minister for Finance, Mr Seth Emmanuel Terkper on Thursday, 9th July, 2015 in accordance with article 181 of the 1992 Constitution. Mr Speaker referred the request to the Finance Committee for consideration and report in accordance with Order 169 of the Standing Orders of the House.
The Committee was assisted at its deliberations by the Hon Minster for Finance, Mr. Seth Emmanuel Terkper and his deputy, Mr. Cassiel Ato Baah Forson, and officials from the Ministry of Finance.
The Committee appreciates the co- operation and assistance received from the Hon Minister, his deputy and officials during the deliberations.
The Committee referred to the following additional documents during its deliberations:
The 1992 Constitution of Ghana
The Standing Orders of the Parliament of Ghana
Loans Act 1970 (Act 335)
Ghana has over the past decade made phenomenal strides in economic growth with real GDP growth rising steadily from 3.7 per cent in 2000 to 8.9 per cent before decelerating slightly to 7.2 per cent in 2013.
Between 2011 and 2013, growth rates accelerated further averaging a remarkable 10.2 per cent per year with 2011 witnessing a record high GDP growth rate of 14.4 per cent. This success came on the back of a positive trend in terms of trade, large oil and gas discoveries, and commencement of oil production, substantial capital inflows, and a reputation for robust democratic institutions.
From 2013, however, the economy began to show signs of severe stress. Economic growth slowed from a previously high level, fiscal targets were missed despite significant measures to contain the deficit, exchange rate difficulties as a result to the cedi's depreciation, spike in inflation, energy rationing due to disruption in supply of gas from Nigeria, worsening terms of trade and the subsequent dwindling of international reserves.
Fiscal deficits and currency depreciation caused the debt profile to rapidly deteriorate and interest payments on the public debt jumped to over 6 per cent of GDP by 2014. The net public debt stock increased dramatically, rising from 38.7 per cent of GDP in 2011 to 52 per cent in 2013 and reaching 65 per cent in 2014. Overall inflation rose sharply, from 8.8 per cent in 2012 to 17 per cent in 2014, with non-food inflation increasing from 11.6 per cent to 23.9 per cent.
Government realising the severe impact of the crisis quickly developed a consolidated set of home grown polices to stem the further decline of the economy. These policies included revenue enhancing and fiscal consolidation measures which sought to broaden the tax base and thus spread the burden of national development on all citizens rather than the few who meet their tax obligations; and expenditure rationalisation policies which would help achieve the fiscal targets for the year.
While these measures helped government to substantially address the challenges, 2014 ended with a fiscal deficit of 10.8 per cent of GDP against a target of 9 per cent; mainly due to shortfall in tax revenue, continuous shortfall in grants from development partners and overrun in compensation or personal emoluments.
To stabilise the economy and reassure domestic and external investors of its commitment to prudent macroeconomic policies, in August of 2014, the government began engaging the IMF for support which was subsequently granted in April 2015. To further consolidate the progress being made, Government again requested support from IDA in a three - phase operation called Macroeconomic Stability for Competitiveness and Growth (MSCGI) Development Policy Financing
Justification of the Request
Fiscal year 2012-14 has seen the economy come under severe stress from both domestic and external shocks. Government has responded to these shocks by implementing a number of policies and measures to reverse the trend. Notwithstanding Government's pro- grammes aimed at strengthening fiscal consolidation, significant institutional, policy and systems and process weaknesses continue to manifest themselves, thus limiting the impact of reforms already implemented and leading the country into an unsuitable fiscal path.
Additionally, there is the need to make public expenditure more efficient and effective by continuing with the ongoing reforms in the Public Financial Management (PFM). This is to enhance the credibility of the budget which has hitherto been low and has adversely impacted service delivery efficiency in Government. This is an overarching problem mainly caused by institutional, behavioural and policy weaknesses. Until these weaknesses are addressed, efficient and effective fiscal consolidation will not be achieved.
Given our challenging financial situation, it is anticipated that debt, especially the Eurobond which may fall in 2017, might be serviceable. Hence a guarantee negotiated with the World Bank to refinance existing external and domestic debt, without increasing the total debt stock. The bond proceeds of US$1.0 billion would enable an early payback of the US$531 million sovereign bond due in 2017 with the remaining amount used for refinancing existing domestic debt.
Finally, the Macroeconomic Stability for Competitiveness and Growth (MSCGI) support the policies and programmes outlined in the Ghana Shared Growth Development Agenda (GSGDA) II for 2014-17 and the President's Co-ordinated Programme of Economic and Social
Policies, 2014-2020 -- An Agenda for Transformation.
Terms of the Facility
The terms of the credit facility are as follows:
Loan amount -- US$150 million
Repayment period -- 25 years
Grace period -- 5 years
Interest rate -- 1.25 per cent p.a. on the withdrawn credit balance
Maximum commitment charge -- 0.5 per cent of 1 per cent p.a. on unwithdrawn credit balance
Service charge -- 0.75 per cent of 1 per cent on withdrawn balance
Closing date -- June 2016
Grant Element -- 38.75 per cent
Organisation of the Operations
The proposed operation has been organised around two strategic pillars namely:
Pillar 1:Strengthen institutions for more predictable fiscal
Pillar 2: Enhance the productivity of public spending.
Pillar 1: Strengthen institutions for more predictable fiscal outcomes: This pillar will support reforms designed to increase the comprehensiveness of fiscal accounting, strengthen oversight of the budget allocation and expenditure processes, and ensure that annual budget and medium-term fiscal plans are credible and consistent with the Government's broader development strategy.
Pillar 2: Enhance the productivity of public spending: Pillar 2 will support reforms in Public Investment Management (PIM) and the governance of SOEs and their regulators to reduce technical and operational inefficiencies, improve the quality of public services, and enhance the economic impact of capital investment.
The Programme and the use of the Credit
The Committee noted that the MSCGI is the first in a series of three DPF operations which combine an IDA Credit of US$150 million and a Policy-based Guarantee (PBG) up to the equivalent of US$400 million to cover securities issuance of up to US$1.0 billion by the Government. The proposed operation, the Committee was informed, would build
upon the earlier initiatives of government and support its efforts to strengthen institutions for more predictable fiscal outcomes and enhance the productivity of public spending. Thus, the IDA Credit is intended to support efforts to consolidate ongoing fiscal stabilisation measures and support the policies outlined in the Ghana Shared Growth and Development Agenda (“GSGDA”) for
The Committee was further informed that the proceeds of the credit basically will be used to support the implementation of the 2015 Budget and Economic Policy of Government and contribute to the attainment of key macroeconomic targets outlined in the Budget. The targets were highlighted as follows:
i. Non-oil real GDP growth of 2.7 per cent.
ii. Overall real GDP (including oil) growth of 3.9 per cent.
iii. An end year inflation target of 11.5 per cent.
iv. Overall budget deficit equivalent to 6.5 per cent of GDP.
v. Gross international reserves of not less than 3 months of import cover of goods and services.
Financial Implication and Impact on Debt Stock
The Committee was informed that the credit facility is highly concessional with standard IDA terms given that the grant component of 38.78 per cent is higher than the country's minimum grant requirement of 35 per cent. Further, the facility, particularly the proposed PBG of up to US$400 million would support the government's strategy of refinancing
existing, external and domestic debts without increasing the total debt stock. Also the bond proceeds of US$1.0 billion would enable an early payback of the US$531 million sovereign bond due in 2017 with the remaining amount used for refinancing existing domestic debt.
The underlisted were outlined as the expected outcomes of the Credit Facility:
i. Improved control over the wage bill
ii. Better management of government subsidies and arrears
iii. Enhanced debt management capacity
iv. Stronger governance of SOEs
v. More effective public investment management
vi. Reinforcing social protection in a context of macroeconomic transition.
In addition, the PBG will enable Ghana to access longer-term refinancing resources at more attractive rates, extend the maturity of Ghana's debt and lower the interest cost of domestic debt repayments.
Conclusion and Recomemdation
The Committee, after a careful examination of the facility, recommends to the House to adopt its Report and approve by Resolution, the Request for approval of the Financing Agreement between the Government of the Republic of Ghana and the International Development Association (IDA) for an
amount of one hundred and six million, seven hundred thousand Special Drawing Rights [(SDR 106,700,000.00) (USD150.00 million equivalent)] to support the Macro- economic Stability for Competitiveness and Growth Development Policy Financing in accordance with article 181 of the 1992 Constitution, section 7 of the Loans Act, 1970 (Act 335) and Order 169 of the Standing Orders of the Parliament of Ghana and the Identity Agreement between the Government of the Republic of Ghana and the International Development Association (IDA) for a Policy-based Guarantee of four hundred million (US$400 million) in respect of the First Macroeconomic Stability for Competitiveness and Growth Development Policy Financing in accordance with article 181 of the 1992 Constitution, section 7 of the Loans Act, 1970 (Act 335) and Order 169 of the Standing Orders of the House.