The new Budget Responsibility Act (BRA), 2018 (Act 982) passed by Parliament is not original since it only reproduces and modifies Sections 12 to 18 (Macroeconomic and Fiscal Policies component) of the Public Financial Management Act (PFMA), 2016 (Act 921).
In fact, some of the BRA changes rather minimise the overall effectiveness or impact of the PFMA and Petroleum Revenue Management Act (PRMA), 2011 (Act 851). As noted later, the two substantive changes to Sections 12 to 18 below warrant a debatable amendment by Parliament but certainly not an entire law. These are
The first substantive BRA quantitative criterion focuses on the fiscal deficit and reinforces the sub-optimal stance in our annual budgets that define deficits as “fiscal anchor” for PFM practice in Ghana.
This is narrow and not helpful to a comprehensive coverage of fiscal management. It is only similar in substance to Bank of Ghana’s (BoG) equally narrow stance on “inflation targeting” in relation to monetary and financial policy. These MoF and BoG fiscal and monetary positions continue to minimise the wider breadth of macroeconomic policy objectives under the 1992 Constitution (Articles 36(1) and 183(2b). These explain why the PFMA has more fiscal indicators on fiscal sustainability.
The passage of the more comprehensive draft PFMA Regulations, in abeyance now for two years — despite the undertaking in paragraph 829 of the 2017 Budget — would have better served the nation’s fiscal policy, rules, and management. The BRA does not repeal the PFMA or PRMA but, particularly, makes explicit changes to PFMA Section 16. In general, as Tables one and two show, the BRA excludes and modifies major parts of Sections 2 to 18 without being specific on rational, relevance, and application.
Also, while the BRA Memorandum and Objectives to the Act (s1) mention fiscal and debt sustainability, as done in the PFMA (s16), they are explicitly excluded from the critical BRA sections on fiscal rules and indicators.
Object of BRL (s1)
The BRA’s fiscal responsibility rules are designed to (a) correct distorted incentives; (b) ensure fiscal discipline; (c) prevent fiscal slippages; and (d) improve fiscal and debt sustainability. The Act omits a key objective from the Bill presented to Parliament: achieving “a better match of revenues with expenditures, particularly in good times”. This statement is about buffers, which is not borne out by the investments in energy and, since 2017, visible signs of of recovery from the global economic crisis.
The global crisis since 2008 and, as intensified by emerging market crisis in 2015 that led to a BRIC meltdown, had a negative impact on Ghana’s economy. These resulted in low global demand and growth, as well as drastic fall in crude oil prices and the resultant domestic stress from falling commodity prices and misaligned policies (e.g., disruption in gas supply from Nigeria, subsidies and single spine).
In contrast, since 2017, Ghana has tripled and significantly increased its crude oil and gas output from further investments in three oil fields (not one, with “turret bearing” issues); and benefited from increases in crude oil price. The government also inherited fiscal buffers under PRMA and ESLA; and repairs to the damaged West Africa Gas Pipeline (WAGPL) as well as emergency power plants initiative that resolved the power crisis substantially.
Despite Ghana’s relatively good fortunes, an economic policy that focuses on consumption and relied on “offsets” instead of payment of arrears has led to sluggish non-oil real GDP growth, increased public debt, high levels of arrears, and unrealistic decline in fiscal deficit. Contrary to the fiscal benefits stricter budget responsibility practices, we have seen some depletion and relatively slow rebuilding of PRMA buffers as well as recession in a previously vibrant services sector.
PRMA (s12-18) omissions from BRA
Table one shows that the BRA excludes critical rules on fiscal policy that are embedded in the PFMA, such as Application to sub-national governments (s12); Principles of fiscal policy (s13), Cabinet oversight (s17), and mandatory submission of a Fiscal Strategy Document to Cabinet (s15) to operationalise the principles.
Table 1: Summary of PFMA Sections omitted from BRL
While these omissions are not summarised or specified in the BRA, presumably, they will continue to apply because they are not repealed. On the other hand, in relation to Section 16 and others, there is uncertainty where the BRA appears to modify the PFMA without being specific. Finally, the setting up of a Fiscal Advisory Council announced recently is administrative since there is no statutory backing in the BRA or through a PFMA amendment. .
Fiscal responsibility rules (s2) and modifications
The BRA states that “Despite the fiscal policy indicators stated in section 16 of the PRMA, the following numerical fiscal responsibility rules shall apply in the management of public finances: (a) the overall fiscal balance on cash basis for a particular year shall not exceed a deficit of five per cent of the gross domestic product (GDP) for that year; and (b) an annual positive primary balance shall be maintained”. Note that the second rule on primary balance is non-quantitative.
As Table two shows, these two rules minimise Section 14 of the PFMA since the BRA sets aside other critical measures relating to debt and fiscal sustainability. Particularly, despite its mention in the Objectives above, the BRA fiscal indicators do not include public debt, which is an explicit and important PFMA rule because of our pre- and post-HIPC excessive debt burden and current risk of debt distress.
Also excluded are indicators for wages, capital spending, and revenue. Furthermore, the BRA relaxes the PFMA’s fiscal sustainability goals by using only two indicators from Group one (not one) and changing to broader overall fiscal and primary balances (not a narrower non-oil balance) indicator as numerators.
Table 2: Comparison of PFMA and BRA on Fiscal Responsibility Indicators
The inclusion of oil in the base for some indicators makes the deficits pro-cyclical in relation to change in crude oil and other commodity output and prices: crude (i.e., PRMA flows); cocoa (i.e., export duty); and gold (i.e., corporate income tax). Also, the BRA excludes all PFMA Group two measures (instead of picking 2 out of 4, as required by the PFMA) and confines the rules to both of group one indicators (not one). However, both PFMA and BRA refer review of indicators every five years.
Finally, the BRA omits the PFMA edict (s15) that the “numerical rules” must take account of the petroleum law (PRMA) and any other relevant enactment. This is key since the PRMA is counter-cyclical and requires that the “good times” since the oil era should strengthen, not compromise the primary and secondary PRMA “buffers” such as the Stabilisation Fund (budget), GIIF/ABFA (investment), Sinking Fund (debt), Contingency Fund (emergency), and Heritage Fund (generation).
These buffers were set up between 2011 and 2014, at the onset of crude oil exports at high prices, before the precipitous fall in output and prices from 2015 to 2016. The benefits include releases to the budget (Stabilisation Fund), using US$500 million to retire the 2007 Sovereign Bond (Sinking Fund), investment by GIIF in Terminal Three, and funding the Contingency Fund since 1992.
It seems clear that we have not complied with the PRMA’s Section 12 to 18 rules completely. Despite the doubling of crude prices and three-fold increase in oil output in addition to gas since 2017, no allocations were made to GIIF from ABFA and repealed VAT, attempts made to dilute or deplete the Stabilisation and Heritage funds, and the emphasis on consumption policy threatens the ABFA’s capital spending and “sweeping” of the Sinking Fund.
Suspension of fiscal responsibility rules (s3)
Section three of the BRA reflects Section 18 of the PFMA, almost entirely and gives powers to the Minister to suspend the fiscal responsibility rules due to force majeure or unforeseen economic circumstances or both, including;
Under BRA Section 3(2) the Minister must be of the opinion that the reasons given above “would be unduly harmful to the fiscal, macroeconomic, or financial stability of the country”. Under section 3(3), within 30 days of the suspension, the Minister must present to Parliament for approval (a) facts and circumstances for the suspension of the rules; (b) plans for restoring the public finances of the country within a reasonable period after the unforeseen circumstances have elapsed; and (c) a quarterly breakdown of the revised deficit target for the year as part of the budget presented to Parliament.
While the BRA sections restate, almost verbatim, Section 18(1) of the PFMA, it varies the provision in the latter that the suspension of the rules should be with the prior approval of Cabinet—not just with the powers of the Minister. Secondly, the PRMA’s section 18 a(ii} rendition, compared to the BRA section 3(b) above, states: “an unanticipated severe economic shock, including commodity and oil price shocks”. The Bill presented to Parliament even adds cocoa and gold to crude oil. As noted earlier, the inclusion of crude oil price is in keeping with the counter-cyclical goal of the PFMA in minimizing the negative impact of any oscillation in prices, as happened between FY2011 and 2016.
Hence, the BRA should have extended the PFMA provision on crude oil to cover, for example, COCOBOD’s discretionary approach to investing in its Stabilisation Fund to protect the producer price paid to farmers. It should also have revisited the attempt made in the FY2014 Budget (par. 980) to impose a “windfall” tax to set up a buffer when gold and other mineral prices increase. This tax buffer measure was opposed by the current government, at the time it was in opposition anyway. The damage to the WAGPL in 2012 would also have qualified for force majeure exceptions and clarified the impact of the power crisis (“dumsor”) on the country’s fiscal situation better.
Finally, the “reasonable period” used in the suspension clause in BRA Section 3(3)b waters down PFMA Section 18(3), which notes: “The Minister shall state … a fiscal adjustment plan setting out the measures to return to a position of compliance with the fiscal rule or target within a period of not more than five years”. Further details of these changes are in the Appendix Table.
As stated earlier, the requirement to pass PFMA Regulations (Section 101), in abeyance for two years, to cover more comprehensive set of fiscal rules is a more credible alternative to enhancing our budget, public accounts, audit, and macro-fiscal environment.
Among others, the PFMA’s provision on Regulations (Section 101) covers rules for the public accounts, recording and controlling expenditure commitments, management of government assets and debt, audit committees, limits on borrowing by local governments, public corporations and SOEs, Treasury Single Accounts, evaluation of investment projects, and remittance of claims by the minister.
Unless the stance of BRA is to fulfill a political promise or meet some other obligation (reference IMF Program, Letter of Intent for 6 & 7th Review on the PFMA Regulations having been table in Parliament already), it would have been sufficient to focus on the Regulations since the entire fiscal responsibility rules in the BRA exist in the PFMA and in relatively better shape. Further, the exclusion of, and exceptions to, important PFMA provisions appear to give a “pass” to a government which, while in opposition, touted the need for stricter fiscal rules.
Since, compared to the PFMA, the passage of the BRA lacked public consultations and debate, while the exceptions made in the latter do not serve fiscal management well, at a time we should be harnessing our extra oil output and resources to improve public and private investment in the real sector to create more sustainable jobs.
The writer is the Minister of Finance