Set realistic budgetary targets to ensure fiscal credibility – IFS tells govt

The Institute for Fiscal Studies (IFS) has told the government to set realistic budgetary targets to ensure fiscal credibility.

IFS explained that effective fiscal policy rests, among others, on credible budgets.

If a budget lacks credibility, the research think tank said, its policy intentions are less likely to be achieved. Where this is a chronic challenge, it is likely to reduce confidence in fiscal policy, undercutting its effectiveness. An essential feature of a credible budget is realistic revenue targets, since revenue is the cornerstone of any budget, it added.

In a report, IFS noted that the government of Ghana has a poor track record in this area.

Over the years, it recounted, budget statements have featured routine over-projection of revenues, which the IFS has consistently highlighted.

For instance, it said, actual total revenue and grants was below the budget target every year from 2013 to 2023, with an average deviation of -7.4%.

“With respect to the Public Expenditure and Accountability (PEFA) framework, which is a globally recognized standard for evaluating the performance of countries’ public financial management systems, Ghana’s annual revenue deviation was within the framework’s ideal range of -3% to 6% for only 2 out of the 11 years from 2013 to 2023. In fact, Ghana’s average revenue deviation of -7.4% is more than twice the lower limit of the range of -3%, implying undercollection of revenue below the threshold.”

IFS further cautioned the government not to look for the least opportunity to return to the international bond market.

It explained that since 2000, Ghana has suffered two debt crises. The first, the HIPC crisis in 2001, was caused by an excessive build-up of external debt during the 1980s and 90s. Ultimately, it took debt forgiveness under the HIPC Initiative to save the country from a complete meltdown.

The second crisis, which emerged in 2022, resulted from build-up of both external and domestic debts after HIPC, which accelerated in the past decade. However, its trigger was external, because it was precipitated by, as stated earlier, a loss of access to the international bond market in early 2022 after the country’s credit ratings had been downgraded to junk status. Furthermore, during the recent debt restructuring to tackle the crisis, negotiations over external debt were more complex and protracted than those over domestic debt.

“So, while the nation must avert a return to excessive debt build-ups of any form at all costs, past experience shows it is especially imperative to avoid sliding back into another foreign debt entanglement,” IFS said.

“The government should not therefore look for the least opportunity to return to the international bond market. To ensure this: The government should learn lessons from the past three years in which the country has carried on without borrowing from the international bond market. During this period, the government was compelled to pursue steps to ensure lower fiscal deficits. This stance should be maintained into the future, since low deficits imply low borrowing.

“Since the crisis moved the central bank to more vigorously seek non-debt-creating avenues to increase its international reserves (the Gold Purchase Program), this should teach the government a lesson that the nation’s natural resources can be leveraged for self-reliance.”

The post Set realistic budgetary targets to ensure fiscal credibility – IFS tells govt first appeared on 3News.

Read Full Story