Government must gain control of the ballooning public-sector wage bill or risk endangering its economic transformation agenda, the International Monetary Fund (IMF) has warned.
The IMF said the wage bill rose by 47 percent in 2012, with many of the factors explaining the increase not yet quantified. In addition, deferred wage payments from the Single Spine salary reform were twice the level included in the supplementary budget. �A ballooning wage bill, if untamed, will bring debt to levels that could endanger Government�s transformation agenda,� said Christina Daseking, leader of a mission from the IMF that was in the country between April 2nd and 12th.
The implementation of the Single Spine Salary Policy led to a steep increase in the public wage bill, with Government spending 68 percent of tax revenue on public wages alone last year. After targetting wage expenditure of GH�5.6billion in 2012, Government ended up spending GH�8.5billion.
The growing wage bill, costly energy subsidies, and higher interest costs pushed the fiscal deficit to about 12 percent of GDP last year. The external current account deficit also widened to 12 percent of GDP. Ms. Daseking said despite Ghana�s strong economic potential, short-term stability risks have risen.
�Ghana�s strong democratic institutions and favourable prospects for oil and gas continue to attract significant foreign direct investment (FDI). Yet, low external buffers and a rising domestic debt ratio expose the economy to risks -such as weaker terms of trade, reduced capital inflows, or unanticipated spending needs,� she said.
She added that �energy sector problems could curtail growth, while excessive Government domestic borrowing is raising the cost of credit to the private sector�. The Fund said Government�s deficit target of 6 percent of GDP by 2015 will rather keep public debt high while the buffers remain low. It therefore recommended an additional fiscal adjustment of 3 percent of GDP, using a combination of revenue and expenditure measures. This will lessen the public debt-burden and raise official reserves toward the target of more than four months of imports -- up from 2.8 moths currently.
Government�s immediate priority, the Fund said, should be to rebuild buffers to safeguard stability. This will require lower budget deficits to contain external pressures, keep debt sustainable and allow a reduction in interest rates. �Successful economic transformation will require a realignment of spending away from wages and subsidies toward infrastructure investment,� it said.
The mission lauded the Bank of Ghana�s tight monetary policy despite the rise in actual inflation and inflation expectations, and the sharp increase in Government borrowing. It said to strengthen the signalling role of the policy rate within an inflation-targetting framework the gap with current markets rates must be narrowed.
�A successful fiscal consolidation will allow an easing of interest rates in due course, provided inflation expectation decline to levels consistent with the achievement of the target,� Ms. Daseking said.
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