Ghana plans VAT hike and debt swap to tackle worsening crisis

Accra — Ghana will freeze the hiring of public servants and extend a moratorium on government car purchases and non-essential travel in order to tackle a spiralling debt crisis, finance minister Ken Ofori-Atta said on Thursday.

Presenting the West African nation’s 2023 budget in parliament, Ofori-Atta said Ghana was at high risk of debt distress and has agreed on a debt management strategy with the International Monetary Fund (IMF).

Ofori-Atta did not offer any cuts to spending on flagship programmes, however, and detailed a range of wider infrastructure and social investment.

The minister is negotiating a relief package with the IMF as the cocoa, gold and oil-producing nation faces its worst economic crisis in a generation.

Investment bank Morgan Stanley said on Thursday that it expected Ghana to restructure both its domestic and external debt.

“The current debt sustainability analysis conducted reveals that Ghana is now considered to be in high risk of debt distress,” Ofori-Atta told MPs.

“The government and the IMF have agreed on programme objectives, a preliminary fiscal adjustment path, debt strategy and financing required for the programme,” he said, adding he hopes to reach a deal “very soon”.

He said the depreciation of the cedi was “seriously affecting” Ghana’s ability to manage its public debt, which has increased to $48.9bn this year.

Ghana will implement a debt exchange programme to address the challenges, he added.

“The good news is that all revenue measures are in line with what the IMF would have wanted,” said Razia Khan, chief economist for Africa and the Middle East at Standard Chartered.

“Now we await details of the debt exchange plan. So far — as favourable as might have been hoped.”

Ofori-Atta outlined a number of measures that will enable the government to cut expenditure and boost revenue including a 2.5 percentage point increase in VAT to 15%, a freeze on new tax waivers for foreign companies and a review of tax exemptions for free-zone, mining, oil and gas companies.

Despite the projected increase in revenue, Ofori-Atta said the fiscal budget would increase to 7.7% of GDP from 6.6% over the coming year.

The government will also ban the use of V8 and V6 engine vehicles and extend a 50% reduction on fuel allocations and a ban on non-essential travel.

“It has become even more urgent to mobilise domestic revenue especially in times like this when our access to the international capital market is largely closed,” he said.

Ghana’s economic growth is expected to slow to 3.7% in 2022 from 6.7% in 2021, and to 2.8% in 2023, he said.

Ofori-Atta has faced calls for his dismissal from both the ruling party and opposition who accuse him of economic mismanagement. Last week he apologised for the country’s economic hardship but defended himself against their claims.

Ghana will impose a debt limit on non-concessional financing among other reforms, and will focus on using monetary policy to control inflation, which has exceeded 40%, the minister said.

Reuters