SIKAKROM with Gideon DONKOR: Resetting for growth or repeating the past?: Ghana’s budget dilemma

For what has become a November ritual, the Minister of Finance has just presented the sophomore budget for his administration. Earlier in the year, his party assumed office with a decisive mandate, following widespread criticism of the prior administration’s economic management. In March, while presenting the maiden budget, the minister made clear the extent of fiscal problems left by the previous administration.

As the finance minister stood before parliament, he boldly declared “We are happy to note that our policies are yielding results that have brought back smiles to several Ghanaians who were almost at the point of despair not knowing where to turn to”. He cited strong macroeconomic performance: stable economy and exchange rates, reduced inflation, better credit rating, and increased international reserves. Ghanaians appeared to have much reason for optimism.

The economy’s problems appeared resolved within just seven months from his first budget speech, projecting a promising future. Mr. Ken Ofori-Atta, who introduced the “Putting Ghana to Work” budget on 15^th November 2017, will announce nearly five years later that Ghana could not pay its bonds.

Eight years have elapsed, bringing with them another November. On this occasion, Dr. Cassiel Ato Forson is taking his turn to present his budget, with the theme “Resetting for Growth, Jobs, and Economic Transformation.” Just like in 2017, we were once again informed that “through visionary leadership, fiscal discipline, and policy consistency, the tide has turned.

Ghana’s economy has now recovered, marked by renewed investor confidence and an improved macroeconomic outlook”. I am not attempting to be cynical, but I do feel cautious around those who believe the economy can change suddenly and be reformed quickly. What has truly impressed me is the Ghanaian public’s and media’s genuine involvement in analyzing the budget.

There has been extensive expert commentary and numerous discussion forums, evaluating the strengths and weaknesses of the budget. This engagement has moved beyond the typical partisan debate between the NDC and NPP, showing that the country is making significant progress in economic discourse about how its fiscal policies should be managed.

Given all that has been discussed, I doubt I’m offering any thoughts that haven’t already been expressed elsewhere. Since I’m neither an economist nor an expert in finance, my comments may not be especially insightful. Still, if you’re reading this far, you might simply be passing the time—perhaps waiting in a generic dentist’s office—and I appreciate your attention.

This analysis reviews three budgets introduced this year from the standpoint of domestic capital markets. After the government’s 2022 debt default, two main strategies were adopted: fiscal austerity (higher taxes and limited spending growth) and the Domestic Debt Exchange Program (DDEP), which cuts interest costs and delays debt payments until 2027. Treasury bills (T-bills) were exempted to maintain market access.

These emergency measures were put in place to allow for greater fiscal flexibility ahead of possible future increases in interest expenses. The use of short-term T-bills was intended to be temporary; however, by the end of 2025, T-bill maturities are projected to reach GH¢130 billion, up from GH¢24.2 billion in 2022.

This significant rise increases liquidity risks due to the need for frequent rollovers. Key questions arise: Are we leveraging the budget process to facilitate the extension of the short-term portfolio’s maturity profile? Will we be able to manage the increased debt servicing costs as DDEP bonds start to mature in 2027 and 2028? Finally, can we avert another credit event, or are current policies inadvertently laying the groundwork for future challenges?

In March, Dr. Ato Forson presented his first budget, criticizing the previous administration’s mismanagement. The main issue was 2024 expenditures reaching GH¢279.2 billion—over GH¢60 billion above the allocated GH¢219.7 billion—with GH¢65 billion still unpaid. He recommended “shock therapy” through significant spending cuts.

However, his 2025 budget outlined GH¢269.1 billion in spending and only GH¢13.9 billion for arrears repayment. While cash and accrual accounting differ, cash management is crucial during a credit crunch.

Although the minister claimed a GH¢10 billion spending reduction, I view this differently. It appears to me that the government, which had aimed to spend GH¢220 billion in the second year of its credit recovery, is now planning to increase spending to GH¢283 billion in the third year (29% increase).

Despite high spending and net tax reductions —which go against fiscal tightening—, little else stood out in the budget. The real question remains: How did the government meet its 2025 fiscal targets, and what lessons from this year inform the 2026 budget?

This year saw two major macroeconomic changes: Treasury yields dropped by over 1,700 basis points, and the cedi appreciated 35% against the US dollar. These shifts have strongly impacted this year’s budget and will affect next year as well.

On the spending side, both factors—especially the reduced interest rate—have led to a GH¢9.8 billion decrease in interest expenses over the first nine months of the year. Conversely, the stronger currency has significantly impacted revenues. The government has expressed considerable pride in the substantial appreciation of the cedi against major foreign currencies.

During the mid-year review, the minister stated, “this level of appreciation of the Ghana Cedi has never happened in the history of our nation.” Well, it has. A similar event occurred in February 1972 when the National Redemption Council announced a 42 percent revaluation of the cedi against the dollar.

It’s worth revisiting those events (spoiler alert: it did not end well). The strong currency has led to an GH¢8.0 billion revenue shortfall by Q3 and is expected widen to GH¢14.0 billion by year-end. While lower interest costs have so far offset the impact on spending, this may not hold next year.

While reduced T-bill rates can positively impact both the economy and government budgets, I have concerns about the methods employed to reach these lower rates. T-bills are issued through reverse auctions, with rates generally declining when investor demand surpasses the available supply.  One straightforward way to gauge investor interest is by looking at the bid-to-cover ratio.

This ratio is found by dividing the total bids received by the amount of T-bills available at an auction. Generally, a bid-to-cover ratio near 2 indicates strong demand from investors, which usually leads to lower rates. This year, half of all auctions have shown bid-to-cover ratios below 1, even as interest rates have dropped significantly. At present, T-bill rates are 10.7%, which stands in sharp contrast to the Bank of Ghana bill rates at 21%.

The government appears to be deliberately accepting lower bids to drive rates down, which explains this decline despite weak investor interest. Evidence of this approach includes a funding shortfall of GH¢23.12 billion by the third quarter, meaning the government didn’t secure that amount even though it was budgeted (Note, this is different from a revenue shortfall).

As a result, primary spending has been reduced by GH¢20.9 billion, with about half the cuts affecting infrastructure projects. If the government intended to lower T-bill rates by restricting supply, the initial budget should have shown GH¢25-30 billion less spending to accurately represent fiscal tightening.

In 2026, government spending is projected at GH¢325 billion, funded by GH¢268 billion in revenue and GH¢71.0 billion in domestic debt. Interest payments are expected to rise by GH¢6.0 billion from 2025, which may be insufficient given current debt levels. If all new debt is issued as Treasury bills, higher interest rates will likely be needed, making it probable that interest expenses could exceed targets by at least GH¢5.0 billion.

My projected revenue for 2025 is GH¢215.0 billion. If currency appreciation and a tighter monetary policy had been implemented from January 2025 rather than May, the annual revenue would have decreased to GH¢210.0 billion. Excluding the GH¢550.0 million e-levy from Q1 and deducting at least GH¢5.0 billion related to the COVID levy removal and VAT reform results in an adjusted base revenue for 2025 of approximately GH¢205.0 billion. Applying this formula:

yields an amount of GH¢238 billion. According to this estimate, a shortfall of GH¢31 billion is projected. Should interest expenses exceed the budgeted amount by GH¢5 billion, as previously outlined, the budgeted deficit may rise by an additional GH¢36 billion, potentially necessitating reductions in infrastructure and other expenditures.

Following the 2023 DDEP debt restructuring, the government has relied on short-term instruments for domestic funding over the past three years, with no additional bond market refinancing. Starting next year, it will likely need to regularly roll over more than GH¢200 billion, and some DDEP debts are scheduled for refinancing in 2027 (GH¢57.6 billion) and 2028 (GH¢52.5 billion).

Despite frequent undersubscribed auctions this year, defaults have been rare. It remains to be seen how much of these T-bills, if any, have been absorbed by the Bank of Ghana through open market operations.

A practical way to address the looming financing cliff would be to extend the maturities of at least GH¢100 billion in outstanding Treasury bills and focus on refinancing bonds that are set to mature in 2027 over the coming year. It is unclear if this strategy fits the 2026 budget, particularly with limited interest expenditure allocated.

There are two possible scenarios next year. Even if the government meets its revenue goals, it may still exceed budgeted interest costs, diverting resources from infrastructure. Opening the bond market would worsen this, reducing other spending further. If revenues fall short, displacement of expenditures will be greater, making it unlikely the government can refinance short-term bills and causing a major financing problem in 2027 as DDEP bonds mature.

In conclusion, it appears that the government aims to move past our debt challenges and prioritize fulfilling their manifesto commitments, such as infrastructure development. Unfortunately, escalating debt costs are threatening to crowd out future public spending. This has created tension, leading to optimistic assumptions about interest rates and revenue growth, even amidst challenges on both fronts. Budgets are often overly optimistic, relying on flawless execution and presuming we possess adequate institutional and human resources.

The funding and revenue shortfalls experienced this year are clear warnings that should not be overlooked. It may be necessary to reassess our entire fiscal framework to mitigate the risk of another credit or liquidity crisis. If refinancing strategies are not prioritized, there is an increased risk of financial challenges and potential defaults as existing debts reach maturity. Then again, what do I know?

Gideon Donkor, an avid reader, dog lover, foodie, closet sports genius but a non-financial expert

The post SIKAKROM with Gideon DONKOR: Resetting for growth or repeating the past?: Ghana’s budget dilemma appeared first on The Business & Financial Times.

Read Full Story