Building the Foundations for a Resilient and Equitable Fiscal Policy PUBLIC FINANCE REVIEW VOL. 2 / DETAILED ANALYSIS GHANA DECEMBER 2024 GHANA PUBLIC FINANCE REVIEW Building the Foundations for a Resilient and Equitable Fiscal Policy VOL. 2 / DETAILED ANALYSIS DECEMBER 2024 ii © 2024 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “World Bank. 2024. Ghana Public Finance Review: Building the Foundations for a Resilient and Equitable Fiscal Policy Volume 2 - Detailed Analysis. World Bank, Washington, DC.” All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202- 522-2625; e-mail: pubrights@worldbank.org. iii Acknowledgment The Ghana Public Finance Review was prepared at the request of the Ministry of Finance of Ghana, in close collaboration with various other line ministries, departments, and agencies. This review provides an in-depth analysis of the efficiency, equity, and impact of public revenue and expenditure, aimed at informing Ghana’s fiscal consolidation efforts as the country seeks to recover from successive and overlapping crises. The team extends its gratitude to the government and technical teams for their cooperation and collaboration. The report particularly benefited from exchanges with the authorities at different stages of its preparation. This Public Finance Review was prepared by a core World Bank team consisting of David Elmaleh (Senior Economist, Task Team Leader), Stefano Curto (Lead Economist and Program Leader, Co-Task Team Leader), Raymond Muhula (Lead Public Sector Specialist, Co-Task Team Leader), Tamoya Christie (Senior Economist, Co-Task Team Leader), Patrick Mullen (Human Development Program Leader), Anna Twum (Economist), and Kwabena Kwakye (Economist). Chapter 1 was prepared by Juan Pablo Paladino (Consultant) and David Elmaleh, with inputs from Juan Pradelli (Consultant), Fernando Blanco (Lead Economist), Paul Corral Rodas (Senior Economist), and Kwabena Kwakye. Chapter 2 was prepared by Elijah Gatuanjau Kimani (Economist) and Moses Misach Kajubi (Senior Public Sector Specialist), with inputs from Grzegorz Poniatowski (Consultant), Theo Braimah Awanzam (Consultant), and Paul Corral Rodas. Chapter 3 was prepared by Anna Twum, John Nana Darko Francois (Economist), and Francisco Vazquez Ahued (Consultant), with inputs from Kwabena Kwakye and David Elmaleh. Chapter 4 was prepared by Tatsuya Iwasaki (Public Sector Specialist) and Raymond Muhula, with inputs from Smile Kwawukume (Senior Public Sector Specialist) and Fabienne Mroczka (Senior Ghana Public Finance Review | Volume 2 / Detailed Analysis iv Public Sector Specialist). Chapter 5 was prepared by Muhammad Faisal Ali Baig (Public Sector Specialist) and Margherita Fornasari (Consultant). Chapter 6 was prepared by Patrick Mullen, Ali Hasan Ansari (Senior Economist), Eunice Yaa Brimfah Ackwerh (Senior Education Specialist), Ama Koma Blankson Anaman (Education Specialist), Owen Smith (Lead Economist), Enoch Oti Agyekum (Health Economist), Dorothee Chen (Senior Health Specialist), Elisha Ngetich (Health Economist), Christabel E. Dadzie (Senior Social Protection Specialist), Cornelia M. Tesliuc (Lead Economist), Cynthia Nimo Ampredu (Social Protection Specialist), and Leila Fall (United Nations Volunteer). Chapter 7 was prepared by Onasis Tharcisse Adetumi Guedegbe (Young Professional) and Ashwini Rekha Sebastian (Senior Agriculture Economist) with guidance from Abel Lufafa (Practice Manager, AGF). Overall guidance and comments were provided by Abebe Adugna (Regional Director), Sandeep Mahajan (Practice Manager, MTI), Tracey Marie Lane (Practice Manager, GOV), Robert Taliercio (Country Director), Michelle Keane (Manager, Operations), Aurelien Kruse (Lead Economist), Dhruva Sahai (Senior Energy Specialist, Program Leader), Carlos Leonardo Vicente (Lead Financial Sector Economist), and Maame Tabuah Ankoh (Senior Energy Specialist). Colleagues in Accra and Washington, DC, including Gregoria Dawson-Amoah (Senior Program Assistant), Irene Sitienei (Program Assistant), Pinar Baydar (Operations Analyst), Ifeoma Clementina Ikenye (Team Assistant), Elizabeth Naa Amoah Akushey (Senior Executive Assistant), Stephen Tettevi (Program Assistant), Juan Antonio Melendez Azcunaga (Operations Officer), and Kennedy Fosu (External Affairs Officer), facilitated the research process, coordinated mission travel, and supported the preparation and dissemination of the report at different stages. The report was edited by Marcello Arrigo, Erika Jorgensen, and Sophia Whyte-Givans. Vito Raimondi designed the report. The team thanks Florian Blum (Senior Economist), Jana Kunicova (Lead Public Sector Specialist), Maria Eugenia Bonilla-Chacin (Program Leader), and Timothy Williamson (Senior Public Sector Specialist) who acted as peer reviewers for this report. Ghana Public Finance Review | Volume 2 / Detailed Analysis v Contents Acknowledgment iii Abbreviations and Acronyms xv Executive Summary 1 1 Macroeconomic and Fiscal Context 14 1.1 Despite past successes, Ghana faces multiple challenges into the future 15 1.2 Before the COVID-19 shock, Ghana had experienced strong growth, but it was 18 marked by mounting macroeconomic imbalances 1.3 A prolonged and expensive fiscal response to COVID-19 and repeated global 23 shocks plunged Ghana into a full-fledged crisis in 2022 1.4 Ghana’s macro-fiscal outlook hinges on an ambitious fiscal consolidation and 30 significant debt relief 1.5 Key features of Ghana’s macroeconomic and fiscal policy 36 1.6 The right set of fiscal rules could help curb spending pro-cyclicality and 40 strengthen debt sustainability 1.7 Conclusions and policy orientations 44 2 Enhancing Domestic Revenue Mobilization for Fiscal Sustainability 46 2.1 Ghana’s recent revenue performance has been lackluster 47 2.2 Ghana’s PIT regime is in need of reform 56 2.3 The fiscal cost of tax expenditures calls for a rationalization effort 63 2.4 Recommendations for reform 70 3 Reviewing Public Expenditure Trends and Overall Efficiency 73 3.1 Public spending has been fast-growing, volatile, and burdened by interest 74 payments on debt Ghana Public Finance Review | Volume 2 / Detailed Analysis vi 3.2 Efficiency of public spending: lessons from the education and infrastructure 95 sectors 3.3 Conclusions and policy discussion 101 4 Improving Public Financial Management for Better Spending Results 104 4.1 Weaknesses in Ghana’s public financial management 105 4.2 Ongoing reform efforts aim to close PFM gaps 109 4.3 Ghana’s budget lacks credibility and transparency 111 4.4 Commitment controls and cash management need significant enhancements 116 4.5 Effective cash management requires full TSA implementation 117 4.6 More integrated IT infrastructure would strengthen PFM effectiveness 121 4.7 Policy recommendations for public financial management 124 5 Managing the Public Sector Wage Bill to Deliver Services to Citizens 128 5.1 The challenges of public sector employment and wages 129 5.2 Trends in the public sector wage bill 131 5.3 Wage bill planning and controls 135 5.4 Size and composition of the public sector 140 5.5 Wage competitiveness 144 5.6 Wage equity and incentives 147 5.7 Policy recommendations for public wage bill management 149 References 154 6 Enhancing Human Development Spending Efficiency for Service Delivery 156 6.1 Improving spending efficiency in education 157 6.2 Improving spending efficiency in health 163 6.3 Improving performance and impact of social protection 186 7 Spending Better for Agriculture in Ghana 204 7.1 Agriculture’s role in employment, output, and exports 205 7.2 Agricultural expenditure in Ghana: the need for more substantive and efficient 212 efforts References 232 Annexes 235 Ghana Public Finance Review | Volume 2 / Detailed Analysis vii Annex 1. Brief description of the Commitment to Equity (CEQ) approach 236 Annex 2. Estimating the fiscal cost of tax expenditures in Ghana - data and 237 methodology Annex 3. Methodology for expenditure efficiency analysis 239 Annex 4. Guiding framework for wage bill diagnostics 244 Annex 5. Additional agriculture sector data 246 Annex 6. Methodology for estimating the expanded value added in agriculture 249 List of Figures Figure E.1. Poverty rates, Ghana and Sub-Saharan Africa (SSA) (using US$3.65, 2017 3 purchasing power parity [PPP]), 1990–2023 Figure E.2. Central government gross debt (% GDP), 2000–2023 3 Figure E.3. Tax revenue collection and country income (% of GDP and GDP per capita), 4 Ghana and various countries, 2020 Figure E.4. Government expenditures by economic category (% GDP), 2010–2023 6 Figure E.5. Wage bill, Ghana and comparator groups (% GDP), 2000–2020 8 Figure E.6. Economic composition of central government agricultural expenditures (% of 11 total), 2019–2022 Figure 1.1. Ghana and SSA poverty rate (US$3.65, 2017 PPP) 16 Figure 1.2. SSA: poverty headcount rate for 2023 (lower-middle-income poverty line, 16 US$3.65, 2017 PPP) Figure 1.3. GDP per capita (PPP 2017, international dollar) – Ghana vs. SSA 19 Figure 1.4. Production - Total petroleum and other liquids (Million b/d) 20 Figure 1.5. Exports - Crude oil including lease condensate (Million b/d) 20 Figure 1.6. Overall and primary balance - commitment basis (% GDP) 21 Figure 1.7. Real GDP growth (%) 21 Figure 1.8. Central government - gross debt (% GDP) 22 Figure 1.9. Central government - interest payments (% GDP) 22 Figure 1.10. Balance of payments (% GDP) 23 Figure 1.11. Financial account components (% GDP) 23 Figure 1.12. Central government - overall and primary balance - commitment (% GDP) 25 Figure 1.13. Central government - energy subsidies and transfers (% GDP) 26 Figure 1.14. Central government - gross debt (% GDP) 27 Ghana Public Finance Review | Volume 2 / Detailed Analysis viii Figure 1.15. Evolutions of sovereign spreads (basis points) 28 Figure 1.16. Domestic financing - BoG (% GDP) 28 Figure 1.17. Current account deficit (% GDP) 29 Figure 1.18. Balance of payments (% GDP) 29 Figure 1.19. Real GDP (%) 31 Figure 1.20. Inflation - end of period (%) 31 Figure 1.21. Ghana’s present value fiscal multipliers estimates 32 Figure 1.22. Overall and primary deficit - commitment (%) 32 Figure 1.23. Primary expenditure and interest payments (% GDP) 33 Figure 1.24. Gross public debt (% GDP), 2015–2028 33 Figure 1.25. Overall fiscal pro-cyclicality, 2014–2022 38 Figure 1.26. Concentration curves for taxes, Ghana 2023 (items below the 45° line are 40 progressive) Figure 1.27. Concentration curves for transfers, Ghana 2023 (items above the 45° line are 40 progressive) Figure 1.28. Central government - overall and primary balance (% GDP) 41 Figure 2.1. Planned vs. actual revenue (% GDP) 48 Figure 2.2. Tax revenue (% GDP) 49 Figure 2.3. Tax revenue by type (% GDP) 49 Figure 2.4. Benchmarking Ghana’s tax revenue performance against countries with 50 similar levels of GDP per capita and trade Figure 2.5. Benchmarking Ghana’s statutory VAT rate against comparators (% GDP) 51 Figure 2.6. Benchmarking excise revenue performance against comparators (% GDP) 53 Figure 2.7. Excise revenue-to-GDP ratios across SSA 53 Figure 2.8. Gap between actual and potential excise duty revenues in Ghana 53 Figure 2.9. CIT productivity (%) and revenue uptake (% GDP) 54 Figure 2.10. Ghana’s actual CIT collection versus potential, 2000–2020 55 Figure 2.11. PIT revenues among Ghana and comparators, 2008–2019 56 Figure 2.12. Ghana’s actual PIT collection versus potential, 2000–2020 56 Figure 2.13. Ghana PIT buoyancy and PIT rate 57 Figure 2.14. PIT income brackets and marginal rates 58 Figure 2.15. Cost of VAT expenditure, 2021 (% GDP) 65 Figure 2.16. Cost of PIT expenditure, 2021 (% GDP) 66 Figure 2.17. Cost of import duty expenditures, 2022 (% GDP) 67 Figure 2.18. Distributional impact of removing VAT food exemption 68 Figure 2.19. Distributional impact of removing PIT exemption on incomes from cocoa 69 farming Figure 3.1. GDP growth vs. expenditure growth (2000–2023) 75 Figure 3.2. Cyclicality of fiscal policy (2000–2021) 75 Ghana Public Finance Review | Volume 2 / Detailed Analysis ix Figure 3.3. Evolution of budget rigidity in Ghana 76 Figure 3.4. Ghana’s budget rigidity vs. comparators 76 Figure 3.5. Overall expenditures as a share of GDP, 2010–2021 (% GDP) 77 Figure 3.6. Expenditures by economic category, 2010–2021 (%) 77 Figure 3.7. Government spending by economic category, 2010 –2023, (GHS, billions; 78 constant, 2010) Figure 3.8. Expenditure as a share of GDP, 2010–2023 78 Figure 3.9. Contributions to growth, 2010–2023 (%) 78 Figure 3.10. Public sector wage bill as percentage of GDP, 2010–2023 79 Figure 3.11. Public sector wage bill as percentage of total expenditures, 2010–2023 79 Figure 3.12. Wage bill spending, budgeted vs. actual (% GDP) 80 Figure 3.13. Spending on wages against comparators (% GDP) 80 Figure 3.14. Spending on interest payments (% GDP), 2010–2023 81 Figure 3.15. Spending on interest payments (share of total expenditures), 2010–2023 81 Figure 3.16. Interest payment overruns, budgeted vs actual spending (% GDP) 82 Figure 3.17. Spending on interest payments against comparators (% GDP) 82 Figure 3.18. Spending on statutory funds (% GDP) 83 Figure 3.19. Capital expenditures (% GDP) 84 Figure 3.20. Capital expenditures (share of total expenditures) 84 Figure 3.21. Capital expenditure overruns, budgeted vs. actual spending (% GDP) 85 Figure 3.22. Capital expenditures against comparators (% GDP) 85 Figure 3.23. Capital spending by functional classification, 2016–2021, (percent of total 86 capex) Figure 3.24. Major capital expenditure items, 2016–2021 (percent of total capex) 86 Figure 3.25. Capex breakdown classified under GPS 86 Figure 3.26. Infrastructure spending as a share of GDP (selected years) 87 Figure 3.27. Breakdown of primary expenditure spending by functional category (GHS, 89 billions) Figure 3.28. Contribution to primary expenditure growth by functional category 89 Figure 3.29. Ghana’s expenditures against international benchmarks 89 Figure 3.30. Expenditure overruns in election years (% GDP) 91 Figure 3.31. Financial sector cleanup costs (GHS, billions; share of GDP) 92 Figure 3.32. ESLA transfers (share of GDP) 93 Figure 3.33. ESLA utilization, 2021 93 Figure 3.34. Breakdown of COVID-19 spending (share of GDP) 94 Figure 3.35. Efficiency frontier: primary school enrollment 96 Figure 3.36. Efficiency frontier: secondary schooleEnrollment 96 Figure 3.37. Efficiency in public spending (outcome: secondary school enrollment) 97 Ghana Public Finance Review | Volume 2 / Detailed Analysis x Figure 3.38. Efficiency in public spending (outcome: level of education) 97 Figure 3.39. Gains from fully efficient spending 98 Figure 3.40. Gains from partial improvement in spending efficiency 98 Figure 3.41. Gains from fully efficient spending 98 Figure 3.42. Gains from partial improvement in spending efficiency 98 Figure 3.43. Efficiency frontier: quality of overall Infrastructure 99 Figure 3.44. Efficiency frontier: quality of electricity supply 99 Figure 3.45. Efficiency in public spending (outcome: quality of electricity supply) 99 Figure 3.46. Gains from fully efficient spending 100 Figure 3.47. Gains from partial improvement in spending efficiency 100 Figure 3.48. Gains from fully efficient spending 100 Figure 3.49. Gains from partial improvement in spending efficiency 100 Figure 4.1. Snapshot of Ghana’s PFM reform journey since the 1990s 107 Figure 4.2. Pillars and strategic objectives of Ghana’s PFM Strategy (2022–2026) 109 Figure 4.3. Total expenditure (GHS, millions) 111 Figure 4.4. Total revenue and grants (GHS, millions) 111 Figure 4.5. Central government capital expenditure (GHS, millions) 118 Figure 4.6. Central government expenditure on goods and services (GHS, millions) 118 Figure 4.7. PFM cycle and IT systems 122 Figure 5.1. Wage bill (% GDP), 2000–2020 132 Figure 5.2. Wage bill (percent of revenues and expenditures), 2000–2020 132 Figure 5.3. Cross-national wage bill indicator (% GDP), 2020 133 Figure 5.4. Cross-national trend in wage bill (% GDP), 2000–2020 133 Figure 5.5. Wage bill (percent of government revenue), 2020 134 Figure 5.6. Impulse response function (IRF) showing evolution of fiscal deficit after wage 135 bill spending shock equivalent to one standard deviation Figure 5.7. Percentage change in nominal wage bill, 2015–2020 135 Figure 5.8. Growth in the public sector workforce and emoluments 138 Figure 5.9. Wage growth and structural transformation of wages 138 Figure 5.10. Public sector workers’ compensation 139 Figure 5.11. Allowances (as a share of total compensation) by geographical region 139 Figure 5.12. Number of civil servants in Ghana, by region 140 Figure 5.13. Public sector employment as a share of salaried employment 141 Figure 5.14. Public sector employment as a share of total, salaried, and formal 141 employment Figure 5.15. Public sector employment, by occupational group 142 Figure 5.16. Public sector employment, by industry 142 Figure 5.17. Individuals with tertiary education (% of total) 143 Ghana Public Finance Review | Volume 2 / Detailed Analysis xi Figure 5.18. Share of tertiary educated workers across country groups 143 Figure 5.19. Women as a share of public workers over GDP per capita 144 Figure 5.20. Women as a share of public sector workers, by industry 144 Figure 5.21. Public sector wage premium relative to private sector, percentage 145 Figure 5.22. Public sector wage premium, relative to private sector 146 Figure 5.23. Public sector wage premium, compared to private sector 146 Figure 5.24. Public sector wage premium by gender, percentage 147 Figure 5.25. Public sector wage premium by occupational group, percentage 147 Figure 5.26. Government employees on national wage distribution, by quintile 148 Figure 5.27. Relative wage of 90th percentile to 10th percentile of wage earners 148 Figure 5.28. Relative wages of women to men 149 Figure 5.29. Wage premium/penalty for women relative to men, by subsector 149 Figure 6.1. Major education reforms in Ghana over the past 30 years 156 Figure 6.2. GER at the basic level 159 Figure 6.3. NER at the basic level 159 Figure 6.4. Share of public education expenditure by level, 2021 160 Figure 6.5. Education expenditure relative to various aggregates 163 Figure 6.6. Annual education expenditure growth vs. annual average inflation 163 Figure 6.7. Public spending on education in nominal and real terms 163 Figure 6.8. Ghana capitation grant, real growth scenarios 163 Figure 6.9. Composition of recurrent expenditures on education 164 Figure 6.10. Education budget execution rates 164 Figure 6.11. Sectoral education expenditure by category, 2021 165 Figure 6.12. Sectoral education expenditure by category, 2020 165 Figure 6.13. Comparative public spending per primary student in LMICs, structural peers, 166 and aspirational countries Figure 6.14. Comparative public spending per secondary student in LMICs, structural 166 peers, and aspirational countries Figure 6.15. Incidence of public spending in Ghana relative to the bottom 2 wealth 167 quintiles and the educational attainment of fathers and mothers, respectively Figure 6.16. NEA P4 assessment results 170 Figure 6.17. NEA P6 assessment results 170 Figure 6.18. Government health spending in real and nominal terms, 2015 to 2024 173 Figure 6.19. Domestic government health expenditure as a % of GDP vs. GDP per capita 174 Figure 6.20. Composition of public health spending: MoH vs. NHIS 175 Figure 6.21. Economic composition of the MoH budget 176 Figure 6.22. NHIS expenditures in real and nominal terms, 2015–2024 177 Figure 6.23. Sources of NHIA financing 179 Ghana Public Finance Review | Volume 2 / Detailed Analysis xii Figure 6.24. Average annual OOP of members as a % of non-members, by decile 181 Figure 6.25. Composition of internally generated funds (IGFs) for primary and secondary 181 facilities Figure 6.26. Composition of IGFs for tertiary facilities 181 Figure 6.27. Under-5 child mortality and stunting relative to GDP per capita 182 Figure 6.28. Prevalence of under-5 mortality and under-5 stunting in Ghana, 1993–2021 183 Figure 6.29. Beneficiaries benefitting from various social programs 192 Figure 6.30. Expenditure as a percent of GDP and overall government spending, by social 195 program Figure 6.31. Estimated effects on poverty, of increases in value of LEAP benefits 197 Figure 6.32. Distribution of program beneficiaries, by poverty status 198 Figure 6.33. Distribution of program benefits, by poverty status 199 Figure 7.1. Sectoral shares of GDP and employment in Ghana, 2010–2021 207 Figure 7.2. Output and GDP multipliers for various primary and agro-processing 208 subsectors, 2019 Figure 7.3. Performance of agricultural exports and imports, 2012–2021 209 Figure 7.4. Average share of agricultural trade for the top 10 agricultural products 210 exported vs. the top 10 agricultural products imported Figure 7.5. Growth of agriculture relative to GDP growth, 2021–2021 211 Figure 7.6. COCOBOD’s revenues, costs, and net gains - actual and projected 213 Figure 7.7. Composition of COCOBOD’s costs 214 Figure 7.8. Composition of COCOBOD’s revenues 214 Figure 7.9. Real central government agricultural expenditures - value and share of total 216 expenditures, 2019–2022 Figure 7.10. Ghana's comparative performance relative to African peers in reaching the 217 Maputo target, 2019–2021 averages Figure 7.11. AOI scores, average 2012–2021 218 Figure 7.12. Agricultural spending as a share of both GDP and agricultural value added, 219 2019–2022 Figure 7.13. Execution rates for MoFA’s projects, 2017–2021 221 Figure 7.14. Distribution of agricultural expenditures by institution and function - average 222 2019–2022 Figure 7.15. Funding sources for central government’s agricultural expenditures 223 Figure 7.16. Economic composition of central government agricultural expenditures, 224 2019–2022 Figure 7.17. Composition of MoFA’s expenditures, 2019–2022 225 Figure A3.1. Expenditure efficiency and first primary component analysis of PEFA detail 243 indicators Figure A4.1. Key definitions 245 Ghana Public Finance Review | Volume 2 / Detailed Analysis xiii List of Tables Table 1.1. Ghana - selected macroeconomic indicators, 2000–2022 21 Table 1.2. Poverty and inequality using different income concepts 39 Table 2.1. Special VAT treatment among sectors and peers 52 Table 2.2. Withholding tax rates on various types of investment income 60 Table 2.3. TEs in Ghana by tax instrument, 2021 63 Table 2.4. Tax benchmarks constructed for TE analysis, by tax instrument 64 Table 2.5. Recommended tax revenue reforms 71 Table 3.1. Ghana: Public infrastructure spending as a share of government spending, 87 2016–2021 Table 3.2. Recommended public expenditure policy reforms 103 Table 4.1. Ghana’s PEFA scores, 2006–2018 108 Table 4.2. Largest positive and negative differentials between allocation and indicative 112 ceiling, by MDA (2023 budget; GHS, millions) Table 4.3. Disclosure status of MDA-specific documents 114 Table 4.4. Payment status of P2P processed on GIFMIS in 2022 (as of May 2024; GHS, 119 millions) Table 4.5. Ghana’s PFM cycle relies on a plethora of separate IT systems 121 Table 4.6. IT systems lack interoperability and hinder institutional collaboration 123 Table 4.7. Detailed recommendations for PFM 126 Table 5.1. Measures to achieve more cost-effective wage bill management 152 Table 6.1. Trends in education spending by subsector, 2014–2020 (GHS, millions, 161 constant) Table 6.2. Measures to achieve policy priorities for the education sector 172 Table 6.3. Measures to Achieve Policy Priorities for Health Sector Financing 186 Table 6.4. Effectiveness at reducing poverty and inequality varies significantly across 200 programs Table 6.5. Measures to achieve policy priorities for more effective social protection 202 Table 7.1. Cocoa, maize, and cassava account for half of the area harvested (average, 206 2017–2021) Table 7.2. Central and local governments’ expenditures on agriculture (GHS, millions) - 220 2019–2022 Table 7.3. Measures to achieve policy priorities for agricultural sector sustainability 231 Table A3.1. Input-oriented education scores 239 Table A3.2. Output oriented education scores 240 Table A3.3. Capital spending input efficiency 241 Table A3.4. Capital spending output efficiency 242 Ghana Public Finance Review | Volume 2 / Detailed Analysis xiv List of Boxes Box 1.1. Transfers to the energy and financial sectors have posed persistent fiscal risks 26 Box 1.2. Ghana’s debt restructuring operation 34 Box 1.3. Building institutions for fiscal discipline - the case of Jamaica 43 Box 2.1. Retirement contributions: Comparative tax treatment in 59 selected countries Box 2.2 Sustainably improving DRM - Lessons learned from successful country 70 experiences Box 3.1. New insights into expenditures: The BOOST Budget Analysis Tool 76 Box 3.2. Breakdown of capex under GPS 86 Box 3.3. Ghana’s spending on human development and social sectors falls short of 89 international benchmarks Box 4.1. Selected GoG commitments under the Open Government Partnership 110 Box 4.2. PBB implementation in Ghana remains a work in progress 115 Box 4.3. Cash management and commitment controls - what works? 119 Box 4.4. Estonia’s journey over the past three decades showcases how technology can 123 strengthen the PFM cycle to improve trust in government and enhance accountability Box 5.1. Ghana’s public sector is an important source of employment for women 143 Box 5.2. Evolution and labor market impact of public sector wage policy in Ghana 145 Box 6.1. The Education Strategic Plan 2018–2030 158 Box 6.2. Impacts of inflation and debt servicing on education spending 163 Box 6.3. Financial protection and equity: Past achievements at risk 180 Ghana Public Finance Review | Volume 2 / Detailed Analysis xv Abbreviations and Acronyms ABB Application Programming Interface ECF Extended Credit Facility Activity-Based Budget ECG Electricity Company of Ghana AfDB African Development Bank EMDE Emerging Market and Developing Economies AHIES Annual Household Income and Expenditure Survey EmONC Emergency Obstetric and Newborn Care AMIS Audit Management Information System ESLA Energy Sector Levy Act AOI Agriculture Orientation Index ESRP Energy Sector Recovery Program API Application Programming Interface EPOC Economic Programme Oversight Committee BoG Bank of Ghana FCUBE Free, Compulsory, Universal Basic CABRI Collaborative Africa Budget Reform Education Initiative FDH Free Disposable Hull CAGD Controller and Accountant General’s Department FRA Fiscal Responsibility Act CAPEX Capital Expenditure FWSC Fair Wages and Salaries Commission CB Citizens Budget GAS Ghana Audit Service CEQ Commitment to Equity GDP Gross Domestic Product CIT Corporate Income Tax GER Gross Enrollment Rate CLASS Complementary Livelihood Asset Support Scheme GES Ghana Education Service CoA Chart of Accounts GETFund Ghana Education Trust Fund COCOBOD Ghana Cocoa Board Gh-DCMIS Ghana Development Cooperation Management Information System CPIA Country Policy and Institutional Assessment GHANEPS Ghana Electronic Procurement System CSDS-II Second Cocoa Sector Development Strategy GhIPSS Ghana Interbank Payment and Settlement System CSO Civil Society Organization GIFMIS Ghana Integrated Financial DACF District Assembly Common Fund Management Information System DDDP District Development Data Platform GIID Ghana Integrated Infrastructure DDEP Domestic Debt Exchange Program Database DEA Data Envelope Analysis GIPC Ghana Investment Promotion Centre DEA-B DEA Bootstrap GITMIS Ghana Integrated Tax Management DRG Diagnostic-related Group and Information System DRM Domestic Revenue Mobilization GLSS Ghana Living Standard Survey DSA Debt Sustainability Analysis GNHR Ghana National Household Registry Ghana Public Finance Review | Volume 2 / Detailed Analysis xvi GNI Gross National Income MDAs Ministries, Departments, and Agencies GNPC Ghana National Petroleum Corporation MLGDRD Ministry of Local Government, Decentralization, and Rural GoG Government of Ghana Development GPE Global Partnership for Education MLNR Ministry of Land and Natural GRA Ghana Revenue Authority Resources GSFP Ghana School Feeding Program MMDAs Metropolitan, Municipal, and District Assemblies GUSS Ghana Universal Salary Structure MoE Ministry of Education HCI Human Capital Index MoF Ministry of Finance HIPC Heavily Indebted Poor Countries MoFA Ministry of Food and Agriculture HR Human Resource MoFAD Ministry of Fisheries and HRMIS Human Resource Management Aquaculture Development Information System MOGCSP Ministry of Gender, Children, and IBP Integrated Bank of Projects Social Protection ICT Information and Communication MoH Ministry of Health Technology MTEF Medium-Term Expenditure IFMIS Integrated Financial Management Framework Information System MTRS Medium-Term Revenue Strategy IFS International Financial Statistics (IMF) NaMEIS National Monitoring and Evaluation Information System IGF Internally Generated Fund NDPC National Development Planning IMF International Monetary Fund Commission IPP Independent Power Producer NEA National Education Assessment IPPD Integrated Personnel Payroll NER Net Enrollment Rate Database NHIA National Health Insurance Authority IPSAS International Public Sector Accounting Standards NHIF National Health Insurance Fund IRF Impulse Response Function NHIL National Health Insurance Levy IT Information Technology NHIS National Health Insurance Scheme JHS Junior High School NIB National Investment Bank LAYS Learning-Adjusted Years of NITA National Information Technology Schooling Agency LEAP Livelihood Empowerment Against NSPP National Social Protection Policy Poverty OCC Official Creditor Committee LIC-DSF Low-Income Country Debt OECD Organization for Economic Co- Sustainability Framework operation and Development LID Living Income Differential OOP Out-Of-Pocket LIPW Labor-Intensive Public Works P2P Procurement-to-Payment LMIC Lower-Middle-Income Country PAYE Pay-As-You-Earn M&E Monitoring and Evaluation PBB Program-Based Budgeting Ghana Public Finance Review | Volume 2 / Detailed Analysis xvii PC-PEG Post COVID-19 Program for TVET Technical and Vocational Economic Growth Education and Training PEFA Public Expenditure and Financial UNU-Wider United Nations University - Accountability World Institute for Development PFJ Planting for Food and Jobs Economics Research PFM Public Financial Management VAR Vector Autoregression PIB Prices and Incomes Board VAT Value-Added Tax PIM Public Investment Management VFRS VAT Flat Rate Scheme PIP Public Investment Plans WDI World Development Indicators PIT Personal Income Tax WEO World Economic Outlook PPP Purchasing Power Parity WHO World Health Organization PSC Public Services Commission WWBI Worldwide Bureaucracy PTR Pupils-to-Teacher Ratio Indicators PURC Power Utilities Regulatory Commission PV Present Value PWD Persons with Disability R&D Research and Development ReSAKSS Regional Strategic Analysis and Knowledge Support System SDG Sustainable Development Goal SFA Stochastic Frontier Analysis SHS Senior High School SOE State-owned Enterprise SSNIT Social Security and National Insurance Trust SSA Sub-Saharan Africa SSPP Single Spine Pay Policy SSSS Single-Spine Salary Structure ST/MTAP Short and Medium-Term PFM Action Plan STEM Science, Technology, Engineering, and Mathematics TADAT Tax Administration Diagnostic Assessment Tool TE Tax Expenditure TSA Treasury Single Account Credits: World Bank xviii Summary Executive Ghana Public Finance Review | Building the Foundations for a Resilient and Equitable Fiscal Policy 1 Ghana Public Finance Review | Volume 2 / Detailed Analysis 2 Ghana’s rapid gross domestic product (GDP) growth, fueled by debt accumulation, fostered past progress on poverty reduction but left it highly vulnerable to global shocks such as COVID-19. Ghana’s development path, although registering past successes, faces a series of current and future public finance challenges. Ghana succeeded in halving its poverty rate between 1991 and 2016, but recent global crises have reversed progress (Figure E.1). Ghana needs to provide more and better jobs and foster inclusive productivity growth, especially through investments in human capital. At the same time, the country’s growth path is increasingly vulnerable to climate change and climate-related shocks. Tackling these challenges will require fiscal policy to promote macroeconomic stability, create the right incentives, and generate the necessary public investments. Starting in 2009, Ghana experienced a growth acceleration driven by oil production, leading to a buildup of significant macroeconomic imbalances and debt accumulation. Between 2008 and 2019, Ghana’s economy grew at an average rate of 6.8 percent per year, outpacing both regional and global growth rates. While this rapid expansion brought significant increases in per capita income, continued progress on poverty reduction, and improvements in social indicators, it was largely fueled by budget overruns and external borrowing. The fiscal deficit, which averaged 4 percent of GDP between 2008 and 2019, was more than double the average of the preceding decade. Despite benefiting from debt relief through the Highly Indebted Poor Countries (HIPC) initiative in the early 2000s, Ghana’s debt began to rise again in the decade to 2019, driven by fast-rising external commercial debt (notably Eurobonds). By 2019, public debt had reached 60 percent of GDP (Figure E.2). Executive Summary 3 Ghana’s achievements in poverty reduction have recently faced Following HIPC debt relief (2002–04), Ghana’s debt burden rose setbacks again as the oil boom began and skyrocketed after the COVID-19 shock Figure E.1. Poverty rates, Ghana and Sub-Saharan Africa (SSA) (using Figure E.2. Central government gross debt (% GDP), 2000–2023 US$3.65, 2017 purchasing power parity [PPP]), 1990–2023 100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Source: World Bank. (2023). Poverty and Inequality Platform for Source: International Monetary Fund (IMF) World Economic Outlook Global poverty lineup numbers. Macro Poverty Outlook (Annual (WEO), 2000–2019; Debt Sustainability Analysis (DSA), 2020–2023. meetings 2023). Note: 2023 public debt presents a post-domestic debt restructuring/ pre-external debt restructuring scenario. The lack of fiscal discipline was marked by weak budgetary institutions, high fiscal liabilities from the financial and energy sectors, and insufficient revenue collection. Public spending surged, with total expenditures averaging 19 percent of GDP during 2008–2019. Ineffective spending controls, frequent budget overruns (notably on the wage bill), and inadequate procurement practices contributed to increasing deficits. Fiscal pressures were intensified by an expensive cleanup of the financial sector (costing the equivalent of 8.3 percent of cumulative GDP for 2017 to 2021) and ongoing losses in the energy sector (costing the government an annual average 1.7 percent of GDP since 2019). The fiscal situation was further weakened by declining tax revenue, as collection from most major taxes declined. A prolonged and expensive fiscal response to COVID-19 and repeated global shocks plunged Ghana into a full-fledged crisis in 2022, from which it is now emerging. Entering the pandemic with already unsustainable deficits, Ghana’s strong fiscal response caused deficits to soar to unprecedented levels, and public debt skyrocketed to 93 percent of GDP by the end of 2022. In 2023, Ghana entered a three-year Extended Credit Facility (ECF) arrangement with the IMF and initiated decisive fiscal consolidation measures and comprehensive debt restructuring. The path to fiscal sustainability will Ghana Public Finance Review | Volume 2 / Detailed Analysis 4 require policy makers to adopt long-term fiscal reforms, such as reintroduction of fiscal rules to limit pro-cyclical spending and creation of safeguards against future crises. Strengthening the independence of fiscal institutions, such as the fiscal council, will be crucial in maintaining discipline. With recent revenue performance lagging, stronger domestic revenue mobilization (DRM) can create fiscal space, especially tackling the fiscal cost of tax expenditures (TEs). Ghana’s DRM has been a persistent challenge, with declining revenues contributing to the country’s fiscal woes. Between 2017 and 2021, Ghana’s revenue-to-GDP ratio fell from 15.7 percent to 13.0 percent, significantly below the average for SSA and for comparator countries (Figure E.3). Most notably, revenues from income taxes and value-added tax (VAT) saw a marked decline during this period as a share of GDP, and VAT collections remained well below benchmarks. This underperformance is particularly concerning, given that Ghana’s estimated tax capacity stands at 21.2 percent of GDP, meaning that the country is under-collecting by more than eight percentage points relative to its potential. Ghana’s tax collection performance falls slightly short of comparators although not for all taxes Figure E.3. Tax revenue collection and country income (% of GDP and GDP per capita), Ghana and various countries, 2020 Source: World Bank Revenue Dashboard. Ghana’s tax system suffers from excessive complexity and a proliferation of exemptions which foster noncompliance and erode the tax base. Personal income taxes (PIT) account for just 15 percent of total tax revenue in Ghana, significantly below the SSA average of 18 percent. The system is highly reliant on payroll taxes, but fewer than 25 percent of eligible Ghanaians pay payroll taxes. The system’s progressive rate structure is undermined by Ghana Public Finance Review | Volume 2 / Detailed Analysis 5 numerous exemptions, particularly for retirement funds and social security contributions. VAT, once a major contributor to Ghana’s revenue, has seen a steep decline. Between 2015 and 2021, the share of VAT in total tax revenue fell from 34 percent to 17 percent, partly due to a reduction in the standard VAT rate in 2018, which was reversed in 2023. Additionally, a large portion of domestic consumption remains VAT-exempt, including essential goods such as agricultural products, water, and electricity. Excise taxes (mostly petroleum taxes) provide about 17 percent of revenues and also suffer from low compliance. By contrast, Ghana’s corporate income tax (CIT) performance has improved over the past decade and contributed over 21 percent of revenue in 2021. However, the statutory CIT rate of 25 percent is lower than in key structural peers, while a complex regime of 22 reduced CIT rates complicates the administration of taxes, lowers the effective tax rate, and fosters a misallocation of resources as businesses engage in aggressive tax planning. The high fiscal cost of tax exemptions underscores the need for better oversight and rationalization of TEs. In 2021, tax exemptions were estimated to have cost Ghana 3.9 percent of GDP, with VAT exemptions alone accounting for 1.9 percent of this total. The largest source of forgone VAT revenue is the exemption on the supply of dwellings and land. PIT exemptions cost an additional 1.4 percent of GDP, with the deepest impact on revenue from exemptions for cocoa farmers, pension/social security contributions, and provident fund contributions. Import duty exemptions, which are often granted by parliament to specific taxpayers, also represent a significant fiscal burden, costing 0.2 percent of GDP in 2022. Rationalizing these exemptions, particularly those that disproportionately benefit wealthier households, will be critical to improving Ghana’s revenue performance without exacerbating inequality. Public expenditure, fast-growing and burdened by mounting rigidities and high interest payments on debt, falls short on spending efficiency, especially in education services and infrastructure. Ghana’s public spending has risen sharply, accompanied by growing inefficiencies and rigidities that limit the government’s ability to respond to economic challenges. Government expenditure in Ghana nearly doubled between 2010 and 2022, surpassing the pace of economic growth and reaching unprecedented levels (Figure E.4). During that period, 70 percent of total public spending was dedicated to three spending items: public sector wages, interest payments, and statutory transfers. Ghana spent two to four times more on interest payments than key comparators, highlighting a growing debt service burden to bilateral and commercial creditors. Interest payments now account for more than 5 percent of GDP, a significant fiscal burden that has reduced the government’s capacity to invest in key sectors like infrastructure and social development. Capital expenditures, which averaged just 3.5 percent of Ghana Public Finance Review | Volume 2 / Detailed Analysis 6 GDP during this period, are well below the levels needed to address Ghana’s infrastructure bottlenecks such as depreciated power distribution and transmission assets and limited road connectivity in the northern regions of the country. In a difficult macro-fiscal environment, it is critical to maximize the efficiency of public spending in areas critical to growth and inclusion, such as education and infrastructure. Ghana outperforms its structural peers on efficiency of public spending in education, but it lags aspirational peers and sits far from the efficiency frontier. Even partial improvements in education spending efficiency could significantly boost outcomes. Similarly, Ghana’s public spending on infrastructure is far from the efficiency frontier, and significant gains in infrastructure quality, especially in roads and electricity, could be attained by partial improvement in spending efficiency. Fast-rising interest payments contributed most to overall expenditure growth Figure E.4. Government expenditures by economic category (% GDP), 2010–2023 30 25 20 15 10 5 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Use of Goods and Services Interest Payments Compensation of Employees Capital Expenditure Grants to Other Governments Units Social Benefits Subsidies Other expenditures Source: Ministry of Finance (MoF) of Ghana, World Bank calculations. Latest available data. Weak PFM systems have further contributed to inefficiencies in public spending, resulting in poor budget execution and the accumulation of arrears. Ghana has made some progress in reforming its PFM framework, notably through the enactment of the PFM Act in 2016 and the development of a Medium-Term Expenditure Framework (MTEF). However, significant implementation gaps remain. Budget preparation often faces delays, and indicative budget ceilings are frequently ignored, leading to overspending. The MTEF, while theoretically designed to align medium-term fiscal planning with Executive Summary 7 annual budgets, is not fully operational, and performance-based budgeting is still in its infancy. Fragmented and outdated information technology (IT) systems also hinder effective PFM, with data on budget execution often incomplete or unavailable in real time. The fragmentation of Ghana’s PFM system, combined with weak cash management and commitment controls, has led to the accumulation of significant arrears. As of the end of 2022, non-energy sector arrears stood at 5.8 percent of GDP, a clear indicator of the government’s inability to manage its cash flow effectively. The Ghana Integrated Financial Management Information System (GIFMIS), intended to serve as the backbone of the country’s PFM system, has not been fully implemented across all government entities, and the Treasury Single Account (TSA) is not comprehensive. Many public institutions, particularly those reliant on internally generated funds (IGFs), operate outside of the TSA, limiting the government’s visibility into their overall cash position. Strengthening the GIFMIS and expanding the TSA to cover all public entities will be critical to improving cash management and preventing the further accumulation of arrears. The public sector wage bill, large and unpredictable, fails to provide the civil service Ghana needs. Public wages, one of the biggest areas of government spending, have been unpredictable, in part from ineffective personnel management and weak information systems. Ghana’s public sector wage bill has been highly volatile, rising from 2 percent of GDP in 2000 to 8.8 percent in 2013, then falling to 6 percent by 2019 (Figure E.5). The wage bill’s instability is due to inconsistent workforce planning and reactive employment decisions, compounded by inconsistent recordkeeping and antiquated information systems. Compensation growth has outpaced employment growth, driven largely by increases in allowances rather than base pay, leading to regional disparities across the country. While the public sector is a major employer of highly educated workers, offering a 20 percent wage premium compared to the private sector, concerns persist about over-concentration of skilled labor in government roles, wage inequality, and gender disparities in remuneration. Ghana Public Finance Review | Volume 2 / Detailed Analysis 8 Ghana’s wage bill as a share of GDP is broadly in line with those of most peers, but it has been more volatile Figure E.5. Wage bill, Ghana and comparator groups (% GDP), 2000–2020 12 10.0 9.0 10 8.0 7.0 8 6.0 6 5.0 4.0 4 3.0 2.0 2 1.0 0 - 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Recession Ghana Aspirational Peer Regional Peer Structural Peer Source: World Bank estimates based on World Bank Worldwide Bureaucracy Indicators (WWBI) and IMF WEO data, 2023. Human development spending must rise but with a stronger pro-poor allocation to counter education spending overly weighted toward secondary and tertiary levels, financing shortfalls in Ghana’s National Health Insurance Scheme (NHIS), and low benefit levels in its well-targeted social assistance programs. Ghana’s public spending on education has been falling short of international benchmarks, with the country’s education budget increasingly skewed toward secondary and tertiary levels at the expense of primary education. Ghana has made significant progress in education, with gross primary enrollment at nearly 100 percent and secondary enrollment rising to about 66 percent as well as a balanced ratio of girls to boys at pre-primary, primary, and secondary levels. In 2018, public spending on education accounted for 24 percent of total government spending, but by 2024, this share had dropped to 14 percent or 3.1 percent of GDP. This level falls well below the benchmark of the Global Partnership for Education (GPE) of 20 percent of government expenditure and the United Nations’ minimum recommendation of 15 percent of total spending and 5 percent of GDP. This underinvestment is particularly concerning at the primary level, where government spending per student is just over half the average for Ghana’s aspirational peers. Primary education is crucial for laying the foundation for future learning, and inadequate investment in this area risks widening inequality. Executive Summary 9 Most education funding is used for staff compensation, leaving little for classroom materials or infrastructure improvements and continuing to burden households with large out-of-pocket (OOP) expenses. More than 70 percent of the education budget goes toward compensating teachers, who earn relatively high wages compared to other workers in the country. While a well-compensated teaching workforce is essential for improving education outcomes, the current allocation leaves very little for non-salary expenditures on teaching and learning materials and for improvement and maintenance of school infrastructure. Moreover, most of non-salary expenditure flows to secondary and tertiary levels. One outcome is that the pupils-to-textbook ratios for English, mathematics, and science in public primary schools are just shy of 2:1, far above the government prescription of one book per child. Another outcome is that, despite the complete removal of school fees, households continue to spend the equivalent of 40 to 50 percent of government spending per student for the preschool to junior secondary level, mostly for food and lodging. In the health sector, Ghana’s NHIS faces significant financing challenges that are undermining progress toward universal health coverage. The country’s health outcomes compare well with those of its regional and economic peers, and, appropriately, community, primary, and secondary levels of care receive more than half of public health resources. The NHIS, introduced in 2003–2005, was a major milestone in Ghana’s efforts to improve access to health care, particularly for low-income households. However, the NHIS has faced persistent financial shortfalls in recent years, limiting its ability to provide comprehensive coverage. One major challenge is the capping law introduced in 2017, which limits the allocation of earmarked funds to statutory programs like the NHIS. This has reduced the NHIS’s share of the National Health Insurance Levy (NHIL) and contributed to growing financial pressures. Additionally, there is a gap between the NHIS’s budgeted allocations and the actual cash transfers it receives from the MoF. The NHIS’s financial difficulties have led to an increase in OOP payments for health care. While the NHIS has succeeded in reducing the financial burden of health care for many households, especially in the early years of its implementation, evidence indicates that OOP payments have remained significant over time. These payments, which now account for 35 percent of total health spending, disproportionately affect low-income households and undermine the equity of the health care system. Addressing the NHIS’s financing gaps and ensuring timely transfers of earmarked funds will be critical to maintain progress toward universal health coverage and protecting vulnerable populations from the financial burden of health care. Social assistance programs are well-targeted to the poor, but their impact is limited by low benefit levels. Most of the 1.4 percent of GDP spent on public social protection programs, already below the SSA average, goes to Ghana Public Finance Review | Volume 2 / Detailed Analysis 10 social insurance programs not targeted to the poor. Ghana’s Social Security and National Insurance Trust (SSNIT) provides pensions which, until recently, were limited to retirees who worked in the formal sector; and the NHIS is meant to be universal, not focused on the poor. The main social assistance programs in Ghana are the Livelihood Empowerment Against Poverty (LEAP) program, the Labor-Intensive Public Works (LIPW) program, and the Ghana School Feeding Program (GSFP), which are targeted effectively to reach the poor. However, spending on these programs is equivalent to just 0.2 percent of GDP and 1.0 percent of overall government spending, far below the averages of comparator countries (1.5 percent of GDP). External funding continues to be critical to these programs. To have a significant impact on poverty and to build on their effectiveness, these programs need to continue expanding coverage and value of benefits. Agriculture, critical for rural Ghanaian livelihoods and for export earnings, could greatly benefit from more efficient and better targeted government support, moving away from input subsidies and addressing accumulated losses in the cocoa sector. Agriculture remains a cornerstone of Ghana’s economy, providing employment for a significant portion of the population and contributing to the country’s export earnings, but the sector faces significant challenges that limit its future growth potential. Agriculture accounts for 21 percent of Ghana’s GDP and employs 41 percent of the workforce, including nearly two-thirds of the rural population. The sector is also a major source of export earnings, with agricultural exports generating an average of US$3.23 billion annually between 2012 and 2021. Cocoa, which accounts for 74 percent of agricultural exports, is Ghana’s most important export crop and a key driver of rural livelihoods. However, the agricultural sector faces structural challenges, including limited access to modern inputs, inadequate infrastructure, and low productivity, which threaten its long-term growth prospects. Despite strong performance in recent years, agriculture in Ghana is constrained by a lack of modern inputs, services, and infrastructure, which are essential for increasing productivity and competitiveness. The use of agrochemicals, certified seeds, and mechanization remains low, particularly among smallholder farmers, who account for most of the agricultural output. Extension services, credit, and access to markets are also limited, making it difficult for farmers to adopt modern farming techniques and improve their yields. Additionally, infrastructure deficits, particularly in irrigation, transportation, and storage, further constrain productivity. Addressing these bottlenecks will be critical to ensure that agriculture continues to play a central role in Ghana’s economy and to reduce rural poverty. Executive Summary 11 Government spending on agriculture has been insufficient and inefficiently allocated, with a large share of the budget going toward subsidies rather than capital investment. Between 2019 and 2022, government spending on agriculture stagnated in real terms, with only 2.1 percent of total public spending allocated to the sector and with just 26 percent of that total allocated to much-needed capital investment. Furthermore, a significant portion of this spending—about 13 percent—was directed toward input subsidies, particularly for fertilizers and seeds, under programs like the Planting for Food and Jobs (PFJ) initiative (Figure E.6). While the PFJ has had some success in increasing the availability of inputs and improving food security, it has also suffered from inefficiencies, including poor targeting of beneficiaries and low input- use efficiency. The second phase of the PFJ, started in 2023, has shifted from input subsidies to targeted credit provision. Shifting resources toward capital investment, particularly in infrastructure, will be essential to improving the productivity and sustainability of the agricultural sector. Government spending in agriculture has neglected capital investment Figure E.6. Economic composition of central government agricultural expenditures (% of total), 2019–2022 100% 8% 90% 13% 13% 20% 11% 80% 25% 15% Other Expenses 70% 31% 26% 34% 60% Subsidy 50% 33% Social Benefits 40% 23% 43% 33% Non-Financial Assets 32% 30% Interest 20% 29% 33% Goods and Services 10% 25% 18% 18% 0% Compensation 2019 2020 2021 2022 Average 2019-2022 Source: World Bank calculations based on data from Ministry of Agriculture and the Ghana Audit Service (GAS). The cocoa sector, which is managed by the state-owned Ghana Cocoa Board (COCOBOD), faces financial difficulties that require urgent reforms to ensure its sustainability. COCOBOD, which is responsible for purchasing, marketing, and exporting cocoa, has accumulated significant losses due to high operational costs, inefficient procurement practices, and quasi-fiscal activities, such as the provision of rural roads and fertilizer subsidies. The board’s financial difficulties have been exacerbated by high debt service costs, as COCOBOD relies on short-term loans to finance its operations. The Ghana Public Finance Review | Volume 2 / Detailed Analysis 12 government is currently preparing a turnaround strategy for COCOBOD, which includes rationalizing expenditures, phasing out subsidies, and reforming the pricing mechanism for cocoa. These reforms are critical to restoring the financial viability of the cocoa sector and ensuring its continued contribution to Ghana’s export earnings and rural development. Policy recommendations: To implement a fair and sustainable adjustment, Ghana needs to shift from short-term crisis response to long-term structural reforms that tackle the root causes of the crisis and build the foundations of a robust fiscal system which can support its long-term development goals. Ghana has taken decisive steps to stabilize the economy since 2022, and it is critical that the required fiscal adjustment is both fair and efficient. Having embarked on an ambitious fiscal consolidation, a comprehensive debt restructuring, and enhanced monetary policy discipline, Ghana now needs to stay the course on ongoing reforms and to deepen some of them, such as the implementation of the Medium-Term Revenue Strategy (MTRS) and the strengthening of commitments controls and cash management, while ensuring that the burden of the adjustment does not fall on its poorest and most vulnerable citizens. In the short term (over the next year), pro-poor spending, such as for social protection, public health, and public education, and pro- growth spending, such as for public investment, must be protected. In the medium (next three years) to long term (by 2030), Ghana needs to build the foundations of a robust fiscal system which can support its long- term development goals by a. Entrenching fiscal discipline via a fiscal rule to limit pro-cyclicality, establish more effective spending controls, and ensure better oversight of contingent liabilities, including a stronger fiscal council, greater demand for fiscal data, structural PFM reforms, and energy and cocoa sector reforms; b. Sustainably enhancing DRM to reduce external financing needs, including operationalization of the MTRS and reform of exemptions and TEs while enhancing progressivity; c. Carefully managing the financing mix to match the return of investment with financial costs, especially non-concessional external borrowing; and d. Ring-fencing investment spending and prioritizing public goods spending to support human development, economic transformation, and climate resilience, by protecting social assistance programs and improving financing for primary-level education and health services while prioritizing high-impact targeted interventions; through more capital expenditures in agriculture and comprehensive farmer support while bringing the cocoa Executive Summary 13 sector to profitability; by improving transport, logistical services, and trade facilitation and developing information and communication technology (ICT) infrastructure in Ghana’s private sector; and by investing in ‘no regret’ climate actions that also deliver economic benefits. In conclusion, Ghana’s fiscal challenges are significant, but with the right reforms, the country can build a more resilient and equitable fiscal policy framework. By addressing the root causes of its fiscal imbalances—weak revenue mobilization, inefficient spending, and growing debt—Ghana can lay the foundation for sustainable economic growth and development. The path forward will require difficult choices, but by prioritizing fiscal discipline, transparency, and efficiency, the government can ensure that the burden of adjustment is shared fairly and that the country’s long-term development goals are achieved. Credits: Gerhard Pettersson on Shutterstock 1/ Context and Fiscal Ghana Public Finance Review | Volume 2 / Detailed Analysis Macroeconomic Ghana Public Finance Review | Building the Foundations for a Resilient and Equitable Fiscal Policy 14 1/ Macroeconomic and Fiscal Context 15 1.1/ Despite past successes, Ghana faces multiple challenges into the future Ghana is one of the largest countries in Africa by gross domestic product (GDP) and population. With close to 32 million inhabitants and a GDP of US$73 billion, Ghana ranks 10th by population and 6th by economic size in Sub-Saharan Africa (SSA) and 47th and 78th, respectively, in the world. GDP per capita stands at about US$2,300, having almost quadrupled since the early 2000s, and reaches US$5,700 in constant purchasing power parity (PPP) terms (the 11th highest level in SSA). Ghana’s economy has grown faster than the regional average since 2008, but macroeconomic imbalances, structural challenges, and external shocks have recently hindered growth. Since the 1990s, and up to 2019, the share of the population living in poverty has halved. While poverty affected more than 85 percent of Ghanaians in 1991, about half of the population lived on less than US$3.65 a day (2017 PPP) in 2016—a share lower than the SSA average, which stood at around 65 percent (Figure 1.1). This decline highlights that Ghana had outpaced the region on poverty reduction. However, the impacts of the COVID-19 pandemic and Russia’s invasion of Ukraine have caused poverty to bounce back since 2020, to reach 57 percent of the population in 2023, moving Ghana closer to the SSA average.1 Inflation has been one of the highest in the region and, by eroding the purchasing power of Ghanaians and affecting the most vulnerable groups of population, it has contributed to a recent increase in poverty. 1 This corresponds to an estimated international poverty rate (US$2.15 in 2017 PPP) of 31 percent in 2023. Ghana Public Finance Review | Volume 2 / Detailed Analysis 16 Ghana has achieved faster poverty reduction than SSA’s average, despite recent setbacks Figure 1.1. Ghana and SSA poverty rate (US$3.65, 2017 PPP) Figure 1.2. SSA: poverty headcount rate for 2023 (lower-middle-income poverty line, US$3.65, 2017 PPP) 56.50 Ghana Source: World Bank 2023. Poverty and Inequality Platform for global poverty lineup numbers. Macro Poverty Outlook (Annual meetings 2023). For sustained poverty reduction, fiscal policy will need to support economic transformation. Ghana faces significant development challenges in providing more and better jobs and needs to further promote inclusive growth, partly through appropriate fiscal policies. As the share of extractives in GDP started to increase since the early 2010s, a sizable portion of Ghana’s growth has not 1/ Macroeconomic and Fiscal Context 17 generated sufficient jobs, and the impact of growth on poverty reduction has declined. Ghana now faces an acute jobs challenge that will require generating more and better job opportunities for lower- and mid-skilled workers. More than 70 percent of current jobs are in the informal sector, and around 10 million Ghanaians will enter the labor force between now and 2040. As set out in the 2021 World Bank Report ‘Ghana Rising’, Ghana needs to support improved productivity of existing firms and spur entrepreneurship, innovation, and job creation, through global integration (by harnessing the potential of trade, foreign direct investment, and global value chains) and technological progress (better management practices, increased use of technologies, and enhanced worker skills). A strategic fiscal policy that promotes macroeconomic stability, generates the necessary public investments, and creates the right incentives is needed to tackle these challenges. To support economic transformation, fiscal policy must first ensure a stable macroeconomic environment conducive to private investments. This involves limiting deficits and government borrowing, which have historically driven up interest rates and crowded out private borrowers. Second, fiscal policy should facilitate targeted public investments and reforms that reduce barriers to participation in global value chains. This includes improving transport and trade-related logistical services, particularly inland connections, and implementing measures to reduce non- tariff barriers and enhance trade facilitation. Additionally, fiscal policy must enhance mobility, connectivity, and urban planning to support transitions to higher value-added, labor-intensive tradable services. Finally, it should support the development of information and communication technology (ICT) infrastructure, such as broadband internet and universal service, and promote research and development (R&D), technological innovation, and digital upgrading in Ghana’s private sector through competitive grants or cost-based income tax incentives for R&D. Furthermore, it should invest in foundational digital skills for all and expand advanced digital skills in tertiary education. Fiscal policy also needs to advance human development outcomes, which, despite some progress, have been uneven and incomplete, limiting Ghanaians’ ability to lead healthy and productive lives. With mixed progress on human capital, Ghana needs to ensure sufficient spending levels and address efficiency challenges. Ghana’s Human Capital Index (HCI) of 0.45 in 2023 is higher than the SSA average of 0.40 but lower than the average for lower-middle-income countries (LMICs), which stands at 0.48. This index is slightly below the level expected given Ghana’s per capita GDP, influenced by low test scores but supported by the relatively high proportion of children not stunted (82 percent).2 School enrollment rates are 2 World Bank. 2023. Ghana: Human Capital Country Brief. Ghana Public Finance Review | Volume 2 / Detailed Analysis 18 high at the primary level and increasing at the secondary level, but challenges remain with quality and learning outcomes. Ghana has made substantial progress toward gender equity in education, achieving a one-to-one ratio of girls to boys up to the secondary level. However, significant urban-rural and socioeconomic disparities in access to education persist, and learning outcomes have remained consistently poor, particularly at the primary level. Health and nutrition outcomes have seen steady improvements, despite a recent slowdown in some indicators, as health service coverage has improved. While inequalities in health outcomes are evident, they have become less pronounced for access to basic services as coverage levels have increased. Nonetheless, urban-rural and socioeconomic differences persist for some indicators, such as full child vaccination coverage.3 Ghana’s development is vulnerable to climate change and climate-related shocks. Without prompt global and local climate actions, including investments (often public) in agriculture, water management, infrastructure, and transport, higher temperatures and heat stress will affect crop and labor productivity and threaten Ghana’s development gains. Since 1960, Ghana’s average annual mean temperature has increased by around 1°C, rainfall has become more erratic, and sea level rise and changing hydrodynamics have resulted in increased coastal erosion. As a result, weather and climate extremes have increased in frequency and magnitude, triggering floods, droughts, and heat waves that, associated with increased exposure, cause human losses, damages to public and private assets, and disruption of economic activities. Without strong adaptation measures, more erratic rainfall patterns will damage infrastructure and buildings, and local air pollution and congestion will hamper human capital and productivity in cities. These damages could increase poverty rates by at least 1 to 2 percentage points by 2050 (or up to around 1 million people), when compared to a scenario with no climate change.4 1.2/ Before the COVID-19 shock, Ghana had experienced strong growth, but it was marked by mounting macroeconomic imbalances Starting in 2010, Ghana experienced a growth acceleration driven by oil production. The pace of economic growth in Ghana was slower than the regional average in the early 2000s but accelerated sharply afterwards. Between 3 Ghana Demographic and Health Surveys. 4 Ghana Country Climate and Development Report (English). Washington, DC, 2022, World Bank Group. 1/ Macroeconomic and Fiscal Context 19 2000 and 2007, Ghana’s GDP expanded at a yearly rate of 4.8 percent, versus the SSA average of 5.7 percent (Figure 1.3). As of 2007, GDP per capita stood at about US$3,400 (2017 PPP), in line with the regional average. Then, between 2008 and 2019, Ghana’s economy expanded by about 6.7 percent per year—versus regional and global averages of 4.2 percent and 3.3 percent, respectively. By 2019, GDP per capita in constant international dollars had reached approximately US$5,600—a level 60 percent higher than in 2007 and 40 percent higher than the regional average. An expansionary fiscal policy and rising private credit—both fueled by soaring oil production—underpinned strong growth between 2008 and 2019. GDP growth accelerated to 7.5 percent per year during the period 2008– 2010, primarily due to expansionary fiscal policy following large-scale Highly Indebted Poor Countries (HIPC) debt relief, which was mainly directed toward infrastructure investment, and a boom in private credit.5 These trends were likely driven by the expectation of increased tax revenues and a structurally stronger repayment capacity, owing to rising oil production, with the Jubilee field set to come online in 2011. Indeed, oil production surged to 80 million barrels per day (b/d) in 2011, up from an average of 7 million b/d during 2000– 2010. Between 2013 and 2019, the oil sector expanded at an annual rate of approximately 11 percent, more than double the GDP growth rate (Figure 1.4 and Figure 1.5). Ghana’s GDP level rose above the SSA average over the last decade Figure 1.3. GDP per capita (PPP 2017, international dollar) – Ghana vs. SSA 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 Ghana Sub-Saharan Africa Source: International Monetary Fund (IMF) World Economic Outlook (WEO), October 2023. 5 Between 2002 and 2004, the IMF and the International Development Association (IDA) jointly endorsed an extensive debt relief program for Ghana, structured within the framework of the HIPC Initiative. As a result of this plan, Ghana witnessed a substantial 56.2 percent debt reduction, measured in net present value terms. Ghana Public Finance Review | Volume 2 / Detailed Analysis 20 This GDP takeoff was supported by booming oil production and exports Figure 1.4. Production - Total petroleum and other liquids (Million Figure 1.5. Exports - Crude oil including lease condensate (Million b/d) b/d) 250 200 200 150 150 100 100 50 50 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Bank of Ghana (BoG) and United States Energy Information Administration. However, this growth acceleration was accompanied by a fiscal deterioration… The fast GDP growth of 2008–2019 was partially sustained by growing fiscal and external imbalances, which fueled debt accumulation. Although tax revenues grew during that time, with both oil and non-oil sectors performing strongly, mounting expenditures (with spikes in the run-up to elections) weakened the country’s fiscal position. In the same period, the current account deficit increased by almost 3 percentage points of GDP, as rising deficit from net primary income, dwindling secondary income, and surging imports more than offset a boom in exports. Growing imbalances exacerbated the external and fiscal deficits, resulting in mounting debt and a heavier servicing burden. Notably, the total fiscal deficit averaged around 4 percent of GDP between 2008 and 2019—more than two times as much as in 2000–2007 (see Table 1.1). Between 2008 and 2019, total expenditures averaged 19 percent of GDP—a share 6 percentage points higher than in 2000–2007—and grew faster than revenues. The rise in expenditure began in 2006, soon after the completion of the HIPC initiative, and continued as a dynamic economy and booming oil production boosted government revenues. Rigid primary expenditure items, such as the public wage bill, grants to government units, and interest payments, drove expenditure growth, thereby narrowing the available fiscal space. Infrastructure spending increased only slightly. The total revenue of the central government averaged 14.6 percent of GDP in 2008–2019, 3.3 percentage points higher than in 2000–2007. Both tax and non-tax revenues soared, with oil revenues that started in 2011 contributing around 0.8 percent of GDP. Despite these gains, the growth in revenues was insufficient to match the rapid increase in expenditures. 1/ Macroeconomic and Fiscal Context 21 Table 1.1. Ghana - selected macroeconomic indicators, 2000–2022 2000–2007 2008-2019 2020-2022 (average, %) (average, %) (average, %) GDP Growth (CAGR) 4.8 6.7 2.9 Fiscal Balance (commitment basis) -1.8 6.7 2.9 Revenues 11.3 14.6 15.0 Expenditures 13.1 18.8 26.7 Current Account Balance -3.1 -5.9 -2.8 Trade Balance -9.0 -7.5 -2.3 Exports of Goods and Services 18.1 28.5 32.4 Imports of Goods and Services -27.2 -35.9 -34.7 Primary Income -0.9 -2.9 -5.3 Secondary Income 6.8 4.5 4.8 Public Debt (end of period) 22.5 58.3 92.4 Interest Payments (end of period) 1.4 5.5 7.5 Source: WEO, International Financial Statistics (IFS) IMF, and Ministry of Finance (MoF) of Ghana. Note: CAGR = Compound Annual Growth Rate. The growth acceleration was accompanied by increased volatility and deteriorating fiscal balances Figure 1.6. Overall and primary balance - commitment basis (% GDP) Figure 1.7. Real GDP growth (%) Primary Balance (cash) 16 Overall Balance (commitment) 4 14 2 12 0 10 -2 8 -4 6 -6 4 -8 2 -10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: MoF of Ghana. Ghana Public Finance Review | Volume 2 / Detailed Analysis 22 …financed by rapid debt accumulation. After a substantial reduction in public debt through the HIPC relief efforts (2002–2004), public debt resumed an upward trajectory in the decade leading up to 2019, notably fueled by external commercial debt. The completion of the HIPC initiative resulted in a sharp reduction in public debt, from 80 percent of GDP in 2000 to 18 percent of GDP in 2006, and a significant decrease in debt service, from more than 5 percent of gross national income (GNI) in 2000–2005 to less than 1 percent in 2007–2008. However, between 2008 and 2019, expansionary fiscal policy increased the public debt-to-GDP ratio by an average of 3 percentage points per year, with the ratio exceeding its pre-HIPC levels as early as 2010. By 2019, public debt had reached 60 percent of GDP, equally split between domestic and external liabilities. Annual interest payments almost quadrupled, rising from 1.4 percent of GDP in 2007 to 5.5 percent in 2019. Historically, direct investment and concessional financing were the main sources of external accounts financing. However, from 2009 onward, financing through portfolio investments, such as debt instruments like bonds and loans, increased significantly (Figure 1.8). After benefitting from the HIPC debt relief in the 2000s, Ghana’s debt burden started increasing at the beginning of the oil boom Figure 1.8. Central government - gross debt (% GDP) Figure 1.9. Central government - interest payments (% GDP) 100.0 8.0 90.0 7.0 80.0 70.0 6.0 60.0 5.0 50.0 4.0 40.0 3.0 30.0 2.0 20.0 10.0 1.0 0.0 0.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Source: IMF WEO, 2000–2019; joint World Bank-IMF Debt Sustainability Analysis (DSA), 2020–2023. Note: 2023 public debt presents a post-domestic debt restructuring but pre-external debt restructuring scenario. 1/ Macroeconomic and Fiscal Context 23 The balance of payments was increasingly financed by portfolio investment, including external commercial debt Figure 1.10. Balance of payments (% GDP) Figure 1.11. Financial account components (% GDP) 15.0 14.0 12.0 10.0 10.0 8.0 5.0 6.0 4.0 0.0 2.0 0.0 -5.0 -2.0 -4.0 -10.0 -6.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Direct investment Portfolio investment Other Overall Balance Source: IFS (IMF). 1.3/ A prolonged and expensive fiscal response to COVID-19 and repeated global shocks plunged Ghana into a full-fledged crisis in 2022 Ghana entered the COVID-19 shock from a weakened position… Years of rapid but unbalanced growth left Ghana vulnerable to recent global shocks. In 2019, the overall fiscal deficit (accounting for bailouts of the financial and energy sectors)6 amounted to 5.6 percent of GDP, while public debt stood at 58 percent of GDP—thereby limiting the country’s ability to absorb external shocks. In this context, the COVID-19 pandemic (2020) and the international spillovers of Russia’s invasion of Ukraine (2022–23) have had significant impacts (see Table 1.1). The COVID-19 pandemic was an unanticipated and significant shock to the economy: GDP fell by 5.7 percent in Q2 2020, in the midst of a global recession and plunging international trade and tourism. The shock was severe enough to slow output growth to 0.5 percent in 2020 and dampen GDP growth to around 3 percent per year between 2020 and 2022, versus 5.3 percent in 2015–2019. 6 Measures to stabilize and strengthen the financial sector were first enacted in 2017, and their scale grew exponentially during the pandemic. Heavily subsidized electricity tariffs and other system leakages (bottlenecks in transmission and distribution losses) exerted pressure on public spending through compensatory transfers. Ghana Public Finance Review | Volume 2 / Detailed Analysis 24 Low domestic revenue mobilization (DRM)—particularly tax revenue—is a key source of Ghana’s persistent fiscal stresses (see Chapter 2). Ghana’s tax-to-GDP ratio averaged 12.8 percent for the period 2013–2020, well below most other LMICs (16.9 percent in 2021) and the rest of SSA (18.4 percent in 2021). The primary impediments are the existence of a large informal sector, low tax compliance and weak revenue administration (addressed under the IMF program), and widespread tax exemptions. World Bank and IMF estimates show that value-added tax (VAT) exemptions result in 2–3 percentage points reduction in the tax-to-GDP ratio. The fiscal deficit and public debt surged in 2020 amid countercyclical measures and revenue shortfalls. Revenues fell by 6 percent of GDP in real terms in 2020, on account of weaker tax collection while expenditures soared by nearly 30 percent in real terms (a growth equivalent to 5.7 percentage points of GDP). As a result, the overall deficit increased from 4.5 percent of GDP in 2019 to 11 percent in 2020—and by 5.6 percent of GDP in 2019 to nearly 14 percent in 2020, when accounting for bailouts for the energy sector and publicly funded recapitalizations of the banking sector. The increase in the fiscal deficit led to a 14 percentage point rise in the public debt-to-GDP ratio, bringing it to 72 percent of GDP. …which contributed to a volatile recovery, marked by global shocks amplified by domestic vulnerabilities. The recovery was hindered by expenditure rigidities and headwinds from Russia’s invasion of Ukraine. A rapid rebound in 2021 could only partially mitigate the effects of expenditure rigidities, and public debt continued to rise, increasing by a further 7 percentage points in 2021. In 2022, Ghana felt the impact of spillovers from Russia’s invasion of Ukraine alongside global monetary tightening to curb inflation. Global economic turmoil, rising commodity prices, and supply chain disruptions exacerbated domestic inflationary pressures (with the consumer price index rising by 32 percent in 2022, up from a yearly average of around 13 percent in 2013–2021). Price hikes drove up interest rates, and overall macroeconomic instability slowed down GDP growth to 3.1 percent in 2022, with the non-extractive sectors bearing the brunt of the slowdown. In a worsening global environment, fiscal consolidation was hampered by energy subsidies and mounting interest payments. Fiscal space continued to shrink due to the sequential impact of the pandemic, Russia’s invasion of Ukraine, and global monetary tightening. Soaring subsidies to the energy sector (Box 1.1) and heavier interest payments further hampered fiscal consolidation. The overall deficit remained at 11.8 percent of GDP in 2022, 1/ Macroeconomic and Fiscal Context 25 and concerns about debt sustainability Fiscal balances deteriorated in the wake of the COVID-19 shock became more acute. As the fiscal and did not fully recover afterwards deficit surged, gross financing needs Figure 1.12. Central government - overall and primary balance - escalated to more than 25 percent of commitment (% GDP) GDP in 2020–2022, up from less than 20 percent in 2019. Moreover, the share of 4 2 highly rigid expenses (interest payments 0 and grants to government units) grew -2 to almost 75 percent of total revenue in -4 2022, up from half of the total revenue -6 on average in 2008–2019. -8 -10 -12 -11.8 -14 -16 2000 2003 2006 2009 2012 2015 2018 2021 Primary Balance Overall Balance Overall Balance (incl. bailouts and bank capitalization costs) Source: IMF WEO, MoF of Ghana, and Ghana Statistical Services. Credits: World Bank Ghana Public Finance Review | Volume 2 / Detailed Analysis 26 Box 1.1. Transfers to the energy and financial sectors have posed persistent fiscal risks The growing fiscal cost of energy (IPPs) and fuel suppliers. Implementation subsidies has driven the authorities to of the action items under the Energy Sector launch ambitious reforms. Subsidies to Recovery Program (ESRP), which started in the energy sector have distortive effects 2019 and was extended in 2023 until end 2025, and, after stripping out the public sector will be key to bringing the overall sector back wage bill, interest payments, and grants to to financial sustainability. Specific reforms government units, represent one-quarter of are underway; notably, the Power Utilities the government’s remaining outlays. Revenue Regulatory Commission (PURC) adopted new shortfalls in the energy sector have been tariff-setting guidelines in September 2022 significant, due to below-cost-recovery tariffs, and raised electricity tariffs by close to 90 large distribution losses, and excess capacity percent since then to help increase tariffs fueled by take-or-pay contracts. Transfers to to cost-recovery levels. Going forward, the compensate for such shortfalls have cost the continued implementation of the quarterly central government up to 2 percent of GDP per tariff adjustment formula should help to ensure year since 2019 and led to the accumulation that tariffs reflect fluctuations in the exchange of payables to independent power producers rate, inflation, and cost of fuel. Energy sector transfers are expected to progressively decline owing to sectoral reforms Figure 1.13. Central government - energy subsidies and transfers (% GDP) 3 2.7 2.2 2.3 2.5 2.1 1.9 2 1.7 1.6 1.5 1 0.5 0 2021 2022 2023 2024 2025 2026 2027 Est. Projected Transfers to energy producers Payables buildup to energy producers Source: Request for an arrangement under the Extended Credit Facility (ECF), IMF (May 2023). Ghana’s banking sector benefited from However, the sector’s increased exposure to significant recapitalization and appeared the sovereign posed significant risks, which healthy, but it built large exposure to the materialized with the implementation of sovereign, creating new vulnerabilities the 2023 Domestic Debt Exchange Program following the 2023 domestic debt exchange. (DDEP), significantly eroding the capital buffers Between 2017 and 2019, the Government of financial institutions. To address this, the of Ghana (GoG) conducted a banking sector authorities have developed a Financial Sector cleanup, spending GHS 18.99 billion (5.5 Strengthening Strategy and established the percent of GDP) to rescue failed banks and Ghana Financial Stability Fund (GFSF), which compensate depositors of non-bank deposit- has been provisioned in the medium-term taking institutions. As a result, key indicators budget framework to recapitalize banks of financial sector health improved markedly. affected by the exchange. 1/ Macroeconomic and Fiscal Context 27 In 2022, a confluence of pre-existing imbalances and external shocks pushed Ghana into a macroeconomic crisis. Public debt skyrocketed to 92 percent of GDP in 2022, as fiscal balances deteriorated while growth slowed markedly. Public debt grew at an annual average of 1.1 percentage points in 2016–2019, reaching 58 percent of GDP in 2019. The increase was mainly driven by the primary deficit, but the country’s robust economic growth limited its magnitude. However, the GDP growth rate fell from 6.1 percent in 2016–2019 to 2.9 percent in 2020–2022, while the primary balance (on cash basis) shifted from a surplus of 0.4 percent to a deficit of 3 percent of GDP. Concurrently, a falling exchange rate contributed to raising the ratio of external debt to GDP, and the overall debt-to-GDP ratio grew at an annual average of 11 percentage points in 2020–2022—reaching around 92 percent in the latter year. Public debt skyrocketed after the COVID-19 shock Figure 1.14. Central government - gross debt (% GDP) 100 92.4 90 79.2 80 72.3 70 58.3 60 50 40 30 22.5 20 10 0 2007 2019 2020 2021 2022 External Debt Domestic Debt Source: IMF WEO, October 2023. Due to currency depreciation and concerns about debt sustainability, Ghana lost access to the international capital markets and struggled to roll over domestic debt. Ghana experienced rating downgrades by all three major global credit rating agencies and lost access to international markets in late-2021. Debt service-to-revenue was estimated at 117.6 percent in 2022, as Eurobond spreads were well over 3,500 basis points (bps). To make up for the financing shortfall, the government increasingly relied on monetary financing from the BoG, which reached 7.9 percent of GDP in 2022. Ghana Public Finance Review | Volume 2 / Detailed Analysis 28 As Ghana was effectively shut off from international capital markets, it relied increasingly on the central bank for financing Figure 1.15. Evolutions of sovereign spreads (basis points) Figure 1.16. Domestic financing - BoG (% GDP) 10.0 8.0 6.0 4.0 2.0 0.0 -2.0 -4.0 02 04 06 08 10 12 14 16 18 20 22 20 20 20 20 20 20 20 20 20 20 20 Source: S&P Ghana Sovereign Bond Index, IMF (May 2023). After losing access to international capital markets, Ghana started tapping into its international reserves to finance current account deficits and resorted to monetary financing. Ghana’s current account deficit has narrowed in the last decade, but its financing relied extensively on external commercial debt. The current account deficit hovered around 3 percent of GDP in 2020–21, marked by strong goods trade and secondary income surpluses. External issuances (Eurobonds) to meet rising gross financing needs attracted large financial inflows, which were largely used to finance domestic expenditure. This contributed to inflationary pressures through monetary creation and rising borrowing costs. Sovereign borrowing (excluding loans) amounted to nearly 5 percent of GDP in 2021, and foreign reserves surpassed US$9 billion. In 2022, despite booming exports that helped reduce the current account deficit to 2.1 percent of GDP, external financing collapsed as debt sustainability concerns arose and international reserves started shrinking. The pressure stemming from Ghana’s loss of access to international capital markets, capital outflows, and difficulties in rolling over the central bank’s foreign exchange liabilities prompted a balance-of-payments crisis, and international reserves fell by about US$3.5 billion (to US$6.2 billion). By the end of 2022, gross international reserves (excluding oil funds and encumbered or pledged assets)7 covered less than one month of imports. 7 Per IMF program definition of gross international reserves. 1/ Macroeconomic and Fiscal Context 29 In 2022, despite an improving current account deficit, external financing collapsed Figure 1.17. Current account deficit (% GDP) Figure 1.18. Balance of payments (% GDP 2.0 15.0 0.0 10.0 -2.0 5.0 0.0 -4.0 -5.0 -6.0 -10.0 -8.0 00 02 04 06 08 10 12 14 16 18 20 22 20 20 20 20 20 20 20 20 20 20 20 20 -10.0 Overall Balance 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Necessity = Current account - Capital account Financial account Source: IFS (IMF). Amid declining international reserves and heightened country risk, the Ghanaian cedi depreciated significantly, fueling inflation. The cedi lost 36 percent of its value relative to the US dollar between July and October 2022, and an additional 15 percent in November, when the exchange rate exceeded GHS 13 per US dollar. Despite a partial revaluation in December, in 2022 the cedi depreciated by more than 40 percent relative to the US dollar, boosting import prices and stoking inflation. Consumer price inflation accelerated to 54 percent in 2022, from 13 percent in 2021. Faced with rising gross financing needs, the GoG continued to rely on monetary financing from the BoG, contributing to inflationary pressures. The cumulative outstanding net monetary financing averaged 5.8 percent of GDP in 2008–2019 and 5.4 percent of GDP in 2020–2021. The central bank continued to intervene in 2020 and 2022, amid major financing needs and a dearth of funding options, with monetary financing reaching 7.9 percent of GDP for 2022 alone. Legal limits to monetary financing were regularly breached: the 2002 Central Bank Act limits the maximum amount the government can borrow from the BoG in a given year to 5 percent of the government’s annual revenues. In the exceptional circumstances of the COVID-19 pandemic, the government chose to suspend this rule, as the economic shock depressed revenues while expenditures spiked. An increase in central bank credit to the government by 1 percentage point of GDP has been associated with a contemporaneous 1 percentage point fall in the value of the Ghana Public Finance Review | Volume 2 / Detailed Analysis 30 currency relative to the US dollar and with a 0.5 percentage points increase in the inflation rate one year later.8 To help cope with the macroeconomic pressures, Ghana negotiated a three-year arrangement under an IMF-supported ECF program of about US$3 billion, which was approved by the IMF board in May 2023. The program is expected to help restore macroeconomic stability and debt sustainability while protecting the vulnerable, preserving financial stability, and laying the foundation for a strong and inclusive recovery. The authorities have demonstrated their commitment to reform by adopting ambitious budgets in 2023 and 2024, including significant energy and water tariff adjustments. They also embarked on a comprehensive (external and domestic) debt restructuring program. This includes a moratorium on external debt repayments, an application to the G20 Common Framework, and the completion (in February 2023) of the DDEP that resulted in the extension of the maturities and a reduction in the cost of bulk of domestic bonds. 1.4/ Ghana’s macro-fiscal outlook hinges on an ambitious fiscal consolidation and significant debt relief Ghana’s baseline macro-fiscal outlook for the medium term is positive, despite a range of challenges. The spillovers from the 2020–2022 global crises and the fiscal consolidation measures are estimated to have curtailed economic expansion throughout 2023 and 2024. However, the GDP growth rate is expected to gradually recover to around 5 percent in 2026–2028. Headline inflation declined from its 2022 peak of 54.1 percent in December 2022 to around 22.1 percent in October 2024 and is expected to hit its one- digit target level from 2025 onward. Importantly, this outlook hinges on the implementation of a growth-friendly fiscal consolidation process—with a balanced mix of measures on both the revenue and expenditure sides—and on a rapid recovery of access to the international capital markets at affordable interest rates. 8 Hooley, J., L. Nguyen, M, Saito, and S. Nikaein Towfighian. 2017. “Fiscal Dominance in Sub-Saharan Africa Revisited”. IMF. 1/ Macroeconomic and Fiscal Context 31 In the medium term, growth is expected to recover and inflation to abate owing to the authorities’ stabilization program Figure 1.19. Real GDP (%) Figure 1.20. Inflation - end of period (%) 9 8.1 60 54.1 8 50 7 6.2 6.5 6 5.3 5.1 40 4.9 5.0 5.0 5 4.4 29.4 3.4 30 4 3.1 2.8 17.7 3 2.1 2.3 20 15.4 12.4 12.6 15.0 11.8 9.4 7.8 10.5 2 8.0 8.0 8.0 8.0 0.5 10 1 0 0 Avg.15-19 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Avg.15-19 Source: Ghanaian authorities and IMF. Note: Green indicates forecast period. The fiscal position is projected to gradually improve, reaching a primary surplus of 1.5 percent of GDP from 2025 onward. The expected fiscal path implies an increase in the primary surplus equal to almost 0.9 percentage points of GDP in 2023–2025, driven by a modest increase in revenues (over 1 percentage point of GDP), to stabilize debt levels and shore up the country’s fiscal credibility in the international capital markets. The overall deficit is expected to widen by around 0.3 percentage points of GDP over the same period, given a 1 percentage point increase in projected interest payments. An analysis of Ghana’s fiscal multipliers indicates that, to preserve economic growth, any chosen fiscal adjustment should preserve public investment. Figure 1.21 presents fiscal multipliers for various spending categories, showing the impact on GDP growth resulting from a one percentage point increase of GDP through different fiscal instruments. The fiscal multiplier for public investment is not only one of the highest in the short term, it also remains high in the medium to long term, as public investment adds to the capital stock and enhances potential GDP growth. This underlines the criticality of safeguarding public investment even in bad times to avoid ‘stop-and-go’ patterns and preserve growth prospects. Other budget instruments, such as personal income tax (PIT), current expenditure (goods and services; public wages), and VAT, would all have a transitory negative impact on growth which would progressively fade out. Direct taxes, such as PIT, may be preferred to indirect taxes, such as VAT, because of their more limited impact on poverty and stronger progressivity. 9 The relatively low multiplier estimated for corporate income tax (CIT) is a result of the narrow tax base for this instrument, reflective of the largely informal nature of the economy. Ghana Public Finance Review | Volume 2 / Detailed Analysis 32 Improving DRM will be key to The fiscal multiplier for public investment dominates that of other fiscal instruments in the long-term the sustainability of the fiscal Figure 1.21. Ghana’s present value fiscal multipliers estimates consolidation. The baseline outlook assumes an ambitious increase in the revenue-to-GDP ratio, from 15.6 percent 1.40 1.20 in 2022 to around 18.4 percent by 1.00 2026. The government has developed 0.80 a Medium-Term Revenue Strategy 0.60 (MTRS) focused on tax policy and 0.40 revenue administration measures that 0.20 0.00 will support this goal. The MTRS was 0 2 4 6 8 10 12 14 16 18 20 22 24 26 approved by the Cabinet and published VAT PIT G&S / Wages Invest. CIT in 2023 and served as input to the 2024 budget. Source: MoF, World Bank staff estimates The primary balance’s target is a 1.5 percent of GDP surplus by 2025 Figure 1.22. Overall and primary deficit - commitment (%) 4 1.5 1.2 1.6 1.5 1.5 1.5 1.5 2 1.0 0.6 0.5 0 -2 -0.5 -4 -2.3 -3.1 -2.6 -2.8 -6 -3.5 -4.0 -3.5 -4.4 -3.9 -3.5 -4.5 -4.6 -4.8 -4.8 -4.6 -8 -10 -7.5 -12 -11.1 -14 -12.0 -11.8 19 15 16 17 18 19 20 21 22 23 24 25 26 27 28 5- 20 20 20 20 20 20 20 20 20 20 20 20 20 20 g .1 Av Primary deficit (commitment) Overall deficit (commitment) Source: Ghanaian authorities and IMF. Primary expenditure is projected to drop from 12.1 percent of GDP in 2022 to around 11.2 percent by 2026, owing to efficiency gains, a revised prioritization of investment projects, and a major reduction in transfers to the energy sector. The IMF and the government have launched reviews of public expenditure that also cover statutory funds and state-owned-enterprises (SOEs), to identify potential sources of savings and improve spending efficiency. In addition, planned energy sector reforms are expected to curb the fiscal cost of sectoral subsidies and aim to clear the stock of payment arrears over seven years (although, in the short term, doing so will boost the deficit on a cash basis). 1/ Macroeconomic and Fiscal Context 33 Expenditure consolidation will stem both from primary expenditure and interest payments Figure 1.23. Primary expenditure and interest payments (% GDP) 27.2 27.7 30.0 25.2 25.0 22.2 7.5 20.3 20.5 20.7 21.2 20.8 20.9 19.5 19.1 19.5 19.8 7.3 18.9 6.3 20.0 5.3 4.6 4.2 4.3 4.1 4.4 4.9 4.9 5.2 5.1 5.5 5.2 15.0 10.0 18.9 20.0 20.2 17.0 16.2 16.1 15.8 16.6 16.7 16.6 14.5 13.9 13.8 14.0 14.6 5.0 0.0 9 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -1 20 20 20 20 20 20 20 20 20 20 20 20 20 20 15 g. Av Primary Expenditure Interest payments Source: Ghanaian authorities and IMF. Ghanaian authorities have Public debt is expected to return to a sustainable path undertaken a comprehensive restructuring of both domestic Figure 1.24. Gross public debt (% GDP), 2015–2028 and external debt (see Box 1.2). The government’s restructuring strategy aims to restore a ‘moderate’ risk of debt 2028 70.5 distress under the IMF-World Bank’s 2027 73.3 Low-income Country Debt Sustainability 2026 76.3 Framework (LIC-DSF), which entails that, by 2028, (a) the ratios of external debt 2025 79.2 service to revenues and exports will 2024 81.8 fall below 18 percent and 15 percent, 2023 83.2 respectively, and (b) the present value 2022 92.4 (PV) of the overall and external debt will 2021 79.2 fall below 55 percent and 40 percent 2020 72.3 of GDP, respectively. In line with this, government has almost completed Avg.15-19 57.4 comprehensive debt restructuring 2019 58.3 achieving 85 percent and 98.7 percent 2018 62.0 participation of eligible domestic bonds 2017 57.0 and Eurobonds, respectively. Along 2016 55.9 with fiscal consolidation and economic growth, these efforts are projected to 2015 53.9 reduce the public debt over the medium 0.0 20.0 40.0 60.0 80.0 100.0 term. Namely, the central government’s debt is expected to decline by around 22 percentage points of GDP in 2023–2028, Source: Ghanaian authorities and IMF. reaching 70 percent of GDP by 2028. Ghana Public Finance Review | Volume 2 / Detailed Analysis 34 Box 1.2. Ghana’s debt restructuring operation Ghana lost access to international markets GDP is projected to decrease by 9 percentage in 2021 due to a notable decline in market points by 2028. confidence leading to an increase in market spreads. Ghana announced a comprehensive The restructuring process for medium-term debt restructuring and a standstill on external marketable debt denominated in Ghanaian cedi commercial and bilateral debt in December provided various options for debt holders. 2022. At the end of 2022, public debt reached 92 percent of GDP (about US$66.5 billion) from • Individuals representing 62 percent 63 percent of GDP in 2019. Domestic debt participation were offered slightly more reached 50 percent of GDP in 2022, of which favorable terms. Individuals below 60 years 16 percent of GDP was held by the BoG, while of age could exchange their bonds into public external debt stood at 42 percent of bonds amortized between 2027 and 2028, GDP. with a cash coupon of 10 percent. Those aged 60 and above were offered similar As of this writing, the authorities have instruments but with a cash coupon of 15 made significant progress. The government percent. completed a domestic debt restructuring (DDEP) in September 2023, achieving its target • Pension funds: Despite initial resistance of 85 percent of eligible bonds participation, from labor unions, pension funds, with 95 helping Ghana’s public debt decrease to 83 percent participation, voluntarily exchanged percent of GDP in 2023. In June 2024, the their holdings of medium-term debt on government reached an agreement with substantially better terms. Old debt was its Official Creditor Committee (OCC) on exchanged for bonds maturing in 2027 a memorandum of understanding for the and 2028, issued during the February 2023 comprehensive restructuring of US$5.4 billion DDEP, at a 115 percent exchange ratio. of debt under the G20 Common Framework. Additionally, pension funds were provided The authorities have also been engaging with with additional strip coupons of 10 percent external commercial creditors to reach an for the same maturities. agreement on comparable terms. • Other holders: Approximately 90 percent Domestic Debt Restructuring of their debt was voluntarily exchanged into new bullet bonds maturing between 2027 The restructuring of domestic debt in Ghana and 2038, with coupons of up to 10 percent. encompassed all domestic debt except treasury A portion of the coupons was capitalized bills. The restructuring process involved the rather than paid in cash in 2023 and 2024. completion of exchanges for medium-term debt denominated in local currency, including Most government bonds denominated in US government treasury bonds, debt issued by dollars, representing 92 percent participation, the Energy Sector Levy Act (ESLA), and Daakye. were voluntarily exchanged for new bullet Additionally, it covered government bonds bonds maturing in 2027 and 2028, with denominated in US dollars, Cocobills issued coupons of 2.75 and 3.25 percent, respectively. by the Ghana Cocoa Board (COCOBOD), and Similarly, most Cocobills, with 97 percent non-marketable debt held by the BoG. As a participation, were exchanged for new bullet result of the restructuring, Ghana is expected bonds issued by COCOBOD, maturing between to achieve approximately US$8 billion in debt 2024 and 2028, with a 13 percent coupon. service savings over the period 2023–2026. Furthermore, the PV of overall public debt-to- 1/ Macroeconomic and Fiscal Context 35 Furthermore, the government exchanged • Last component of external commercial the BoG’s holdings of non-marketable debt, debt: The government is expected to focus including existing non-marketable securities on restructuring the last component of and the current overdraft balance of the external commercial debt, amounting to government, into the 2038 bond utilized in US$2.8 billion, of which US$0.75 billion is the completed domestic debt exchange, at a owed to Chinese banks, US$0.75 billion to 50 percent exchange ratio. However, a US$1 Africa EXIM Bank, and US$1.3 billion to other billion loan related to the BoG’s use of the 2021 commercial banks. Special Drawing Rights allocation to Ghana was not included in the restructuring process. Ghana remains in debt distress with public debt unsustainable, given the need for debt External Debt Restructuring restructuring and large and protracted breaches to the DSA thresholds. The December In line with the objective of comprehensive 2023 DSA update finds that under the baseline debt restructuring under the IMF program, (which accounts for the outcome of the the government built on the domestic debt domestic debt restructuring and does not restructuring by restructuring its external incorporate the impact of the contemplated debt consisting of official bilateral debt and external debt relief) the PV of external debt-to- commercial debt (Eurobond and other external GDP breaches its threshold until 2030, while commercial debt). the external debt service-to-revenues exceeds its thresholds throughout the full-time horizon • Official bilateral debt: A memorandum of the DSA. The PV of public debt-to-GDP of understanding signed between the breaches its 55 percent benchmark over the government and its OCC in June 2024, is full DSA horizon. Stress test results show that going through the bilateral signing process a combined contingent liability shock would with 19 out of 25 official creditors already put overall public debt well above the current having countersigned as at end September unsustainable trajectory throughout the full 2024. horizon. Recent developments and stress tests highlight the sensitivity of the debt ratios to commodity prices, exports, and exchange rate • Eurobond holders: On October 3, 2024, 98.7 shocks. percent of Eurobond creditors consented to the government’s Eurobond debt exchange offer. Under the deal, bondholders would Based on the debt treatments agreed with forgo about US$4.7 billion of debt owed both the OCC and the bondholders and by the GoG, (about 37 percent in nominal given the authorities’ restructuring strategy value of Ghana’s debt), translating into for the remaining non-bonded commercial some US$4.3 billion in debt service savings claims under the principle of comparability of during the IMF program. The interest rate treatment, Ghana’s debt would be assessed as on bonded debt would also decline from sustainable on a forward-looking basis. an average of 8 percent to less than 5 Source: MoF, IMF, and World Bank. percent. Additionally, the consent solicitation facilitated the mandatory exchange of non- tendered notes and amendments to the 2015 World Bank-guaranteed notes, thereby fulfilling the requirements for the World Bank payment. Ghana Public Finance Review | Volume 2 / Detailed Analysis 36 This outlook is subject to multiple risks which could require a larger fiscal adjustment than the one currently planned. Global risks with potential spillovers to Ghana include commodity price shocks and slower-than-expected monetary policy loosening in advanced economies. Ghana-specific risks include domestic policy slippages because of the 2024 presidential elections, financial sector stress following the DDEP, and contingent liabilities in the energy and cocoa sector. There could also be shortfalls in the external debt restructuring process if agreements on comparable terms are not reached with other external commercial creditors (non-bondholders) in a timely fashion. The materialization of these risks, together with Ghana’s limited financing options, could require further fiscal consolidation and partly motivates this study, which aims to identify avenues for fiscal consolidation. 1.5/ Key features of Ghana’s macroeconomic and fiscal policy Ghana’s fiscal stance has historically been pro-cyclical and appears to have remained so after the initial COVID-19 response Historically, Ghana’s public spending has been pro-cyclical, expanding during economic booms and contracting during recessions. Fiscal pro- cyclicality refers to the tendency of government fiscal policies to amplify economic fluctuations rather than stabilize them. This can exacerbate economic volatility because it reinforces the current economic trend rather than counteracting it. In contrast, countercyclical fiscal policies aim to stabilize the economy by moving in the opposite direction of the economic cycle— reducing spending or increasing taxes during booms and increasing spending or cutting taxes during recessions. The cyclicality of public expenditure can be measured as the correlation between real government expenditure and real GDP. Expenditure in Ghana was among the world’s most pro-cyclical between 1980 and 1999, especially between electoral cycles, with a bias for overspending during periods of growth.10 However, rising government expenditures have not always contributed to GDP growth, as spending on public sector wages and interest payments crowded out social spending and capital investment. The expansive bias of public spending became increasingly pronounced in 2008–2019 (especially around the four national elections that took place over that period), fostered by increased fiscal space after the HIPC debt-relief initiative, and by the expectation and subsequent availability of major oil revenues. 10 Geiger, M. and A. Mendes. 2019. “Will Pro-cyclicality Override Ghana’s New Fiscal Responsibility Law?” World Bank Blogs, 2019www.blogs.worldbank.org/ africacan/will-pro-cyclicality-override-ghanas-new-fiscal-responsibility-law 1/ Macroeconomic and Fiscal Context 37 Since 2014, and with few exceptions notably during the COVID-19 pandemic, the fiscal stance has been mostly pro-cyclical. To mitigate the social and economic impact of the pandemic, Ghanaian authorities deployed a large-scale and countercyclical fiscal response in 2020, with the abovementioned growth in spending on health and on economic support to households and businesses. However, as the health crisis subsided and economic activity recovered, public spending reduced significantly in 2021–22, becoming pro-cyclical again even as Ghana’s economy still displayed a negative output gap. Credits: World Bank Ghana Public Finance Review | Volume 2 / Detailed Analysis 38 The fiscal stance has been mostly pro-cyclical Figure 1.25. Overall fiscal pro-cyclicality, 2014–2022 3 Procyclical 2019 Countercyclical Output gap, Percent of potential GDP Fiscal loosening Fiscal tigthening 2 2018 2014 1 2017 0 2021 2022 -1 2020 2015 -2 Countercyclical 2016 Procyclical Fiscal loosening Fiscal tigthening -3 -4 -3 -2 -1 0 1 2 Change in cyclically adjusted primary balance, Percent of GDP Source: Ghanaian authorities and IMF. The fiscal system as a whole is somewhat effective at reducing extreme poverty, but a better targeting of transfers and subsidies could improve its impact on inequality. Ghana’s fiscal system is moderately successful at addressing poverty and inequality, with a strong impact on extreme poverty.11 In general, the existing fiscal system in Ghana has a sizable impact on poverty: the fiscal system reduces absolute poverty by 12 percent and extreme poverty by as much as 33 percent (Table 1.2). However, the fiscal system has a limited effect on the country’s income distribution, reducing inequality, as measured by the Gini coefficient, by 3.7 points (from 43.8 to 40.1), or 8 percent. Compared to countries in SSA, the reduction in inequality is well below the mean which stands at about 14 percent. Kenya and South Africa, for example, achieve a reduction of 19 percent and 26 percent, respectively. Cote d’Ivoire and Ethiopia, on the other hand, achieve a reduction of just 2 percent and 6 percent, respectively. 11 This section follows the Commitment to Equity (CEQ) methodology to assess the redistributive impact of fiscal policy on poverty and inequality, using a microsimulation model based on the Ghana Living Standard Survey (GLSS) 7 household survey (incorporating information on various income sources) to simulate current taxes and transfers (see Annex 1). 1/ Macroeconomic and Fiscal Context 39 The fiscal system, as a whole, contributes to reducing poverty and inequality Table 1.2. Poverty and inequality using different income concepts Absolute poverty Extreme poverty Gini Market income plus pensions 30.5 12.4 43.8 Minus direct taxes 30.6 12.4 43.0 Disposable income (adds transfers) 30.2 11.7 42.6 Minus indirect taxes 34.0 13.6 42.1 Consumable (adds indirect subsidies) 31.7 12.8 42.4 Final income (adds in-kind transfers) 26.8 8.3 40.1 Note: Market income plus pensions includes market income and contributory pensions. Disposable income adds direct transfers and removes direct taxes. Consumable income adds indirect subsidies and subtracts indirect taxes. Final income adds in-kind transfers such as education. While most taxes and social transfers are progressive, some subsidies and in-kind transfers are regressive and explain the limited impact of the fiscal system on equity. Figure 1.26 presents the impact on poverty and inequality of the main components of Ghana’s fiscal system: • Direct taxes: Direct taxes have limited impact on poverty, as only a small segment of the poorest half of the population pays taxes. This is due to tax- free credit brackets and informality, with the poorest half of the population contributing less than 5 percent of PIT revenue. • Transfers: While transfers, such as the Livelihood Empowerment Against Poverty (LEAP) and the Ghana School Feeding Program (GSFP), primarily benefit the poor (Figure 1.27) their impact is constrained by their limited size, resulting in moderate poverty reduction (0.4 percentage points).12 • Indirect taxes: Indirect taxes exacerbate poverty. Although exemptions on food soften the negative impact of VAT and levies, when combined with excises, these indirect taxes contribute to an increase in poverty by approximately 3.8 points and 1.9 points for extreme poverty. • Indirect subsidies: These subsidies, in the form of electricity below cost, offset a considerable amount of the poverty impact of indirect taxes, but lead to increased inequality due to poor targeting and come at a hefty cost to the government, roughly US$2 billion in 2021. • In-kind transfers: Transfers in the form of education have the most substantial impact on poverty reduction but can be regressive (in particular for higher-level education, see Figure 1.27). 12 The impact on extreme poverty is larger, 0.8 percentage points, since LEAP is explicitly targeted to the extreme poor. Ghana Public Finance Review | Volume 2 / Detailed Analysis 40 Ghana’s tax system is mostly progressive while some transfers are regressive Figure 1.26. Concentration curves for taxes, Ghana 2023 (items Figure 1.27. Concentration curves for transfers, Ghana 2023 (items below the 45° line are progressive) above the 45° line are progressive) 1.00 1.00 0.90 0.90 0.80 0.80 0.70 0.70 0.60 0.60 0.50 0.50 0.40 0.40 0.30 0.30 0.20 0.20 0.10 0.10 0.00 0.00 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 Direct taxes (PIT) LEAP Middle school in-kind Contributory Pensions Secondary in-kind VAT+Levies Electricity Subsidy University in-kind Excise taxes Pre-school Free SHS Soc. Sec. Contributions Primary in-kind Ghana SFP Source: World Bank staff estimates based on GLSS 7 microsimulation tool. Pensions in Ghana are regressive as they are mainly funded by formal sector employees. They contribute to the program and, given that the amounts contributed—and benefits received—are dependent on an individual’s wage, the better off employees benefit relatively more. The concentration coefficient for pensions in the country is 0.42.13 Less than 17 percent of pension payouts accrue to the poorest 50 percent of the population. Relatedly, social security contributions are progressive, with a concentration coefficient of 0.73. Less than 5 percent of total contributions are paid by the poorest half of the population. 1.6/ The right set of fiscal rules could help curb spending pro-cyclicality and strengthen debt sustainability Ghana’s fiscal policy framework may be strengthened by adopting a credible rules-based approach aimed at ensuring debt sustainability and economic stabilization. Fiscal rules can help promote debt sustainability, attenuate fluctuations in the business cycle, create a more predictable fiscal policy framework, and build buffers against adverse macroeconomic shocks. 13 The concentration coefficient is a measure of how unequally distributed a transfer or tax is over a reference distribution. For transfers, such as pensions, a positive number suggests these are regressive in the sense that pensions are more highly concentrated among the rich (it is the opposite for tax or social contributions). A negative coefficient for a transfer suggests that it is more concentrated among the poor. 1/ Macroeconomic and Fiscal Context 41 By imposing numerical norms applied to debt levels, fiscal balances, or other key fiscal aggregates, fit-for-purpose fiscal rules could help lessen the deficit bias observed in the country’s fiscal management over the past decades and reinforce policy makers’ commitment to debt sustainability. Fiscal rules could also help stabilize economic fluctuations by enabling acyclical or countercyclical fiscal responses and address the pro-cyclicality of fiscal policy which has been a persistent feature of the existing fiscal framework. Ghana’s recent fiscal rule framework has been unable to promote a dependable fiscal stance and to shore up confidence in the country’s fiscal policy. Effective fiscal rules could have moderated the expansionary and pro-cyclical fiscal stance observed between 2008 and 2019, thereby leaving the country with greater room to respond to subsequent crises. However, Ghana only introduced a Fiscal Responsibility Act (FRA) in December 2018 and then suspended its application in 2020 due to the impact of the COVID-19 pandemic. The FRA sets a double operational rule system, comprising (a) a positive primary balance, and (b) a de facto cap to the annual fiscal deficit at 5 percent of GDP—a relatively high ceiling (for example, the convergence criteria of the West African Monetary Zone envisage a limit of 4 percent of GDP), unsuitable to containing expenditure in periods of high commodity prices or election years. The current fiscal rule was suspended in 2020 just after coming into effect Figure 1.28. Central government - overall and primary balance (% GDP) 4.0 2.0 0.0 -2.0 -4.0 -6.0 5% of GDP (Starting in 2019) -8.0 -10.0 -12.0 -14.0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Primary Balance (cash) Overall Balance (cash) Source: MoF of Ghana. Ghana Public Finance Review | Volume 2 / Detailed Analysis 42 Fiscal balance-based rules, such as those embedded in Ghana’s FRA, tend to be highly pro-cyclical. They allow for expenditure expansions during economic upturns and necessitate fiscal adjustments during downturns, thereby amplifying rather than smoothing cyclical fluctuations. Additionally, the FRA lacks a limitation on indebtedness, failing to offer long-term forward guidance and predictability in fiscal policy, which undermines investor confidence in the government’s ability to manage unsustainable debt trajectories. The FRA also does not include automatic correction mechanisms for deviations or external oversight to ensure compliance. Its escape clause is poorly defined, permitting policy makers to deviate from the rule under numerous circumstances without specifying the extent of deviations or providing clear adjustment paths to return to the rule’s targets. Furthermore, the rule’s limited coverage incentivizes the use of extrabudgetary funds and spending by government agencies not subject to the rule. Moreover, the fiscal rule has been ineffective in curbing the increased reliance on external commercial borrowing and the associated macroeconomic risks. Financing domestic consumption expenditure through external borrowing can lead to hazardous macro-external side effects and should generally be reserved for spending activities that necessitate imports of real goods and services. An effective fiscal responsibility framework should incorporate these considerations into the authorities’ fiscal and financing decision-making processes. This can be achieved through mechanisms such as reviews by a fiscal council or the inclusion of external borrowing caps within the fiscal rule. Policy makers should consider replacing the current fiscal balance rules with a combination of expenditure and debt rules. Since the global financial crisis, an increasing number of countries have adopted expenditure rules, which are simple and effective at limiting expenditure pro-cyclicality. Compliance with these rules is also high and growing globally. International evidence indicates that combining fiscal rules has become increasingly popular since the global financial crisis. By integrating an expenditure rule with a debt rule, and potentially including caps on external commercial borrowing, countries can simultaneously promote debt sustainability and reduce the pro-cyclicality of government spending. This approach can be particularly beneficial for countries like Ghana, which face rising indebtedness and need to reinforce their commitment to debt sustainability while fostering an acyclical or countercyclical stance in government spending.14 Finally, enhancing fiscal rules with well-defined escape clauses can improve their effectiveness in addressing increasingly frequent shocks. These clauses allow for temporary deviations under specific circumstances, providing the flexibility needed to manage serious macroeconomic shocks while maintaining the credibility of the fiscal rule. 14 The IMF has recommended simplifying the operational rules system by focusing on a single rule instead of the current two and incorporating a debt target. This single rule should have broad coverage, including extrabudgetary spending, to better promote debt sustainability. 1/ Macroeconomic and Fiscal Context 43 Finally, the authorities should review the fiscal council framework to strengthen its independence and clarify its mandate. Fiscal councils, or other independent fiscal institutions, have the potential to enhance fiscal discipline, promote greater transparency and accountability, and elevate the quality of public debate on fiscal policy choices. Empirical evidence suggests that fiscal rules have a more significant impact on debt sustainability when supported by robust legal and institutional arrangements, such as a fiscal council and a medium-term budget framework.15 Fiscal councils have proven to be strong enforcement mechanisms by monitoring compliance with fiscal rules and increasing the costs of deviations for fiscal authorities. They play a crucial role in strengthening institutional safeguards by providing independent forecasts, costing measures, and risk assessments, which are essential for calibrating fiscal anchors and plans. In Ghana, the fiscal council should focus on a few core tasks, such as ensuring compliance with the fiscal rule (or set of fiscal rules), and must remain independent from the government to ensure its effectiveness. Box 1.3. Building institutions for fiscal discipline - the case of Jamaica Jamaica successfully cut its public debt in Responsibility Framework adopted by half over a period of ten years. After years Jamaica established fiscal rules focused on of sluggish economic growth and inadequate debt accumulation, fostered the production fiscal discipline, Jamaica’s public debt peaked of a medium-term plan, and limited fiscal at 147 percent of GDP in 2013, raising concerns slippages. It included ambitious targets for about the government’s solvency. The main fiscal deficits and debt stock, along with challenges included a substantial public sector well-designed escape clauses that balanced wage bill, lax budgetary controls leading to transparency and flexibility. Crucially, these persistent deficits, and contingent liabilities efforts were supported by the Economic from the public sector. With support from Programme Oversight Committee (EPOC), the IMF, Jamaica undertook its first debt a social collaboration formed in 2013 that restructuring in 2010 and a second one in included participants from the government, 2013. The primary goal was to increase the private sector, and civil society organizations primary budget surplus to 7.5 percent of GDP (CSOs). EPOC’s role was to oversee and from an average of 3.2 percent. These efforts communicate the progress of economic significantly improved debt dynamics, rebuilt reform actions in line with the IMF agreement investor confidence, and laid the foundation for to the public. Acting as the fiscal council, steady economic growth. By early 2020, total the committee was provided with data by public debt had been reduced to approximately the government to evaluate the nation’s 94 percent of GDP, and 72 percent by 2023, fiscal achievements against set objectives. with the primary balance accounting for over In February 2021, the Jamaican Parliament 55 percent of the improvement. further strengthened this framework by creating the Independent Fiscal Commission. Jamaica’s success was driven by two key elements: (a) a fit-for-purpose set of Sources: World Bank. 2022. “Jamaica - SCD: Boosting Recovery and Sustainable Economic Growth”; and fiscal rules and (b) various institutional Arslanalp, Serkan, Barry Eichengreen, and Peter Blair agreements that ensured the burden of Henry. 2024. “Sustained Debt Reduction: The Jamaica adjustment was shared fairly. The Fiscal Exception”. March 2024. 15 Blanco, F., Saavedra, P., Koehler-Geib, F., and Skrok, E. 2020. “Fiscal Rules and Economic Size in Latin America and the Caribbean”. Latin American Development Forum. Washington, DC: World Bank. doi:10.1596/978-1-4648-1382-5. Ghana Public Finance Review | Volume 2 / Detailed Analysis 44 1.7/ Conclusions and policy orientations Since the early 2010s, the cyclical nature of government revenues and expenditures that are directly included in the budget has contributed to the accumulation of high levels of debt, resulting in a substantial interest burden and exacerbating the current crisis. Ghana’s recovery plans from this crisis rely heavily on an ambitious fiscal consolidation and significant debt relief. The composition of Ghana’s fiscal consolidation needs to be sustainable and equitable. It needs to rely on an overall improvement of the fiscal policy framework, including both expenditure and revenue measures, to make sure that the structural fiscal deficit is reduced in the long run. It also needs to ensure that the burden of the adjustment does not fall on its poorest and most vulnerable citizens. Notably, improving the targeting and scale of some existing benefits will help to further reduce poverty and promote equity. Enhancing DRM is crucial for successful fiscal consolidation. Although Ghana’s tax revenue-to-GDP ratio has been increasing, it remains low by international standards. The steadfast implementation of the country’s MTRS and key reforms will be essential for achieving a favorable medium- term economic outlook. These reforms include: removing VAT exemptions; reforming the CIT by phasing out tax holidays and exemptions and strengthening safeguards against profit-shifting; reducing customs exemptions; enhancing the progressivity of PIT; automatically adjusting fuel levies based on fluctuations in the exchange rate or inflation; and adopting a new fiscal regime for the extractive industries. High levels of public spending call for strategies to contain non-priority expenditure. Key measures to this effect, some of which are already envisaged by the government, include reducing rigid expenditures by containing the public sector wage bill; rationalizing public spending on goods and services and limiting transfers to government units; consolidating and deepening energy sector reforms to contain energy subsidies; and revising the prioritization of capital investment projects. Ghana could strengthen its fiscal consolidation efforts by reforming its fiscal rule framework to be more agile and flexible in responding to crises, while still maintaining fiscal sustainability. Following the suspension of the FRA due to the COVID-19 pandemic and subsequent energy and food price shocks, policy makers should carefully evaluate the advantages and drawbacks of various fiscal rules to select the one that best aligns with Ghana’s economic circumstances and policy priorities. A framework that combines an expenditure rule with a debt rule could help Ghana curb pro-cyclical spending and improve debt sustainability. 1/ Macroeconomic and Fiscal Context 45 Fiscal consolidation is essential for reversing monetary financing. Tightening the legal limits on central bank lending and granting further independence to the BoG can help contain monetary financing. However, implementing an effective fiscal consolidation strategy that moderates the government’s gross financing needs over the medium term will be crucial. If gross financing needs remain elevated, the government may struggle to access funding sources at market conditions and face pressures to revert to monetary financing. Credits: World Bank 2/ Ghana Public Finance Review | Volume 2 / Detailed Analysis 46 Ghana Public Finance Review | Building the Foundations for a Resilient and Equitable Fiscal Policy Enhancing Domestic Revenue Mobilization for Fiscal Sustainability 2/ Enhancing Domestic Revenue Mobilization for Fiscal Sustainability 47 2.1/ Ghana’s recent revenue performance has been lackluster Ghana’s domestic revenue mobilization (DRM) has suffered in recent years, with collected revenues as a share of gross domestic product (GDP) declining from 15.7 percent in 2017 to 13 percent in 2021. Revenue targets were missed by more than 7 percent on average during that period, affecting budget credibility. The impact of Russia’s invasion of Ukraine, notably through higher inflation, has exposed underlying macro-fiscal instability and calls for bold tax policy measures and tax administration reforms. In 2023, Ghana’s economic growth was more resilient than expected, also thanks to greater government appetite for reform and deeper engagement with the International Monetary Fund (IMF) and the World Bank. Inflation has moderated, the fiscal and external positions have improved, and the exchange rate has stabilized. The adoption of an ambitious Medium Term Revenue Strategy (MTRS) for 2024–2027 lays a foundation for even more robust reforms toward fiscal stability and economic prosperity. Ghana Public Finance Review | Volume 2 / Detailed Analysis 48 Ghana’s revenue collection declined and fell short of targets in 2017–2021 Figure 2.1. Planned vs. actual revenue (% GDP) 25.0 20.0 15.7 3.3 2.6 13.0 12.9 13.0 15.0 3.5 2.5 2.6 11.5 2.3 % of GDP 2.7 2.2 2.2 3.3 1.7 2.2 1.8 1.7 1.5 1.5 2.0 1.5 1.5 1.2 10.0 6.8 6.5 5.4 4.9 4.8 5.2 5.4 5.7 5.0 4.1 5.0 6.6 6.5 5.6 5.9 6.6 6.5 6.7 6.2 6.8 6.1 0.0 Plan Actual Plan Actual Plan Actual Plan Actual Plan Actual 2017 2018 2019 2020 2021 Tax on income and property Tax on Goods and Services Taxes international trade Non Tax Revenue Actual Total Tax Revenue Source: Ministry of Finance (MoF) fiscal data reports and World Bank calculations. Ghana’s tax collection relative to GDP remains below the levels of its structural peers. Between 2017 and 2021, Ghana’s average tax collection was 13.2 percent of GDP, which is 8 percentage points below the country’s estimated tax capacity of 21.2 percent of GDP as of 2018,16 and also below the Sub-Saharan Africa (SSA) average. Except for turnover and excise taxes,17 collections from all major taxes have declined in recent years. Value-added tax (VAT) collection decreased from a high of 4.0 percent of GDP in 2015 to 2.0 percent in 2021. Corporate income tax (CIT) and personal income tax (PIT) fell from 3.1 percent and 2.2 percent of GDP, respectively, in 2018, to 2.8 percent and 2.0 percent in 2021. Taxes on international trade dropped from a high of 2.1 percent of GDP in 2017 to 1.5 percent in 2021. The persistent decline in revenue from income taxes and VAT contrasts sharply with trends observed in peer countries. However, two reforms enacted in 2023—a raise in the standard VAT rate from 12.5 percent to 15 percent and the introduction of a new high- income PIT bracket taxed at 35 percent—are projected to increase revenues. Additionally, the tightening of the Exemptions Act and rationalization of tax expenditures (TEs) in the 2024 budget are expected to boost CIT revenues. 16 World Bank Revenue Dashboard. 17 More than 90 percent of excise revenues in Ghana derive from petroleum taxes, that is, energy and road fund levies. 2/ Enhancing Domestic Revenue Mobilization for Fiscal Sustainability 49 Ghana’s tax take relative to GDP is lower than in structural peers and in SSA at large Figure 2.2. Tax revenue (% GDP) 20.0 15.0 % of GDP 10.0 5.0 0.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Cambodia Cameroon Cote d'voire Ghana Senegal SSA Source: United Nations University - World Institute for Development Economics Research (UNU-Wider) dataset and World Bank calculations. VAT revenues declined significantly between 2015 and 2021 Figure 2.3. Tax revenue by type (% GDP) 16.0 14.0 12.0 2.0 1.5 2.0 2.1 1.0 1.5 1.9 0.7 1.4 10.0 0.5 0.5 1.6 0.6 1.7 0.9 1.3 % of GDP 1.3 1.8 8.0 2.4 1.8 2.2 3.5 3.5 6.0 4.0 3.8 2.4 3.8 2.0 4.0 3.1 3.3 2.4 3.0 2.8 2.1 1.9 2.0 1.9 1.7 2.0 2.2 2.2 2.1 2.0 0.0 2015 2016 2017 2018 2019 2020 2021 PIT CIT VAT Excise Taxes Turnover taxes Trade Taxes Non tax Revenue Oil Revenue (GNPC Interest) others Source: UNU-Wider dataset, MoF fiscal reports, and World Bank calculations. VAT revenues have slipped in recent years. Ghana’s fiscal system is moderately successful at addressing poverty The contribution of VAT to total tax revenues and its overall performance in Ghana have been declining, contrary to global trends. The VAT share of Ghana’s total tax revenues decreased from 34 percent in 2015 to 17 percent in 2021, partly due to a reduction in the standard VAT rate from 15 percent to 12.5 percent in 2018. In comparison, the average contribution of VAT to total taxes in all IDA and IBRD eligible countries was 42 percent over the same Ghana Public Finance Review | Volume 2 / Detailed Analysis 50 period. Additionally, Ghana’s VAT productivity18 fell from 32 percent in 2017 to 16 percent in 2021, which is below the SSA average of over 30 percent and the levels of structural peers such as Cambodia (66 percent), Senegal (35 percent), and Cameroon (25 percent).19 VAT collection efficiency,20 which measures actual tax collection against the potential collection if the standard VAT rate were applied to all domestic final consumption without exemptions or special rates, also dropped from 32 percent in 2017 to 20 percent in 2021, compared to the SSA average of 39 percent.21 Recently, Ghana amended the VAT Act to restore the standard VAT rate to 15 percent. Furthermore, streamlining zero-rated items and reviewing VAT-exempt products and services would significantly enhance VAT performance. Ghana’s tax collection falls slightly below that of comparators although not for all tax types Figure 2.4. Benchmarking Ghana’s tax revenue performance against countries with similar levels of GDP per capita and trade Source: World Bank Revenue Dashboard.22 18 VAT productivity is defined as net VAT revenue-to GDP ratio divided by the standard VAT rate. It measures how much a 1 percentage point increase in the VAT rate changes VAT collection in GDP terms. 19 https://www.imf.org/external/np/fad/tpaf/pages/vat.htm 20 Collection efficiency = VAT revenue / ((Total final consumption net of VAT revenue) * VAT rate). 21 https://www.imf.org/external/np/fad/tpaf/pages/vat.htm 22 https://dataviz.worldbank.org/views/TaxRevenueDashboard/CountryBenchmarking?%3AshowAppBanner=false&%3Adisplay_ count=n&%3AshowVizHome=n&%3Aorigin=viz_share_link&%3Aembed=y&%3AisGuestRedirectFromVizportal=y 2/ Enhancing Domestic Revenue Mobilization for Fiscal Sustainability 51 Ghana’s recently increased statutory VAT rate is broadly in line with the levels of regional peers, but exemptions and additional levies create numerous distortions. The current standard statutory VAT rate of 15 percent is closely aligned with the SSA average of 15.8 percent and the lower middle- income country (LMIC) average of 15.1 percent (Figure 2.5). A reduced VAT rate applies to retailers with annual sales revenues between GHS 200,000 and GHS 500,000, effectively functioning as a sales tax. However, several products and services benefit from VAT exemptions without the right to deduct VAT paid on inputs. These exemptions cover a wide range of agricultural products, animals, foodstuffs, inputs to agricultural production, water and electricity supply,23 and domestic passenger transport. The World Bank estimates that these VAT exemptions cost Ghana 1.85 percent of GDP annually, equivalent to about 72 percent of all VAT revenue collected. While regional and structural peers also grant VAT exemptions on certain goods and services, their scope is generally narrower. Additionally, numerous levies are added to the VAT base rate in Ghana, including the National Health Insurance Levy (NHIL) (2.5 percent), the Ghana Education Trust Fund (GETFund) levy (2.5 percent), and the COVID-19 health recovery levy (1 percent), effectively raising the consumption tax on certain items well above the statutory rate. Statutory standard VAT rate in Ghana is aligned with SSA and LMIC levels Figure 2.5. Benchmarking Ghana’s statutory VAT rate against comparators (% GDP) 30% 25% 20% 15% Ghana 10% 5% 0% ld er d A e e e m m m pe n SS or s al l a co co co W ur na in in in e- e- ct io h ig ru eg dl dl H id id st R m m er er w pp Lo U Source: World Bank elaboration based on Organisation for Economic Co-operation and Development (OECD) library. Note: Boxplot displays a five-number summary of rates: minimum, maximum, sample median, and first and third quartiles. Regional and structural peers include Cambodia, Cameroon, Ivory Coast, and Senegal. 23 For households, the exemption applies up to a certain consumption threshold. Ghana Public Finance Review | Volume 2 / Detailed Analysis 52 Ghana grants special VAT treatment to more goods and services than most of its peers Table 2.1. Special VAT treatment among sectors and peers Financial services Electricity supply Accommodation and restaurants Water supply products and Agricultural agricultural production Health and foodstuffs Passenger education transport Inputs to services GHA Ex/SR Ex Ex Ex/SR Ex SR Ex Ex CMR Ex/SR Ex Ex Ex SR/Ex SR SR/Ex Ex CIV Ex/RR/SR SR Ex/SR Ex/SR SR/Ex SR SR/Ex Ex KHM Ex SR SR/Ex SR/Ex SR/Ex Ex Ex Ex SEN Ex/SR SR SR SR SR RR ST Ex Source: World Bank elaboration. Note: Treatment applicable to majority of goods or services within the group. Ex=exempt without the right to deduct/non-taxable, ST=special tax, RR=reduced rate, SR=standard rate. Revenue from excise duties has room for growth. Ghana collects less revenue from excise duties than its structural peers. At about 1.8 percent of GDP, Ghana’s seven-year average collection rate for excise duties falls below the 2.1 percent average across low-income countries and at the lower end of the SSA region—where collection rates range between 6.2 percent and 0.04 percent of GDP. Globally, most countries collect excise duties equivalent to at least 2 percent of GDP.24 More than 90 percent of Ghana’s excise tax revenues derive from petroleum products, through the energy fund and road fund levies; collections from traditional excisable products only amount to approximately 0.1 percent of GDP. Overall, the estimated gap between actual and potential excise duty collection in Ghana is equivalent to 2 percent of GDP (Figure 2.8), pointing to considerable scope to increase rates in pursuit of revenue objectives. At the same time, increasing excise taxes on tobacco and alcohol products would raise their prices and reduce their consumption, contributing to better health outcomes. Excisable products are subject to a combination of specific and ad valorem excises. The Ghana Revenue Authority (GRA) requires that producers and importers affix tax stamps to their products before delivery ex-factory or at point of entry. However, the absence of a robust track-and-trace system and of factory-gate flow meters likely contributes to noncompliance. The tax base is narrow, mostly comprising tobacco products, alcoholic beverages, non-alcoholic carbonated beverages, and bottled water. An excise on textile 24 World Bank, 2024. “Eighth Ghana Economic Update: Strengthening Domestic Revenue Systems for Fiscal Sustainability” Ghana Economic Update Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/en/099073124093539928 2/ Enhancing Domestic Revenue Mobilization for Fiscal Sustainability 53 products exists but is primarily geared toward helping detect counterfeits and contraband. In this context, an expanded use of inflation-indexed excise taxes could be considered, as ad valorem taxes are more difficult to manage and vulnerable to price manipulation. Moreover, the introduction of excises on plastics, sugar-sweetened beverages, environmentally detrimental goods, and motor fuels, among others, could generate significant revenue, while helping mitigate the negative externalities of such products on public health and the environment. Ghana’s tax take relative to GDP is lower than in structural peers and in SSA at large Figure 2.6. Benchmarking excise revenue performance against comparators (% GDP) 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Cambodia Cameroon Cote d'Ivoire Ghana Senegal Source: UNU-Wider dataset and World Bank calculations. Figure 2.7. Excise revenue-to-GDP ratios across SSA Figure 2.8. Gap between actual and potential excise duty revenues in Ghana % 4.5 7 4.0 3.5 6 3.0 % of GDP 5 2.5 2.0 4 1.5 3 1.0 0.5 2 0.0 1 18 20 00 02 04 06 08 10 12 14 16 20 20 20 20 20 20 20 20 20 20 20 0 LSO TZA UGA GHA MLI SEN ZMB SLE AGO NGA Capacity Actual Source: IMF Longitudinal Data Set, World Bank, Budget Profile 2019–2023. Ghana Public Finance Review | Volume 2 / Detailed Analysis 54 Revenue from CIT: a mixed picture. CIT revenue performance gradually improved over the past decade reaching a high of 3.3 percent of GDP in 2019, until the COVID-19 pandemic in 2020 triggered a notable slowdown (Figure 2.3). CIT’s share of total tax revenues increased from 18 percent in 2015 to 24 percent in 2021, with CIT collection averaging 2.2 percent of GDP over that period—less than in regional and structural peers such as Cambodia, Cameroon, and Kenya, and significantly less than in the best-performing SSA countries, such as Mozambique and the Seychelles. The statutory CIT rate of 25 percent is lower than in key structural peers (Cameroon: 33 percent, Senegal and Kenya: 30 percent), while a complex regime of 22 reduced CIT rates (ranging from 1 percent to 22 percent) complicates the administration of taxes, lowers the effective tax rate, and fosters a misallocation of resources as businesses engage in aggressive tax planning. Ghana’s CIT productivity and actual revenues from CIT (% GDP) are comparatively low Figure 2.9. CIT productivity (%) and revenue uptake (% GDP) 7.0% 25.0% 6.0% 20.0% 5.0% % of GDP 15.0% Percent 4.0% 3.0% 10.0% 2.0% 5.0% 1.0% 0.0% 0.0% a na n nd s a al re e le di ny qu oo g oi ha ila l ne bo he Ke bi er Iv az G Se m d' am yc m Sw Ca Se Ca te oz Co M CIT/GDP CIT Productivity (RHS) Source: IMF Longitudinal Data Set, World Bank. Note: CIT productivity is calculated as the ratio between CIT collection as a share of GDP and the statutory CIT rate. The narrow tax base caused by the extensive use of CIT relief is a key driver of poor CIT productivity. Over the five years ending in 2020, the average gap between actual and potential CIT revenues in Ghana is estimated at about 1.3 percent of GDP. Notably, the country’s tax framework includes more than two dozen CIT-related TEs which, according to World Bank estimates, cost the equivalent of about 0.5 percent of GDP per year in lost CIT revenue. Concerted efforts to rationalize such generous TEs may enhance CIT productivity and revenue mobilization at large. 2/ Enhancing Domestic Revenue Mobilization for Fiscal Sustainability 55 Since 2000, Ghana has consistently fallen short of its CIT revenue potential Figure 2.10. Ghana’s actual CIT collection versus potential, 2000–2020 5.0 4.0 % of GDP 3.0 2.0 1.0 0.0 2000 2005 2010 2015 2020 CIT Potential Actual CIT Source: World Bank Revenue Dashboard.25 The following sections delve into various tax policy aspects critical to achieving better fiscal outcomes. Specifically, Section 2.2 analyzes PIT policy and administration, while Section 2.3 covers TEs concerning VAT, PIT, and customs duties.26 Finally, the Recommendations section proposes reforms of PIT and TEs that could boost revenue collection. Reforms to indirect taxes, primarily VAT, hold great promise in augmenting Ghana’s revenues and have been comprehensively covered under other engagements and by other partners. In this report, VAT reforms are covered within the context of TEs as a significant share of domestic consumption is VAT exempt. This Public Finance Review then dedicates more time to PIT and other TEs with the remaining areas of focus planned for subsequent follow-up activities to this Public Finance Review. 25 https://dataviz.worldbank.org/views/TaxRevenueDashboard/TaxCapacityandTaxPerformanceDashboard?%3AshowAppBanner=false&%3Adisplay_ count=n&%3AshowVizHome=n&%3Aorigin=viz_share_link&%3Aembed=y&%3AisGuestRedirectFromVizportal=y 27 This report does not cover TEs around CIT and excises, due to the lack of relevant data at the time of the analysis. Such data is expected to be available for a follow-on report in 2024. Ghana Public Finance Review | Volume 2 / Detailed Analysis 56 2.2/ Ghana’s PIT regime is in need of reform Ghana’s PIT revenues are comparatively low, slow growing, and overreliant on payroll taxes. PIT accounts for about 15 percent of Ghana’s total tax revenues, below the SSA average of 18 percent.27 As of 2020, Ghana’s PIT take was equivalent to 2 percent of GDP, compared to the SSA average of 3.5 percent,28 resulting in a gap of over 2 percent of GDP between the actual and potential PIT revenue. Payroll taxes constitute more than 99 percent of total PIT proceeds,29 while other forms of PIT, such as taxes on capital gains, investment income, and business income of the self-employed, account for less than 1 percent of total PIT proceeds. This is significantly lower than in some other LMICs, like India, where these forms of PIT make up more than 30 percent of total PIT proceeds. In 2022, less than 25 percent of Ghanaians of voting age (18 and older) paid payroll taxes under the pay-as-you-earn (PAYE) scheme, and less than 0.2 percent declared any business income. In contrast, in countries with high PIT productivity such as Norway, Sweden, and Canada, almost 100 percent of the voting population files PIT returns. Ghana’s PIT revenues have stagnated, falling increasingly short of their potential Figure 2.11. PIT revenues among Ghana and comparators, Figure 2.12. Ghana’s actual PIT collection versus potential, 2008–2019 2000–2020 6.0 4.50 4.00 5.0 3.50 4.0 % of GDP 3.00 3.0 % of GDP 2.50 2.0 2.00 1.50 1.0 1.00 0.0 0.50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 0.00 00 02 04 06 08 10 12 14 16 18 20 20 20 20 20 20 20 20 20 20 20 20 Cameroon Cambodia Ghana Kenya Moroco Senegal Capacity Actual Revenue Source: UNU-Wider database, World Bank calculations. 27 United Nations University UNU-WIDER. 28 Tax revenue dashboard. 29 GRA data and World Bank calculations. 2/ Enhancing Domestic Revenue Mobilization for Fiscal Sustainability 57 Although Ghana’s GDP has almost doubled over the past decade, PIT revenue has not grown at a comparable rate. Unlike CIT, PIT collection has lagged GDP growth, as evidenced by trends in PIT buoyancy. PIT buoyancy measures the responsiveness of PIT revenue to changes in national income and discretionary tax policy changes over time. A tax buoyancy value of 1 indicates that a 1 percent increase in GDP would result in a 1 percent increase in tax revenues. In Ghana, the PIT buoyancy value has declined throughout most of the past decade and frequently failed to reach 1. Occasional rebounds in PIT buoyancy were primarily driven by significant changes in GDP, such as the recovery from the global oil slump of 2014–2016 and the easing of pandemic-induced lockdowns in 2020 and 2021 (Figure 2.13). Ghana’s PIT revenue has often failed to grow in line with GDP expansion Figure 2.13. Ghana PIT buoyancy and PIT rate 2.50 40 35 2.00 30 PIT Buoyancy 1.50 25 PIT Rate 20 1.00 15 10 0.50 5 0.00 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Ghana PIT Buoyancy PIT Rate Source: World Bank calculations based on GLSS–7. Numerous and generous exemptions constrain PIT revenues. Ghana’s PIT system is progressive, featuring a seven-band rate structure. Until 2022, the top marginal PIT rate was 30 percent, aligning with the SSA average of 30.6 percent. Since then, the top rate has been increased to 35 percent for all incomes exceeding GHS 600,000 (approximately US$50,000) per year. Although only a small number of registered PIT taxpayers reach this income level, enhancing compliance, targeting taxpayer registration more effectively, and utilizing third-party data to accurately determine income can significantly increase the PIT collected from the top income bracket. Ghana Public Finance Review | Volume 2 / Detailed Analysis 58 Figure 2.14. PIT income brackets and marginal rates 35% 30% 25% 18% 10% 5% 0% 0% 0 4,824 6,144 7,704 43,704 240,444 600,000 >600000 Income Bracket (in GHS/year) and Corresponding Marginal Rate Source: GRA: https://gra.gov.gh/domestic-tax/tax-types/paye/ A range of PIT exemptions further shrink the already narrow tax base. Ghana’s definition of personal income for tax purposes includes gains from regular employment, allowances, gifts, and benefits paid in cash or in kind to or on behalf of an employee. While contributions to retirement funds on behalf of an employee or retirement payments received for employment should also be included as part of employment income, exemptions are introduced through the National Pensions Act, 2008 (Act 766) making such contributions fully exempt from PIT. Other items not accounted for as employment income30 or whose tax treatment may require clarification, include reimbursements of medical, dental, and health insurance expenses; employer-provided on- site accommodation in certain sectors;31 payments made to employees on a nondiscriminatory basis that, due to their size, type, and frequency, are unreasonable or administratively impractical for the employer to account for, such as meals; allowances paid to members of an employee’s family; sums paid in respect to agreements to changes in employment conditions; employment income settled through forms of remuneration other than cash (for example, company stock); and redundancy pay. In practice, it is difficult for tax authorities to monitor potential abuse of such exemptions. The tax treatment of retirement funds in Ghana is among the most generous in the world, depriving the government of significant revenues. 30 Section 4 (2) (vi) of the Income Tax Act, 2015 896. 31 For example, timber, mining, building, construction, farming, and petroleum-related operations. 2/ Enhancing Domestic Revenue Mobilization for Fiscal Sustainability 59 Internationally, the key policy options for pension taxation focus on three major choices: (a) Exempt (E) or tax (T) the contributions made into a retirement fund (b) Exempt (E) or tax (T) the interest or gains earned from such funds (c) Exempt (E) or tax (T) withdrawals from such funds during retirement In Ghana, no tax is paid on contributions made toward or on benefits received from retirement or pension schemes.32 Withdrawals of accrued benefits from a provident fund or personal pension scheme are tax exempt.33 Benefits from the Social Security and National Insurance Trust (SSNIT) are also tax exempt.34 As a result, Ghana runs a generous EEE model. In addition,: (a) employer contributions are tax deductible and (b) additional contributions up to a maximum of 16.5 percent of a contributor’s monthly income are tax deductible for the purposes of determining the income of the contributor or their employer effectively lowering the taxable income. Box 2.1. Retirement contributions: Comparative tax treatment in Ghana’s legal definition of employee35 selected countries for tax purposes is not fully aligned with international best practice. For Kenya operates a refined TEE model. example, corporate directors are not Employee contributions are considered considered employees for payroll tax part of employment income, and purposes; instead, fees and/or allowances individuals can deduct contributions of up paid to directors are subject to a non-final to K Sh 240,000. Withdrawals of up to K withholding tax of 20 percent. Moreover, Sh 600,000 are tax exempt. fees paid to lecturers, invigilators, Uganda operates a TEE model. Employee examiners, and part-time teachers, as contributions are part of employment well as endorsement fees, attract a final income and taxed accordingly. Interest withholding tax rate of 10 percent. This accrued on contributions is tax exempt, contrasts with international best practice, as are withdrawals. whereby corporate directors are employees for tax purposes, and fees that add to Senegal operates a modified EEE model. overall income do not benefit from special Pension contributions up to 5 percent of treatment. taxable income, or voluntary insurance premiums up to 10 percent of taxable income, are deductible. A total tax-exempt Several streams of investment income, contribution threshold of CFAF 300,000 typically accruing to high-income applies. Interest accrued on benefits is tax individuals, are tax exempt, thereby exempt, as are withdrawals. reducing the progressivity and efficiency of the PIT regime. Tax-exempt investment 32 Section 89 of the National Pensions Act, 2008. 33 Section 112 (5) of National Pensions Act, 2008. Taxes apply if contributions are made for less than 10 years or a withdrawal is made before retirement. 34 Section 54 of the National Pensions Act, 2008. 35 For income tax purposes, an employee is an individual engaged in employment. The latter is defined to mean: (a) a position of an individual in the employ of another person; (b) a position of an individual as manager of an entity other than as partner of a partnership; (c) a position of an individual entitling the individual to a fixed or ascertainable remuneration in respect of services performed; and (d) a public office held by an individual. Ghana Public Finance Review | Volume 2 / Detailed Analysis 60 income includes interest paid to individuals by financial institutions, interest on Ghanaian sovereign bonds, and interest or dividends paid to members of approved unit trusts or mutual funds. Additionally, an extensive withholding tax regime applies to payments from transactions made by business entities, which simplifies tax management but also creates opportunities for potential abuse. For instance, rent derived from residential properties is subject to a lower withholding rate (8 percent) compared to commercial properties (15 percent), incentivizing the misclassification of commercial properties as residential. Table 2.2. Withholding tax rates on various types of investment income Income source Withholding tax rate (%) Final tax Interest (not applicable to individuals and resident financial institutions) 8 No Dividends 8 Yes Rent on residential properties (as investment income) 8 Yes Rent on commercial properties (as investment income) 15 Yes Royalties and natural resource payments 15 No Note: Market income plus pensions includes market income and contributory pensions. Disposable income adds direct transfers and removes direct taxes. Consumable income adds indirect subsidies and subtracts indirect taxes. Final income adds in-kind transfers such as education. The PIT and CIT regimes are not fully aligned. Profits distributable to shareholders are first taxed at a CIT rate of 25 percent; when distributed as dividends, an additional dividend tax rate of 8 percent applies. Consequently, the effective tax rate on returns from equity shares amounts to 33 percent, which is lower than the maximum PIT rate of 35 percent. This misalignment between the effective PIT and CIT rates creates opportunities for aggressive tax planning, with taxpayers who own incorporated businesses opting to receive payments through the channel with the lower effective tax rate. Additionally, the greater availability of deductions from corporate rather than personal income can further amplify the gap between the effective CIT and PIT rates. In this context, a review of dividend rates could help align the PIT and CIT regimes. Gains from a capital asset used for business or investment purposes36 are taxable, while the appreciation of personal assets is not. Asset gains are realized when the owner disposes of the capital asset through sale, exchange, transfer, distribution, redemption, destruction, loss, or expiry, or upon the 36 Excluding depreciable assets and trading stock. 2/ Enhancing Domestic Revenue Mobilization for Fiscal Sustainability 61 owner’s death or surrender. However, realization of an asset is not imputed in cases of mergers, amalgamations, or reorganizations of a company where there is continuity of underlying ownership of at least 50 percent. This means that gains from the appreciation of personal assets—such as jewelry, artwork, antiques, or real estate not used for business or investment—are tax exempt. In these cases, only a stamp duty ranging from 0.25 percent to 1 percent is levied upon conveyance or transfer of property, which is a low rate that does not fully compensate for the absence of a capital gains tax on personal property. The cost or basis of the assets realized is not indexed to inflation. When capital gains derive from assets used for business or investment, they are deemed part of business or investment income and taxed accordingly. However, individuals may elect to pay a 15 percent tax rate on gains from the realization of an investment asset, instead of adding such gains to their business or investment income. This discretionary approach enables aggressive tax planning that reduces the effective PIT rate. Reforms to expand the range of capital assets that can generate taxable gains, index the cost base for capital assets, and limit taxpayer discretion in the choice of applicable tax rates may all boost government revenue. Ring-fencing capital losses may protect a sizable portion of Ghana’s tax base. Losses from the realization of capital assets and liabilities are deductible before ascertaining income, to the extent that the asset was used in the production of income of the business or investment.37 However, there are no provisions to ensure that capital losses are not offset against other types of earnings (for example, from business, investment, or employment) or to limit the carry-forward of unused capital losses so that they can only be offset against future capital gains within a set timeframe. The complexity of the PIT system has a detrimental impact on compliance and revenues. Ghana’s PIT system is complex, and the cost of compliance for taxpayers is high. Such costs include the time and money spent on bookkeeping, tax planning, information gathering, and preparing tax returns, which can be significant. Ghana’s PIT system features a seven-band tax rate structure and multiple levies, credits, exemptions, and allowances—all of which change frequently (seven times just in the last seven years). Unsurprisingly, almost 67 percent of taxpayers perceive the tax system as complex.38 Self-employed individuals are required to pay taxes monthly, while everyone else must file their returns within four months of the end of the tax year. In addition, primary employers must file returns on behalf of their employees within three months of the end of the tax year. In contrast, international best practice requires less frequent filing/payments for individual taxpayers to reduce 37 Section 15 of the Income Tax Act, 2015. 38 https://doi.org/10.1080/23322039.2020.1782074 Ghana Public Finance Review | Volume 2 / Detailed Analysis 62 the cost of compliance. A simpler tax system can reduce the time and effort that authorities must dedicate to enforcement, while reducing the cost of compliance for taxpayers. Tax complexity and insufficient enforcement effort from tax authorities contribute to poor compliance with the PIT regime. Various statistics highlight the compliance gap: for instance, enterprises using taxpayer service centers exhibit a 22 percent filing gap for PAYE filings. Out of over 500,000 registered businesses in Ghana, only 45,585 are PAYE registered, and merely 68,385 Ghanaian taxpayers are registered as self-employed in a country with a population exceeding 30 million. Furthermore, the 2023 assessment by the Tax Administration Diagnostic Assessment Tool (TADAT) reveals that only 23.2 percent of PIT returns and 46 percent of PAYE returns are filed on time. Credits: World Bank 2/ Enhancing Domestic Revenue Mobilization for Fiscal Sustainability 63 2.3/ The fiscal cost of tax expenditures calls for a rationalization effort In Ghana, the estimated value of TEs related to VAT, PIT, and import duties is equal to 3.87 percent of GDP. TEs are deviations from the benchmark tax system, often used by governments instead of outlay expenditures to offer fiscal relief. TEs may aim to support the achievement of particular social, economic, or equity objectives, but can also result in significant forgone revenues. In Ghana, TEs are regulated by the Tax Exemptions Act, 2022 (Act 1083), while the Public Financial Management Act, 2016 (Act 921) and the Revenue Administration Act, 2016 (Act 915) mandate annual reporting of such expenditures. Table 2.3. TEs in Ghana by tax instrument, 2021 Nominal value Value as share of Value as share of actual revenue (GHS, millions) GDP (%) from relevant tax instrument (%) VAT 8,677 1.85 72.4 PIT 6,292 1.37 61.6 Import duties* 1,407 0.23 20.5 TOTAL 18,376 3.87 37.5 Source: World Bank elaboration. Data on TEs for CIT and excises not available. Note: * Estimate based on 2022 data. The Tax Exemptions Act, 2022, sets out clear criteria for introducing TEs,39 guidelines for their administration, and a monitoring and reporting framework. By providing a single overarching legal framework for TEs, the act is likely to reduce their proliferation and abuse. Importantly, the act introduced a rigorous approval process, with parliamentary involvement, that curtails the discretionary powers of the MoF; it also mandates a post-approval review and validation of TEs by the GRA. However, the new regime does not touch existing TEs. Although the Tax Exemptions Act, 2022, features a list of applicable TEs, other pieces of legislation set out further tax incentives and concessions that deviate from the notional tax benchmark. To account for this, the analysis in this chapter considered a tax benchmark for Ghana based on a combination of the conceptual and reference law approaches.40 The resulting benchmark framework is outlined in Table 2.4. 39 Defined as (a) a waiver or variation of a tax, levy, rate, duty, fee, or charge provided for under an enactment, or (b) a variation of the timing of the payment of a tax, levy, rate, duty, fee, or charge which results in a reduction in the effective liability of the taxpayer. 40 Under the reference law approach, the foundation for the benchmark is the definition of tax base set out in the tax code or in other relevant law. In contrast, the conceptual approach sets a normative benchmark in line with the notional concept of a specific tax instrument (OECD, DIAN and Minhacienda, 2021). Tax authorities do not typically follow a formalized framework to define their tax benchmark. Ghana Public Finance Review | Volume 2 / Detailed Analysis 64 Table 2.4. Tax benchmarks constructed for TE analysis, by tax instrument Tax instrument Tax base Excluded from tax Rate Variations incorporated in the base tax benchmark VAT Final domestic Non-market Standard VAT rate Deliveries exempted by use of any goods transactions, non- (12.5% in 2021)41 international treaties; supplies of and services economic activity economic operators below the involved in market VAT registration threshold (GHS transactions 200,000 in 2021) Excises Sales and release Goods not covered by Standard or, if Diplomatic purchases for free circulation laws on excises relevant, top of selected goods applicable rate for covered goods PIT All income of all Income from occasional As per current Non-taxability of social security individuals and non-economic activity, progressive rates expenses or contributions, work- unincorporated non-market transfers and brackets related expenses, income untaxed companies (taxed (for example, gifts, by international treaties, donations once) inheritance, and spousal and child support payments), non-market household services CIT All income of — Current standard Depreciation schedule as per incorporated CIT rate (25%) Income Tax Act businesses (taxed once) Customs duties All imported — As per ECOWAS Diplomatic purchases goods and tariff schedule services Source: World Bank elaboration. Note: ECOWAS = Economic Community of West African States. Due to data limitations, this report only estimates forgone revenue from TEs on VAT, PIT, and import duties. All TEs were classified by type, objective, sector of the economy directly affected, and impact on climate. Due to data limitations, calculation methodologies varied by tax instrument and nature of the TE. Overall, the study used a mix of administrative, national accounts, and survey data. Regardless of the data source used, tax liabilities were matched with revenue to account for ineffectiveness of tax collection. 2.3.1/ VAT expenditures: Key findings The fiscal cost of VAT TEs in 2021 is estimated at GHS 8.7 billion, equal to more than 72 percent of Ghana’s actual VAT revenue in the same year. The single largest source of forgone revenue from all TEs was the VAT exemption on the supply of dwellings and land on initial sale,42 which accounted for 33 percent of the overall fiscal burden from TEs and cost the equivalent of 1.13 41 VAT rate applicable during the reference year for the data underpinning this analysis. The rate has since increased to 15 percent. 42 Only the initial sale constitutes a true ‘supply of goods and services’ and would attract VAT. Subsequent sales would be ‘transfer for use’, taxed using property taxes, stamp duties, and capital gains taxes. 2/ Enhancing Domestic Revenue Mobilization for Fiscal Sustainability 65 percent of GDP. VAT exemptions on the supply of locally produced foodstuff, locally raised live animals, and agricultural inputs cost the equivalent of 0.66 percent of GDP. Finally, VAT exemptions on domestic passenger transport and on electricity and water supply (other than for industrial use) cost 0.17 percent and 0.02 percent of GDP, respectively. Counterintuitively, three deviations from the VAT benchmark—namely, VAT exemptions on the supply of crude oil and hydrocarbon products, water for industrial use, and financial and insurance services—had a positive impact on total VAT revenue. Since the relevant goods and services are mostly used as intermediate inputs, proceeds from the corresponding non-deductible VAT on inputs exceeded the revenue forgone from exempting the final goods and services. Overall, exemptions that come without a right to deduct VAT on inputs create cascading effects, with businesses’ use of intermediate inputs often taxed more than once throughout the value- add chain. By imposing a high burden on business inputs, the tax system discourages specialization as businesses consequently prefer to conduct all their operations inhouse disregarding inefficiencies generated but avoiding the high tax burden. Exemption on supply of dwellings and land was by far Ghana’s costliest VAT expenditure Figure 2.15. Cost of VAT expenditure, 2021 (% GDP) Exemption from VAT for the Exemption from VAT Exemption from VAT for supply of education services, for the supply of the supply of 0.14% agricultural inputs, pharmaceuticals, 0.03% 0.08% Exemption from VAT for the supply of transportation of passengers by road, rail, Exemption from VAT for water, 0.17% the supply of medical services, 0.04% Exemption from VAT for the supply of locally produced foodstuffs for the supply of locally raised live animals, 0.66% Exemption from VAT for the supply of supply of dwellings and land, 1.13% Source: World Bank elaboration. Note: Size of each slice illustrates cost of TE as a share of all VAT expenditures. Ghana Public Finance Review | Volume 2 / Detailed Analysis 66 2.3.2/ PIT expenditures: Key findings The fiscal cost of PIT expenditures in 2021 is estimated at GHS 6.3 billion, equal to about 62 percent of actual PIT revenues in the same year. The cost of the 12 most sizable PIT expenditures that could be estimated amounted to 1.37 percent of GDP. The PIT exemption for cocoa farmers had the deepest impact on revenue (0.42 percent of GDP), followed by deductions for pension/ social security contributions (0.37 percent of GDP), and by those for provident fund contributions (0.36 percent of GDP). Three exemptions accounted for nearly 85% of all PIT expenditures Figure 2.16. Cost of PIT expenditure, 2021 (% GDP) Provision of accommodation by an employer in certain sectors is not subject to PIT, 0.04% PIT allowance for aged dependents, 0.04% PIT allowance for dependents in the family, 0.05% PIT allowance for children education, 0.06% PIT exemption for cocoa farmers, 0.42% Deduction for provident fund contributions; 0.36% Deduction for contributions to Social Security and National Insurance Trust , 0.37% Source: World Bank elaboration. Note: Size of each slice illustrates cost of TE as a share of all PIT expenditures. 2.3.3/ Import duty expenditures: Key findings The fiscal cost of import duties expenditures in 2022 is estimated at GHS 1.4 billion, equal to about 21 percent of Ghana’s actual revenues from import duties that year. The import duty exemptions that affected revenues the most were those granted by parliament to specific taxpayers, whose value reached 0.14 percent of GDP. Other significant beneficiaries of such exemptions included a range of government agencies and state-owned- enterprises (SOEs)—for example, the Ghana Investment Promotion Centre (GIPC) and the Ghana National Petroleum Corporation (GNPC). 2/ Enhancing Domestic Revenue Mobilization for Fiscal Sustainability 67 Exemptions granted by parliament to specific taxpayers were the largest import duty expenditures Figure 2.17. Cost of import duty expenditures, 2022 (% GDP) Exemption - Technical Exemption from duty of Ghana Assistance Scheme - 0.01% Water Company Limited or Electricity Company of Ghana Limited - 0.01% Exemption from duty of Ministry of Defence Forces Movement Unit - 0.02% Exemption for GIPC - 0.01% Exemption for GNPC - 0.03% Exemption from import VAT for imports by taxpayers granted benefits by parliament - 0.14% Source: World Bank elaboration. Note: Size of each slice illustrates cost of TE as a share of all PIT expenditures. 2.3.4/ Rationalizing TEs: The balance between revenue growth and social costs Rationalizing TEs will entail removing those deemed to be unjustified or falling short of their stated goals. However, to avoid potential welfare losses larger than the expected revenue gains from such removals, the MoF should first assess the impact of TE removals on poverty—and, if needed, suggest appropriate mitigating efforts, such as targeted transfers through social support programs. Additionally, the cost of collection and administration can often be inhibitive in cases where the revenue potential is low. As such, rationalization exercises should always perform requisite cost benefit analysis of administration. This section considers options for the rationalization of three large TEs with significant potential—that is, the VAT exemption on certain foodstuffs and live animals, the VAT exemption on land and dwellings, and the PIT exemption on earnings from cocoa farming—as well as their potential impact on poverty levels. Removing the VAT exemption on the supply of locally produced foodstuffs and locally raised live animals would have a negative impact on poverty reduction. Although the estimated value of the exemption amounts to 0.66 Ghana Public Finance Review | Volume 2 / Detailed Analysis 68 percent of GDP, its potential removal is projected to raise less than that in revenues, while exacerbating poverty among those at the lower end of the income distribution (who devote most of their income to buying food). While such an effect may be less pronounced on the significant share of poor households (especially in rural areas) that produce much of the food they consume, overall welfare losses would still be significant: the removal is projected to increase the share of the population living in poverty from 31.7 percent to 34.8 percent (equivalent to an extra 1 million people), and the share of those in extreme poverty from 12.8 percent to 14.6 percent (equivalent to nearly 600,000 more people).43 Removing the VAT exemption on the supply of land and dwellings would have a minimal impact on poverty. With an estimated cost equal to 1.13 percent of GDP in forgone revenues, such exemption is the single largest TE in Ghana across all tax instruments. Moreover, any tax benefits related to land ownership or land improvement and development are likely to accrue disproportionately to those in the higher deciles of the income distribution. Reforming the taxation on land and housing is a complex endeavor that would require Removing VAT exemption on food would disproportionately affect those in lower deciles of the welfare distribution significant political capital, and the lack of reliable data makes it difficult to estimate Figure 2.18. Distributional impact of removing VAT food exemption the number of those potentially affected. However, the removal of such an exemption 120 would have a negligible impact on poverty 110 100 Percentage increase in VAT paid levels and could be considered as part of TE 90 rationalization efforts. 80 70 Eliminating the PIT exemption for cocoa 60 farmers could be disruptive in isolation 50 but would enable the introduction of 40 30 more targeted instruments to mitigate 20 welfare losses among key beneficiaries. The 10 exemption from income taxes on farmers’ 0 2 3 4 5 6 7 8 9 earnings from cocoa has an estimated value Poorest Richest equal to 0.42 percent of GDP and applies to all farmers regardless of the scale of their Source: World Bank elaboration based on Ghana Microsimulation tool. operations. Other cash crops do not entitle farmers to the same benefit and at best enable a one-off exemption for up to five years. The removal of the cocoa-related exemption would enhance market efficiency and improve the allocation of agricultural resources; however, without mitigating action, it would also push close to 75,000 people into poverty and 55,000 into extreme poverty. Crucially, 43 The poverty impacts are likely to be somewhat smaller as these estimates do not account for the fact that poor households are more likely to buy from informal stores, which do not remit taxes (see Bachas, P., L. Gadenne, and A. Jensen. 2020. “Informality, Consumption Taxes, and Redistribution.” Working Paper 27429, National Bureau of Economic Research, Cambridge, MA). 2/ Enhancing Domestic Revenue Mobilization for Fiscal Sustainability 69 by boosting PIT revenues by a considerable 12 percent, the removal of the exemption could enable the funding of welfare programs better targeted to reach those most in need of support—that is, small-scale farmers. While such a reform would have a significant impact on tax revenue, it would be politically sensitive and require strong commitment from the government. Removing PIT exemption on incomes from cocoa farming would especially increase PIT coverage (left) and amounts paid (right) among the poorest Figure 2.19. Distributional impact of removing PIT exemption on incomes from cocoa farming Percent change in individuals in a PIT paying household 240 2400 220 2200 200 2000 180 1800 Percent in PIT paid 160 1600 140 1400 120 1200 100 1000 80 800 60 600 40 400 20 200 0 0 2 3 4 5 6 7 8 9 2 3 4 5 6 7 8 9 Poorest Richest Poorest Richest Source: World Bank elaboration based on Ghana Microsimulation tool. PIT exemptions on pension contributions could be rationalized without exacerbating poverty. Contributions to the SSNIT and to provident funds are discounted from taxable income before assessment for PIT, resulting in the equivalent of 0.73 percent of GDP in forgone tax revenue. A reform that allowed for income tax to be applied before pension contributions are made would have a negligible impact on poverty but a significant effect on the amount of PIT revenue collected. Notably, since the population at the lower end of the income distribution does not participate in the pension system, fewer than 2,000 individuals would be pushed into absolute poverty and fewer than 4,000 into extreme poverty. Overall, it is estimated that after such a reform, PIT revenues would rise by 32 percent, while pension contributions would fall by 15 percent. Concurrently, pension savings could be incentivized through other means that favor a wider participation among the general public. Ghana Public Finance Review | Volume 2 / Detailed Analysis 70 Box 2.2. Sustainably improving DRM - Lessons learned from successful country experiences A 2023 IMF study identifies four recent Tax administration reforms mainly focused on episodes of countries which successfully improving compliance through strengthening increased revenue mobilization (Mauritania, taxpayer segmentation and automation. Rwanda, The Gambia, and Uganda). Some of Uganda expanded its taxpayer segmentation the main lessons are as follows: approach to the medium taxpayer by creating the Medium Taxpayer Office “The identified cases conducted both tax (MTO), combined with ‘e-tax services’ to administration and tax policy reforms as facilitate taxpayers’ registration, filing, and a package. All four identified countries payments. The Gambia implemented a implemented several tax administration detailed ’Compliance Improvement Plan measures and tax policy reforms (that is, (CIP)’ for large taxpayers. Rwanda introduced tax rate increase, base broadening, and tax new electronic filing and payment systems incentive rationalizations) in parallel. The during 2010–11 with the implementation of literature also supports that a package reform electronic tax registration. tended to be more successful in revenue mobilization (Akitoby et al, 2019). […] All four countries mainly focused on indirect tax High-level political commitment and buy-in (VAT and excise) reforms and reduction of tax from key stakeholders played a critical role exemptions as effective revenue booster. The for reform success. Uganda announced and Gambia introduced a VAT to replace a sales implemented national revenue plans with tax and a specific excise on tobacco products strong political will, and Mauritania launched in 2013. […] Uganda increased several excise social dialogues with civil society and rates on locally produced spirits from 45 to opposition groups, which helped enhance 60 percent and on cigarettes by almost 60 buy-in from key stakeholders and reduce percent in 2014, as well as reduced many VAT resistance to the reforms. exemptions. Rwanda raised its excise rate on airtime of mobile phones from 5 to 10 percent Source: “Nigeria’s Tax Revenue Mobilization: Lessons in 2011–14 and removed incentives granting from Successful Revenue Reform Episodes”, Il Jung, IMF, VAT exemptions on imports for investment 2023. certificate holders. These indirect tax reforms contributed to significant revenue gains in the identified episodes. 2.4/ Recommendations for reform The recommendations below only cover PIT and TEs, the two deep-dive topics in the DRM section of this report estimated to have the largest impact on revenue collection. Subsequent Public Finance Review reports are expected to cover other aspects of DRM reforms. Recommendations for PIT reform aim to expand the tax base, lower the cost of compliance for taxpayers, and simplify the administration of the PIT system. Notably, by laying the foundation for reducing the compliance 2/ Enhancing Domestic Revenue Mobilization for Fiscal Sustainability 71 gap—currently driven by non-filing of tax returns, and by underreporting and/ or underpayment of tax liabilities—such reforms have the potential to raise significant revenues. Recommendations targeting TE reforms ensure that TEs are fit to achieve their intended policy goals, and that revenue losses from their abuse are minimized. Many TEs are useful for the pursuit of desirable welfare objectives—e.g., the VAT exception on locally produced food items is crucial to reduce the cost of food for those on low incomes. However, it is important to quantify the benefits of each TE and ascertain whether they could be achieved more efficiently by other means—e.g., in the case of food consumption, through outlay expenditures to subsidize certain food items, or through welfare programs such as food vouchers or cash transfers. The Ghana MTRS 2024–2027 envisions some immediate critical TE reforms. With the support of the World Bank, two such reforms are underway: (a) the development of regulation on the deployment of tax concessions and incentives and (b) the development and publication of a repository of all TEs, as the first step toward the publication of TEs on an annual basis. Table 2.5. Recommended tax revenue reforms Policy Priority Measures Timeframe PIT Reforms Employee benefits Review the definition of employment income to encompass the following: Short Term allowances paid in respect of any member of the employee’s family; consideration paid in respect of agreements to any changes in conditions of employment; employment income settled through forms of remuneration other than cash, including employment benefits; and payments made in respect of redundancy or loss of employment. Employee benefits Review benefit on motor vehicles based on an appropriate proxy (that is, the cost Short Term of the vehicle) to reflect the true value of the benefit. Exemption from PIT Consider company directors as employees for tax purposes, with obligation to Short Term file annual PIT returns. Review taxation of fees paid to directors, eliminating preferential rates. Exemption from PIT Eliminate preferential tax rates on fees paid to lecturers and examiners, taxing Short Term them instead as part of employment income. PIT return filing threshold To reduce the administrative burden on the GRA, eliminate obligation to file Short Term annual PIT return for those who only earn employment income from a single source;44 alternatively, set an income threshold below which employees do not need to file a return. Exemption from PIT Reform the generous triple-exemption (EEE) model on contributions to retirement Medium Term funds, favoring models that include such contributions in the tax base but exempt interest earned on or withdrawals from retirement funds. Exemption from PIT Review exemptions on interest income paid by financial institutions, interest on Medium Term bonds issued by the government, and interest or dividends paid by unit trusts or mutual funds to their members or holders. Rental Income Limit tax avoidance opportunities and expand the tax base by setting a common Medium Term 15 percent tax rate on rental income from residential and commercial properties. 44 Individuals who earn employment income from multiple sources should continue filing annual tax returns. Ghana Public Finance Review | Volume 2 / Detailed Analysis 72 Policy Priority Measures Timeframe Dividends withholding Better integrate the PIT and CIT frameworks and raise the dividend withholding tax Medium Term rate from 8 percent to 10 percent. Taxation of capital gains/ Enable the taxation of capital gains on select personal assets that can appreciate Medium Term losses in value; remove taxpayers’ discretion about choice of tax rate applicable to gains from investment assets; ensure that capital losses can only be offset against capital gains; and limit carry-forward of capital losses, so that they can only be offset against future capital gains within a set timeframe. PIT regime To simplify the PIT regime and reduce the compliance gap, consider rationalizing Medium Term and/or reducing the number of available reliefs, tax rates (for example, overtime tax), and tax bands (from seven to about three). TE Reforms VAT Remove exemptions that do not allow for the deduction of VAT on inputs to lower Medium Term the cost of certain goods and services for final consumers and reduce market distortions. VAT Remove the VAT exemption on land and dwellings, albeit politically sensitive, to Medium Term boost revenue by the equivalent of 1.13 percent of GDP. PIT Remove exemption on earnings from cocoa farming: The removal of such Medium Term exemption would generate revenue gains equal to 0.42 percent of GDP. Albeit a politically sensitive reform that would require concurrent mitigating efforts, it would eliminate unfair discretion and discrepancies in the tax treatment of different crops, which induce suboptimal decision-making by farmers and distort the allocation of agricultural resources. Social Security Revise taxation of pension contributions and benefits: Deploying a TEE model Medium Term Contributions (SSC) for pension taxation would generate revenue gains equal to 0.73 percent of GDP. Despite some potential impact on saving rates, international best practice calls for pension contributions and/or benefits to be taxed. Such a reform would have no impact on poverty levels. Imports Reduce scope of import duty exemptions: Import duty exemptions granted Short Term by parliament exemptions are highly discretionary and leave room for abuse. Moreover, the guidelines under the Exemptions Act 2022 that introduce multiple layers of accountability (MoF, Cabinet, parliament, and GRA) for the issuance of TEs should be applied to import duty relief. Source: World Bank elaboration. Note: ECOWAS = Economic Community of West African States. 3/ 3/ Reviewing Public Expenditure Trends and Overall Efficiency 73 Ghana Public Finance Review | Building the Foundations for a Resilient and Equitable Fiscal Policy Reviewing Public Expenditure Trends and Overall Efficiency Ghana Public Finance Review | Volume 2 / Detailed Analysis 74 3.1/ Public spending has been fast-growing, volatile, and burdened by interest payments on debt Between 2010 and 2021, and before the fiscal consolidation following the 2022 economic crisis, government spending in Ghana almost doubled, reaching record levels and outpacing economic growth. In 2020, necessary- yet-costly pandemic containment and economic support measures, coupled with pre-election spending, pushed expenditures to a historic high of 25.1 percent of gross domestic product (GDP)—almost 5 percentage points above the average of the previous five years. Since 2010, public expenditure in Ghana has been volatile and inadequately targeted, with limited capital spending on critical infrastructure, and varying degrees of fiscal restraint as the government fluctuated between pro-cyclical and countercyclical policies (Figure 3.1 and Figure 3.2).45 In a context of growing needs, limited resources, and the required fiscal consolidation to stabilize the economy post crises, enhancing the efficiency of fiscal spending is more critical than ever. 45 Notably, public expenditures grew by about 40 percent year-on-year in 2012, driven by a surge in recurrent spending due to higher interest costs, energy subsidies, and substantial growth in the wage bill. Moreover, expenditure levels in 2020 were also the highest since 2012, underscoring the unprecedented challenges faced during that period. 3/ Reviewing Public Expenditure Trends and Overall Efficiency 75 Expenditures have grown faster than GDP and the fiscal stance has leaned pro-cyclical Figure 3.1. GDP growth vs. expenditure growth (2000–2023) Figure 3.2. Cyclicality of fiscal policy (2000–2021) 50% 8 Expansive fiscal policy 6 40% 4 30% 2 20% 0 % GDP 10% -2 -4 0% -6 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 -10% -8 Restrictive fiscal policy -20% -10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 -30% Total expenditure (real) Real GDP CAPB + CAPB - Output gap/GDP Source: World Economic Outlook (WEO), Macro Poverty Outlook (MPO) World Bank calculations. Latest available data. Note: CAPB = Cyclically Adjusted Primary Balance. Ghana’s budget is more rigid than those Credits: World Bank of selected peers, hindering the agility and responsiveness of fiscal policy. Expenditures are considered rigid when legal, contractual, or institutional constraints hamper short-term adjustments. In Ghana, about 75 percent of public expenditure can be classified as mandatory or highly rigid;46 the relevant categories include public sector wages, interest payments, pensions, and externally financed capital expenditure. Spending categories of medium rigidity— which include subsidies, grants, and social benefits—account for another 5 percent of total expenditure. Overall, budget rigidity in Ghana is higher than the averages of the country’s structural and aspirational peers, as well of other lower-middle-income countries (LMICs). 46 Based on World Bank Group methodology. See note to figures 3.3 and 3,4. Ghana Public Finance Review | Volume 2 / Detailed Analysis 76 Ghana’s budget is more rigid than those of its aspirational and structural peers Figure 3.3. Evolution of budget rigidity in Ghana Figure 3.4. Ghana’s budget rigidity vs. comparators 80% 100% 90% 70% 80% 60% 70% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 2016 2017 2018 2019 2020 2021 0% Ghana Structural Aspirational LMIC SSA High Medium Low peers peers 2009-2014 2015-2019 2020 Source: BOOST, WEO, World Bank calculations. Latest available data. Note: World Bank Group classification of expenditures by rigidity: Low rigidity (spending on goods, services, and capital), Medium rigidity (subsidies; goods, services, and capital spending for education and health), High rigidity (public sector wages, interest on debt, social protection excluding pensions, pensions, goods and services spending for basic services and employment contracts) Box 3.1. New insights into expenditures: The BOOST Budget Analysis Tool BOOST is an analytical framework and • Developing institutional and analytical database implemented in more than 80 capacity within the government is countries. Developed jointly by the World Bank necessary to further strengthen the and client countries, BOOST collects line-item BOOST database. data about public budgets and their execution, • Plugging the coverage gaps of GIFMIS— to enable bottom-up, detailed analyses at thereby including statutory funds, the sectoral and macro levels. In Ghana, the institutions reliant on internally generated BOOST database covers the period between funds (IGFs), local governments, SOEs, 2016 and 2021, based on thoroughly reconciled and extrabudgetary central government data from the Ghana Integrated Financial units—would add key data to BOOST and, Management Information System (GIFMIS). most importantly, would strengthen the oversight of the central government on Each line of the Ghana BOOST database those spending units. is cross-referenced at the administrative, • Ghana’s GIFMIS only includes execution economic, functional, and programmatic levels, data, while budget data is stored in a covering the budgetary central government. different system. Ideally, GIFMIS should Spending from local governments, state- include both sets of data at the line-item owned-enterprises (SOEs), and extrabudgetary level, as well as revised budgets and central government units is not included in payment data. GIFMIS, while spending directly funded by • Between 90 percent and 98 percent of the donors and certain other items were not government spending recorded in GIFMIS included in BOOST. While the development is geographically attributed to the city of of a BOOST database was a remarkable Accra or to the ‘Central’ category, revealing accomplishment for public financial the need for more accurate geotagging at management (PFM) in Ghana, further reforms the line ministry level. can help address remaining data gaps. Specifically, 3/ Reviewing Public Expenditure Trends and Overall Efficiency 77 Ghana stands out among peer countries for its high spending on interest payments and low capital expenditures. Between 2010 and 2021, Ghana spent between two and four times more (as a share of total spending) on interest payments than key comparators, highlighting the growing burden of debt servicing due to higher commitments to bilateral and commercial creditors (Figure 3.6). Burdensome interest payments were detrimental to capital expenditures, which averaged around 16 percent of total spending and 3.5 percent of GDP over the same period—versus close to 20 percent of total spending and 5 percent of GDP across LMICs and the Sub-Saharan Africa (SSA) region. On the other hand, the resources allocated to public sector salaries and benefits—33 percent of total spending and 7 percent of GDP, on average— were broadly in line with the levels recorded in LMICs and the SSA region, as well as in aspirational and structural peers. Notably, Ghana allocates a significant portion of its budget to interest payments but comparatively little to capital spending Figure 3.5. Overall expenditures as a share of GDP, 2010–2021 Figure 3.6. Expenditures by economic category, 2010–2021 (%) (% GDP) 30 100% 90% 25 80% 70% 20 60% 50% 15 40% 30% 10 20% 10% 5 0% Ghana Structural Aspirational LMIC SSA 0 Peers Peers Ghana Structural Aspirational LMIC SSA Wages Interest Capex Other Source: BOOST, WEO, World Bank calculations. Latest available data. Note: Aspirational peers include Guatemala (GTM), Philippines (PHL), and Tunisia (TUN). Structural peers include Cameroon (CMR), Ethiopia (ETH), and Senegal (SEN). Capex = Capital Expenditure. Non-discretionary spending—primarily on public sector wages, interest payments, and earmarked transfers to statutory funds—has severely limited the fiscal space available to the government. From 2010 to 2021, these combined expenditures averaged approximately 15.8 percent of GDP (Figure 3.8), accounted for 60 percent of the government’s total annual spending, and were equivalent to nearly 100 percent of its total annual revenues. Public sector wages and interest payments (averaging 7.3 percent and 4.8 percent of GDP, respectively) jointly accounted for nearly half of government spending over that period, while earmarked transfers to statutory funds (discussed later in this chapter) averaged 3.7 percent of GDP. Overall, public spending averaged Ghana Public Finance Review | Volume 2 / Detailed Analysis 78 22 percent of GDP between 2010 and 2021 (Figure 3.7). Notably, in the three years up to 2020, Ghana recorded the lowest average ratio of expenditures to GDP throughout the period considered, reflecting a political and institutional commitment to fiscal consolidation that was then disrupted by the COVID-19 pandemic. Between 2010 and 2021, government spending almost doubled in real terms, as interest payments ballooned, and declined from 2022 onward as the government embarked on fiscal consolidation Figure 3.7. Government spending by economic category, 2010 –2023, (GHS, billions; constant, 2010) 50 45 40 35 Subsidies, transfers and 30 other 25 Billions Capital expenditure 20 15 Compensation 10 5 Interest payments Goods and services 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: Ministry of Finance Ghana, World Bank calculations. Latest available data. Interest payments and wages have contributed the most to overall expenditure growth Figure 3.8. Expenditure as a share of GDP, 2010–2023 (% GDP) Figure 3.9. Contributions to growth, 2010–2023 (%) 30 50 25 40 20 30 Percent of GDP 15 20 Percent 10 10 5 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Average -10 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 -20 Use of Goods and Services Interest Payments Subisidies, transfers and other Capital Expenditure Compensation of Employees Capital Expenditure -30 Compensation of Employees Interest Payments Grants to Other Government Units Social Benefits Subsidies Other expenditures Use of Goods and Services Source: MoF of Ghana, World Bank calculations. Latest available data. 3/ Reviewing Public Expenditure Trends and Overall Efficiency 79 3.1.1/ Efficiently managing the public sector wage bill is key for fiscal sustainability The public sector wage bill was the single largest expenditure item between 2010 and 2021 and a frequent source of budgetary overruns. The public sector’s workforce and wage bill soared to averages of more than 600,000 workers (double the number of workers in 2000) and 7.3 percent of GDP, respectively, between 2010 and 2021. The trend was driven by headcount growth in public education and health care, in particular, and by collective bargaining arrangements that boosted compensation levels. Recognizing the wage bill’s fiscal burden, in 2011 the government implemented the Single-Spine Salary Structure (SSSS), to standardize wages and benefits and to streamline compensation negotiations and reviews across the public sector. However, the reform prompted an immediate spike in the wage bill in 2011 and 2012, as public workers shifted to the new salary scheme with a 20 percent increase in base pay. The switch to the SSSS also included an update to the payroll registry and a nationwide biometric registration and verification campaign for public sector workers. Notably, actual spending on the wage bill exceeded the budgeted amount in 6 out of 12 years between 2010 and 2021, by an average of 0.7 percent of GDP; the budget was underspent in the remaining years, but only by 0.3 percent of GDP on average (Figure 3.12). As outlined in Chapter 5, periodic adjustments to compensation policies and inconsistent workforce planning were the main drivers of spending overruns. Additionally, Ghana’s wage bill is relatively high compared to both aspirational and structural peers (except Tunisia) (Figure 3.13). The public sector wage bill is the government’s single largest spending item and a notable source of budgetary overruns Figure 3.10. Public sector wage bill as percentage of GDP, 2010–2023 Figure 3.11. Public sector wage bill as percentage of total expenditures, 2010–2023 12% 45% 40% 10% 35% 8% 30% 25% 6% 20% 4% 15% 10% 2% 5% 0% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 10 11 12 13 14 15 16 17 18 19 20 21 22 23 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Wages & Salaries Pensions Gratuities Social Security Wages & Salaries Pensions Gratuities Social Security Source: MoF of Ghana, World Bank calculations. Latest available data. Ghana Public Finance Review | Volume 2 / Detailed Analysis 80 Figure 3.12. Wage bill spending, budgeted vs. actual (% GDP) Figure 3.13. Spending on wages against comparators (% GDP 1.5 16.0 1 14.0 (2015-2021 average) 12.0 0.5 10.0 % GDP 8.0 0 6.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 4.0 -0.5 2.0 0.0 -1 GHA GTM PHL TUN CMR ETH SEN Aspirational Structural -1.5 Source: MoF of Ghana, World Bank calculations. Latest available Source: BOOST, WEO, World Bank calculations. Latest available data. data. Note: Yellow bars indicate overruns and clear bars indicate underruns. The SSSS has yielded mixed results, highlighting the need for further policy efforts to limit nominal wage growth, reduce the size of the public sector, improve wage bill management systems, and encourage employment growth in the private sector. On this note, the government’s recent Post COVID-19 Program for Economic Growth (PC-PEG) includes plans to reduce the salaries of political office holders by 30 percent and to adjust other wages and allowances with a view to reducing overall compensation costs by 0.5 percent of GDP. (Chapter 5 discusses the public sector wage bill and its management in greater depth). 3.1.2/ Soaring interest payments and rigid spending through statutory funds have weighed heavily on Ghana’s finances As debt levels grew to finance recurrent and off-budget spending, support the energy and financial services sectors, and cope with shocks from the pandemic and Russia’s invasion of Ukraine, so did interest payments. The combination of rising government expenditures (particularly during the period of extractives-driven economic growth described in Chapter 1) and insufficient domestic revenue mobilization (DRM) caused financing gaps that were increasingly plugged by public debt. As a result, interest payments on domestic and external debt rose from around 3 percent of GDP in 2010 to over 7 percent of GDP (and about one-third of total expenditure) in 2021. Although domestic investors hold a large share of the debt stock, the onset 3/ Reviewing Public Expenditure Trends and Overall Efficiency 81 of oil production and relatively strong economic growth over the past two decades enabled Ghana to also tap into the commercial debt market. Thus, external interest payments soared from around 0.7 percent of GDP in 2010 to 1.6 percent of GDP in 2021. By the end of 2022, international commercial creditors held 27 percent of the country’s total debt, for a value equivalent to 33.6 percent of GDP. Interest payments declined markedly in 2023, after the government initiated a comprehensive debt restructuring operation and suspended the service of most of its external debt. Interest payments rose as the government took on more debt to cover growing financing gaps Figure 3.14. Spending on interest payments (% GDP), 2010–2023 Figure 3.15. Spending on interest payments (share of total expenditures), 2010–2023 8% 35% 7% 30% 6% 25% 5% 20% 4% 15% 3% 10% 2% 1% 5% 0% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Domestic External (Due) Domestic External (Due) Source: MoF of Ghana, World Bank calculations. Latest available data. Furthermore, interest payments have been a significant source of budgetary overruns, especially as currency volatility heightened the cost of servicing dollar-denominated debt. As Ghana’s debt-to-GDP ratio soared from around 35 percent in 2010 to 81.8 percent in 2021, the country’s spending on interest payments relative to GDP reached almost double the levels of key structural and aspirational peers (Figure 3.17). High debt servicing costs are a major cause of Ghana’s ongoing debt crisis, which led to a restructuring of all debt (domestic, external official, and external commercial) starting in 2022. Ghana Public Finance Review | Volume 2 / Detailed Analysis 82 Interest payments have frequently gone over-budget and exceeded the levels of peer economies Figure 3.16. Interest payment overruns, budgeted vs actual spending Figure 3.17. Spending on interest payments against comparators (% GDP) (% GDP) 1.2 1 7.0 0.8 6.0 (2015-2021 average) 5.0 0.6 4.0 % GDP 0.4 3.0 2.0 0.2 1.0 0 0.0 GHA GTM PHL TUN CMR ETH SEN 10 11 12 13 14 15 16 17 18 19 20 21 22 -0.2 20 20 20 20 20 20 20 20 20 20 20 20 20 Aspirational Structural -0.4 -0.6 -0.8 Source: MoF of Ghana, World Bank calculations. Latest available Source: BOOST, WEO, World Bank calculations. Latest available data. data. Note: Yellow bars indicate overruns and clear bars indicate underruns. Substantial spending through earmarked funds further constrains budgetary flexibility and transparency. Spending through statutory funds and by institutions reliant on IGFs amounted to around 3.7 percent of GDP and 17 percent of total expenditures, on average, between 2010 and 2021. Statutory funds are government funds established through constitutional provisions or other legal mechanism and financed through dedicated revenue sources—for example, earmarked taxes or transfers allocated for specified spending categories. Each statutory fund has an independent governance structure outside the full remit of the Controller and Accountant General’s Department (CAGD), causing a transparency gap around their management and spending priorities. Moreover, most statutory funds are yet to be fully integrated into the government’s annual budgetary process and systems, and their activities are not fully captured by the expenditure accounting and control system (GIFMIS). Five statutory funds capture half of the total spending allocated to this category: the National Health Insurance Fund (NHIF), the Road Fund, the Ghana Education Trust Fund (GETFund), the District Assembly Common Fund (DACF), and the Energy Fund. The rationale for the various statutory funds varies. In the case of health, the institutional status of NHIF is consistent with good practice in middle- and high-income countries, while in some other sectors the logic underpinning the relevant fund is much weaker. 3/ Reviewing Public Expenditure Trends and Overall Efficiency 83 A large share of the budget is earmarked for statutory funds Figure 3.18. Spending on statutory funds (% GDP) 6% 5% 4% 3% 2% 1% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 National Health Fund (NHF) Ghana Education Trust Fund Road Fund Energy Fund Dist. Ass. Common Fund Ghana Infrastructure Fund (Capex ABFA) Retention of Internally-generated funds (IGFs) Transfer to the National Oil Company from Oil Revenue Other Earmarked Funds Source: MoF of Ghana, World Bank calculations. Latest available data. To increase fiscal space and facilitate budget management, the government introduced the Earmarked Funds Capping and Realignment Act in 2017. The act capped transfers to earmarked funds at 25 percent of tax revenues. Concurrently, the government launched plans to review the operations of the statutory funds and, if necessary, eliminate them to reduce spending inefficiencies and enhance transparency and accountability. In the aftermath of the 2017 act, transfers to earmarked funds relative to GDP steadily declined, but remained above 3 percent of GDP (around 15 percent of total expenditures). As part of the economic recovery efforts following the 2022 economic crisis, the government further lowered the cap on transfers to earmarked funds to 17.5 percent of tax revenues. Notably, the capping of transfers to statutory funds has drastically reduced capital expenditures from such funds, which have declined by 74 percent from their high point in 2019; conversely, statutory fund spending on goods, services, and compensation has increased in real terms. Overall spending levels have remained stable under the government’s fiscal consolidation program and above pre-pandemic levels. 3.1.3/ Lagging capital expenditures hamper durable economic growth As spending pressures intensified and the budget remained highly rigid, total capital expenditures declined to a level that is not sufficient to catalyze growth. Between 2010 and 2021, capital spending only averaged 3.5 percent of GDP per year and progressively declined (in 2018, it was equal Ghana Public Finance Review | Volume 2 / Detailed Analysis 84 to 1.6 percent of GDP). The trend holds even when accounting for capital expenditures through statutory funds, which were equal to about an additional 2 percent of GDP on average over the same period. Moreover, as mentioned above, statutory funds, a channel for capital expenditures, had seen declining transfers as the government worked to reduce budget rigidities with no corresponding increase in capital expenditures. Concurrently, recurrent spending—particularly on interest payments—ballooned, squeezing out the fiscal space for capital investment. Capital spending has been chronically low amid budgetary rigidity and increased interest payments Figure 3.19. Capital expenditures (% GDP) Figure 3.20. Capital expenditures (share of total expenditures) 6% 25% 5% 20% 4% 15% 3% 10% 2% 5% 1% 0% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Domestic financed Foreign financed Domestic financed Foreign financed Source: MoF of Ghana, World Bank calculations. Latest available data. Note: Graphs do not include capex spending through statutory funds. Over the years, capital spending has often undershot budgeted levels, revealing systemic issues around public investment management (PIM). The execution shortfall on capital expenditures averaged 0.7 percent of GDP between 2010 and 2021, as major investment projects were often delayed or postponed. As capital expenditure is one of the few discretionary spending categories in the budget, it is frequently targeted by the government when spending cuts are required. In this context, Ghana’s capital spending has been chronically low in comparison with peer countries (Figure 3.22). 3/ Reviewing Public Expenditure Trends and Overall Efficiency 85 Capital spending in Ghana has been under-executed and lower than in peer countries Figure 3.21. Capital expenditure overruns, budgeted vs. actual Figure 3.22. Capital expenditures against comparators (% GDP) spending (% GDP) 3 7.0 2 6.0 (2015-2021 average) 5.0 1 4.0 % GDP 0 3.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2.0 -1 1.0 -2 0.0 GHA GTM PHL TUN CMR ETH SEN -3 Aspirational Structural -4 Source: MoF of Ghana, World Bank calculations. Latest available Source: BOOST, WEO, World Bank calculations. Latest available data. data. While capital expenditures on transportation, education, health, and agriculture reflect the government’s commitment to these sectors, a large share of capital spending lacks clear functional or sectoral classifications. Between 2016 and 2021, 36 percent of capital spending was allocated to the transport sector, 16 percent to education, 4 percent to health care, and 3 percent to agriculture (Figure 3.23). A significant 18 percent of capital expenditure went toward a broad category labeled ’general public services’ (GPS), with the final use for almost half of that not specified any further (See Box 3.2). Overall, one-third of capital spending was used on roads and highways, 9 percent on office buildings, and 7 percent on school buildings (Figure 3.24). Credits: World Bank Ghana Public Finance Review | Volume 2 / Detailed Analysis 86 Capital spending has focused on the transport sector Figure 3.23. Capital spending by functional classification, Figure 3.24. Major capital expenditure items, 2016–2021 (percent of total 2016–2021, (percent of total capex) capex) 33% 9% 7% Transport 36% General Public Services 18% Education 16% Electrical Office Buildings Networks Other economic affairs 10% 7% 6% 3% Public Order & Safety &… 7% Plant Housing & Community… 5% and Machin- Motor Vehicle ery, Health 4% 2% 2% Agriculture 3% Computers School Office and Roads and Highways Buildings Equipment Accessories Source: BOOST, World Bank calculations. Latest available data. Box 3.2. Breakdown of capex under GPS About 21 percent of the capex under GPS is commitment to upholding the democratic classified as ‘unspecified’. Spending on ‘other process and improving revenue collection. government obligations’, also not directly The 24 percent of GPS capex under ’Other’ attributable to specific projects, accounts encompasses various additional government for around 15 percent of GPS spending, activities and initiatives like policy planning, and half of it goes toward generic ‘executive budgeting, monitoring and evaluation (M&E), support functions’. Spending on elections economic infrastructure and social service support (10 percent of GPS capex) and DRM infrastructure delivery and management, and (6 percent) align with the government’s decentralization. Figure 3.25. Capex breakdown classified under GPS Regional reorganisation and dev, 5% Unspecified, 21% Other , 14% Finance and finance sector development, 9% Human Resource and Other government General Services , 5% obligations , 15% DRM, 6% Election support , 10% General Administration, 15% Source: BOOST, World Bank calculations. Latest available data. 3/ Reviewing Public Expenditure Trends and Overall Efficiency 87 Ghana has chronically lagged peer countries on public infrastructure spending and public capital stock. Since 2000, Ghana’s government spending on infrastructure relative to GDP has consistently fallen short of the levels recorded in Low Income Development Countries (LIDCs) and in selected peers (Figure 3.26). In contrast, private infrastructure investment was consistently higher than in peer countries, although recent signs of stagnation have emerged. As a result, Ghana’s public capital stock is lower than in peer countries, while the private capital stock is higher. Ghana’s public infrastructure spending lags peers Figure 3.26. Infrastructure spending as a share of GDP (selected years) 35 30 25 20 15 10 5 0 Government Private Government Private Government Private infrastructure infrastructure infrastructure infrastructure infrastructure infrastructure spending Spending spending Spending spending Spending 2000 2010 2019 Ghana Structural peers Aspirational peers Sources: International Monetary Fund (IMF) Investment and Capital Stock Dataset, 2021, and World Bank calculations. Challenges around public infrastructure are most pressing in the power sector, where distribution and transmission assets are quickly depreciating. Other key issues include limited road connectivity in the northern regions of the country, insufficient coordination between the private and public sectors, and low efficiency in spending.47 Table 3.1. Ghana: Public infrastructure spending as a share of government spending, 2016–2021 2016 2017 2018 2019 2020 2021 Total infrastructure spending 4.64 2.12 6.76 6.31 8.71 6.21 Infrastructure Assets 1.55 0.65 0.43 0.33 0.87 0.74 Electrical Networks 1.14 0.18 0.18 0.16 0.34 0.09 Furniture and Fittings 0.04 0.03 0.08 0.09 0.12 0.16 Water and Irrigation Systems 0.19 0.08 0.14 0.02 0.18 0.19 Other infrastructure assets 0.17 0.36 0.03 0.06 0.23 0.30 47 See Dumedah, G, and Garsonu E. K. 2021. Characterizing the structural pattern of urban road networks in Ghana using geometric and topological measures. Geo: Geography and Environment, doi: 10.1002/geo2.95. https://doi.org/10.1002/geo2.95.; IMF, 2023. Staff Report: IMF Executive Board Approves US$3 Billion Extended Credit Facility Arrangement for Ghana. Country Report No. 23/168. Ghana Public Finance Review | Volume 2 / Detailed Analysis 88 2016 2017 2018 2019 2020 2021 Intangible Fixed Assets 0.00 0.05 0.02 0.03 0.05 0.11 Land 0.00 0.00 0.00 0.03 0.01 0.04 Nonresidential buildings 0.28 0.19 2.62 1.35 2.55 1.25 Hospitals, Clinics, Day Care Centers, and Health Centers 0.04 0.03 0.05 0.06 0.74 0.12 School buildings 0.06 0.10 0.21 0.69 1.13 0.79 Office Buildings 0.17 0.04 2.09 0.41 0.36 0.21 Other nonresidential buildings 0.01 0.02 0.26 0.19 0.32 0.13 Other structures 2.42 0.40 1.46 3.50 2.62 2.15 Roads 0.00 0.00 0.13 0.61 0.14 0.19 Feeder roads 0.26 0.04 0.07 0.06 0.26 0.31 Urban roads 0.62 0.09 0.58 2.56 0.44 0.46 Highways 1.47 0.20 0.48 0.15 1.31 0.59 Other`s 0.08 0.07 0.21 0.12 0.47 0.60 Residential Buildings 0.07 0.36 0.37 0.00 0.50 0.32 Transport equipment 0.31 0.46 1.84 1.06 2.11 1.60 Source: BOOST, World Bank calculations. Note: The BOOST dataset has important coverage limitations. In particular, it does not capture the significant share of investment in electricity and water infrastructure carried out by public utilities, nor spending from extrabudgetary sources or partially government-owned entities, such as the Ghana Infrastructure Investment Fund. Spending on human development sectors was the largest driver of primary expenditure growth, but Ghana continues to devote a large part of its primary spending to core government functions (GPS) and relatively little to economic affairs. Between 2016 and 2021, average spending on human development—a category encompassing education, health care, and social protection—accounted for 29 percent of primary expenditures (equal to 6 percent of GDP) but remained below international benchmarks (Box 3.3). In comparison, the average allocation to GPS—which encompass territorial administration, financial and budgetary affairs, planning and statistics, administrative staff, and general services—accounted for 18 percent of the budget (around 3.5 percent of GDP). At just 6 percent of primary expenditures (2 percent of GDP), spending on economic affairs was very low and likely insufficient to address opportunities and challenges in key sectors such as agriculture and transport. 3/ Reviewing Public Expenditure Trends and Overall Efficiency 89 Spending on human development sectors was the largest driver of primary expenditure growth but spending on government functions has also grown robustly Figure 3.27. Breakdown of primary expenditure spending by Figure 3.28. Contribution to primary expenditure growth by functional category (GHS, billions) functional category (%) 45 50 40 35 30 Interest payments 30 & other debt related costs 10 25 Defence, public order 20 & safety -10 Primary Expenditure General public services 15 Economic affairs -30 10 2017 2018 2019 2020 2021 Average HD sectors 5 Economic sectors Defence, public, order Other spending and safety 0 Other spending General Public Services HD Sectors 2016 2017 2018 2019 2020 2021 Source: World Bank calculations using BOOST data. Latest available data. Notes: These graphs are based on primary expenditures (total expenditures minus interest payments). Box 3.3. Ghana’s spending on human development and social sectors falls short of international benchmarks Ghana’s financial commitments to pivotal agriculture and water and sanitation stands sectors such as health care, education, at roughly one-third of the recommended agriculture, and water and sanitation levels. Although the introduction of the free consistently fail to align with indicative senior high-school (SHS) program in 2017 benchmarks that build on international best briefly nudged it within the benchmark practice. For example, while international range, education spending has largely experience suggests dedicating between 6 remained under the relevant threshold in and 9 percent of GDP to health care, Ghana recent years. only allocates around 1–2 percent. Funding for Figure 3.29. Ghana’s expenditures against international benchmarks a. Health care (% GDP) b. Education (% GDP) 10 10 9 9 8 8 ABUJA DECLARATION BENCHMARK 7 7 6 6 GLOBAL PARTNERSHIP FOR EDUCATION BENCHMARK 5 5 4 4 3 3 2 2 1 1 0 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2013 2014 2015 2016 2017 2018 2019 2020 2021 Ghana Public Finance Review | Volume 2 / Detailed Analysis 90 c. Agriculture (% GDP) d. Water and sanitation (% GDP) 5 5 4.5 4.5 4 4 COMPREHENSIVE AFRICA AGRICULTURE UNICEF BENCHMARK 3.5 DEVELOPMENT PROGRAM 3.5 3 3 2.5 2.5 2 2 1.5 1.5 1 1 0.5 0.5 0 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 Source: World Bank Calculations using BOOST data. 3.1.4/ Volatile public expenditure: a multi-faceted challenge The recent volatility of public expenditure in Ghana has had three main drivers: (a) fiscal slippages in election years, (b) the cost of supporting the energy sector and stabilizing the financial sector, and (c) most recently, direct and indirect spending on public health and economic support measures to cope with the COVID-19 shock. Fiscal discipline has been especially lax in election years. In 2008, 2012, and 2016, when presidential elections took place, expenditures went over- budget by 4 percent of GDP on average;48 in contrast, when spending overruns occurred in non-election years, they amounted to less than 1.5 percent of GDP on average. Election-related overspending points to weaknesses in fiscal controls and discipline and to a need for a stronger institutional framework. The implementation of the Fiscal Responsibility Act (FRA) in 2018 and proposed amendments to introduce a debt target might help contain excess spending in election years—as could proposals to revamp the Fiscal Advisory Council, giving it a mandate to evaluate ex post spending as well as budgetary projections (see section on PFM). 48 2020 was another election year with substantial expenditure overruns, but the fiscal impact of the COVID-19 pandemic played a major role. 3/ Reviewing Public Expenditure Trends and Overall Efficiency 91 Figure 3.30. Expenditure overruns in election years (% GDP) 8 6 4 2 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 -2 -4 -6 Source: MoF of Ghana, World Bank calculations. Latest available data. Credits: World Bank Ghana Public Finance Review | Volume 2 / Detailed Analysis 92 A costly cleanup of the financial services sector weighed on expenditures over the past five years. Faced with mounting risk of a financial sector collapse, in 2017, the government announced a program of decisive interventions to stabilize the industry. As a result, over the subsequent two years, the Bank of Ghana (BoG) revoked the licenses of 420 financial institutions. This effort required substantial resources to reimburse depositors and investors and recapitalize state-owned banks, as well as to cover the program’s administrative costs—all without deploying central bank funds. Notably, the government provided a bailout package to settle the claims of investors in 16 failed fund management companies financed through a combination of marketable three-year, four-year, and five-year bonds, plus a five-year zero-coupon bond. In total, the restructuring cost the equivalent of 8.3 percent of the cumulative GDP between 2017 and 2021. A costly financial sector cleanup added to fiscal pressures Figure 3.31. Financial sector cleanup costs (GHS, billions; share of GDP) 35 10 30 8 25 20 6 15 4 10 2 5 0 0 2017 2018 2019 2020 2021p Total Banks Savings and Loans, MFls Asset Management Companies GAT (Banks) NIB Percent of GDP (RHS) Source: Ghanaian authorities and IMF estimates. Latest available data. Note: The amount projected for National Investment Bank (NIB) in 2021 was not included in the 2021 budget but corresponds to NIB’s recapitalization gap as previously identified. Chronic financing shortfalls in the energy sector have been driving up spending. These financing shortfalls have required interventions both on- and off-budget and led to the accumulation of payment arrears with private fuel suppliers and independent power producers (IPPs). The sector’s financial difficulties mainly stem from (a) the high cost of fuel for thermal power plants; (b) gas supply shortages; (c) high payments for installed capacity to IPPs; (d) large distribution losses; (e) poor revenue collection by Electricity Company of Ghana (ECG), the national power distributor; and (f) nonpayment by government entities. Part of the estimated expenditure on the energy sector 3/ Reviewing Public Expenditure Trends and Overall Efficiency 93 falls under the Energy Sector Levy Act (ESLA, Figure 3.32 and Figure 3.33). Government transfers to the power sector (through ESLA and other channels) were equal to a total of 1.5 percent of GDP for 2019 and 2020. Between 2020 and 2022, the government transferred an average of 2.4 percent of GDP per year to the energy sector. Moreover, new payables arising from the sector amounted to 1.5 percent of GDP in 2022 (Ghana Economic Update 2023). ESLA has been a key tool to service energy sector debt Figure 3.32. ESLA transfers (share of GDP) Figure 3.33. ESLA utilization, 2021 0.008 Other spending transfers to Power Generation and Road Fund and for PLC Infrastructure sub account 20% 10% 0.007 0.006 Transfers to MoEN (NEF) 2% 0.005 Transfers to Energy Fund 0.004 1% Price Stabilisation 0.003 and Recovery 9% 0.002 Sanitation and Pollution Account 3% 0.001 Energy Sector Transfers to ESLA PLC Recovery Account 51% 0 4% 2016 2017 2018 2019 2020 2021 Source: MoF of Ghana, World Bank calculations. Latest available data. Fiscal risks from the energy sector could persist over the medium term, as arrears continue to rise. As of end-2022, energy sector payment arrears amounted to approximately US$2.3 billion (equivalent to roughly 3.2 percent of GDP) and could surge to more than US$8 billion by the end of 2025 without prompt corrective measures. In 2019, the government launched the Energy Sector Recovery Program (ESRP) to bolster the sector’s governance and restore its financial sustainability. However, the execution of the ESRP has been hindered by delays, and liabilities continue to increase. Finally, the government adopted exceptional and costly measures to protect public health and the economy amid the COVID-19 pandemic. In 2020, the fiscal shortfall (accounting for spending on the energy and financial sectors) doubled year-on-year to reach 15.2 percent of GDP. COVID-19 49 The ESLA of 2015, also known as Act 899, became law in December 2015. Its comprehensive enforcement commenced on January 1, 2016. This legislation was enacted with the primary objectives of efficiently managing the substantial financial obligations of energy sector SOEs, stimulating investment within the energy sector, extending assistance to fishing communities and industrial sectors through subsidies for Premix Fuel and Residual Fuel Oil (RFO), supporting road maintenance efforts, facilitating the activities of the Energy Commission, and allocating funds for investment in public lighting and the National Electrification Program. Ghana Public Finance Review | Volume 2 / Detailed Analysis 94 related spending in 2020 stood at around 2.3 percent of GDP, funded through domestic and external sources, and was largely used to provide personal protective equipment, treatment, and testing kits; initiate community engagement; build health infrastructure; and quarantine inbound travelers. The government also recruited 37,000 health care workers and granted income tax waivers and life insurance to public sector health care staff as incentives to provide services during the pandemic. Just over one-quarter of pandemic- related spending (equal to 0.6 percent of GDP) went toward fiscal support to households and businesses, including subsidized water and electricity tariffs for households, the provision of food packages and hot meals, and soft loans to small and medium enterprises. Furthermore, the government launched the Ghana COVID-19 Alleviation and Revitalization of Enterprises Support (CARES) program, a four-year initiative aimed at supporting economic recovery. However, the lack of poverty-targeting mechanisms diminished the beneficial impact of such measures on the most vulnerable. Unanticipated but necessary COVID-19 spending exacerbated fiscal pressure Figure 3.34. Breakdown of COVID-19 spending (share of GDP) 2.5% Covid-19 Vaccines (Operational & Procurement) 2.0% Cost of Economic Revitalization payment 1.5% Other Covid-related expense Seed Fund For Capitalisation of 1.0% Development Bank COVID-19 Preparedness Plan (National 0.5% COVID-19 Response) Provision of Health Infrastructure 0.0% COVID-19 Alleviation Programme 2020 2021 Source: Ministry of Finance Ghana, World Bank calculation. Latest available data. Pandemic-related spending lacked transparency, highlighting the need for stronger accountability mechanisms. The COVID-19 spending audit identified violations of PFM-related laws and regulations in connection with COVID-19 spending, such as contracts processed outside GIFMIS and single-source procurement conducted without the required approvals.50 Shortcomings of this nature can compromise future emergency spending and therefore pose a risk to fiscal sustainability. The government has committed to following up on the recommendations of the audit report and, with the support of development partners, plans to draft new guidelines for emergency expenditure management. 50 To address these concerns, the government commissioned a special external audit of COVID-19 spending for the period March 2020 to June 2022. The report completed by the Auditor General was released in December 2022. 3/ Reviewing Public Expenditure Trends and Overall Efficiency 95 3.2/ Efficiency of public spending: lessons from the education and infrastructure sectors In a complex macro-fiscal environment, it is critical to maximize the efficiency of public spending on education services and on physical and human capital. This section focuses on the efficiency of government spending in education and infrastructure in Ghana. The efficiency scores are computed based on the average score from four methodologies—that is, Free Disposable Hull (FDH), Data Envelope Analysis (DEA), DEA Bootstrap (DEA-B), and Stochastic Frontier Analysis (SFA).51 The efficiency scores reported are both input and output oriented. The section will quantify and discuss the gains Ghana could achieve in education and infrastructure outcomes, should it maintain constant levels of public expenditure but enhance its efficiency. Finally, this section discusses policy measures that can help Ghana improve public spending efficiency. 3.2.1/ Education spending: Boosting enrollment through greater efficiency Two decades of sound education policy have fostered better outcomes, but major challenges remain. Ghana introduced free public primary education in 1996 and free public secondary education in 2017. Enrollment in both primary and secondary public schools has surged, although the free SHS policy boosted demand to a level that has overwhelmed capacity52—and overall, enrollment rates remain lower than in aspirational peers such as Vietnam. In this context, challenges persist around the quality of public education, as well as around retention and completion rates. More efficient spending on education could uplift enrollment rates. Figure 3.35 shows the efficiency frontier for primary school enrollment, based on a sample of emerging market and developing economies (EMDEs) and advanced economies. Countries on the frontier, such as Nepal, are those that employ their resources most efficiently to achieve their respective outcomes. In this context, Ghana’s distance from the efficiency frontier indicates that, given its current level of public expenditure on education, the country could achieve a higher rate of primary school enrollment through enhanced spending efficiency. Ghana is also far from the efficiency frontier on secondary school enrollment (Figure 3.36), although the analysis also yields some encouraging findings, as discussed below. 51 The first three methodologies are non-parametric, while the SFA is based on a parametric approach. The specification for the FDH, DEA, and DEA-B follows Herrera and Pang (2005). Details on the methodologies and variables employed are presented in Annex 3. 52 For example, secondary school enrollment surged from 308,000 in 2016 to 430,000 as of June 2019. As demand overwhelmed capacity, a double-track system was introduced for SHS education. In 2022, the deputy minister of education announced the abolition of such system along with new policies to decongest SHSs. Ghana Public Finance Review | Volume 2 / Detailed Analysis 96 Ghana is far from the efficiency frontiers for both primary and secondary school enrollment, indicating potential for better outcomes at current levels of public spending on education Figure 3.35. Efficiency frontier: primary school enrollment 160 MWI NPL MDG GAB Primary School Enrollment (Gross) 140 TCA 120 HKG VNM KEN GHA GTMMUS IRL NLD MDA ISR 100 EMDEs LBR SEN AEs 80 60 GHA DEA Frontier 40 FDH Frontier 20 0 0 500 1000 1500 2000 2500 3000 3500 4000 4500 Orthogonalized Public Expenditure on Education Figure 3.36. Efficiency frontier: secondary schooleEnrollment 180 BEL Secondary School Enrollment (Gross) 160 AUS 140 PLW IRL GRD IRL 120 ATG KAZ HKG EMDEs 100 MUS AEs WSM TJK 80 JOR STP NPL GHA GHA BGD MHL 60 DEA Frontier SEN 40 LBR FDH Frontier 20 0 0 500 1000 1500 2000 2500 3000 3500 4000 4500 Orthogonalized Public Expenditure on Education Source: World Bank analysis. Considering outcomes in secondary school enrollment, Ghana outperforms its structural peers on efficiency of public spending, although it lags aspirational peers. Figure 3.37 presents a benchmarking of output-oriented efficiency of public spending based on secondary school enrollment rates, comparing Ghana with structural and aspirational peers. A score of 1 indicates full spending efficiency, while scores lower than 1 indicate output shortfalls due to inefficiencies. Notably, Ghana’s score exceeds those of its structural peers but remains below the levels of aspirational peers such as Tunisia and the Philippines. 3/ Reviewing Public Expenditure Trends and Overall Efficiency 97 Ghana spends more efficiently than structural peers, based on outcomes in secondary school enrollment Figure 3.37. Efficiency in public spending (outcome: secondary school enrollment) 0.9 0.80 (Secondary School Enrollment) 0.8 0.71 0.7 0.65 0.60 Efficiency score 0.6 0.53 0.47 0.48 0.49 0.5 0.45 0.4 0.35 0.3 0.2 0.1 0.0 re co ia a a es na n a l oi ga di al si oo op in oc ha 'Iv ni m bo ne er pp hi or Tu D te G m Se m Et ili M ua te Ca Ca Ph Co G Source: World Bank computation. Notes: Efficiency scores based on average of scores from FDH, DEA, DEA-B, and SFA methodologies. In the case of level of education, Ghana also outperforms its structural peers on efficiency of public spending, although it lags aspirational peers. Figure 3.38 presents a benchmarking of output-oriented efficiency of public spending based on level of education, comparing Ghana with structural and aspirational peers.53 Specifically, Ghana’s score exceeds those of its structural peers (that is, Ethiopia and Cameroon) but remains below the levels of aspirational peers such as the Philippines and Vietnam. Ghana spends more efficiently than structural peers, based on outcomes in level of education Figure 3.38. Efficiency in public spending (outcome: level of education) 1.0 Efficiency score (Level of 0.9 0.80 0.8 0.73 0.72 0.67 0.69 0.65 0.7 0.60 Education) 0.57 0.55 0.58 0.6 0.47 0.5 0.4 0.3 0.2 0.1 0.0 re co ia a a s na m a n l ne ga di al si oo op oi na oc ha ni m bo ne i 'Iv er pp hi et or Tu te G m Se D m Et Vi ili M ua Ca Ca e Ph t G Co Source: World Bank computation. Notes: Efficiency scores based on average of scores from FDH, DEA, DEA-B, and SFA methodologies. 53 According to World Economic Forum, the level of education assesses the general level of skills of the workforce and the quantity and quality of education. While the concept of educational quality is constantly evolving, important quality factors today include developing digital literacy, interpersonal skills, and the ability to think critically and creatively. See Appendix A of The Global Competitiveness Report 2019 for details: https://www3.weforum.org/docs/WEF_ TheGlobalCompetitivenessReport2019.pdf Ghana Public Finance Review | Volume 2 / Detailed Analysis 98 Enrollment gains from partially improved efficiency in education spending can still be significant Figure 3.39. Gains from fully efficient spending Figure 3.40. Gains from partial improvement in spending efficiency 140 120 120 100 100 80 80 60 60 40 40 20 20 0 0 a ia n a es re na co a l a l a ia n a Se s re ua na co m ga ga si al e di di oo si al oo op op oi in na oi oc in ha oc ni ha ni m ne ne m bo bo er Iv pp er Iv pp hi Tu hi or Tu et or te G te G Se d’ m m d’ m Et m Et ili Vi M ua ili M Ca Ca te Ca te Ca Ph Ph G G Cô Cô Potential Full Sec. School Enrollment (% Gross) Potential Partial Sec. School Enrollment (% Gross) Sec. School Enrollment (% Gross)(Averag:2015-2019) Sec. School Enrollment (% Gross)(Averag:2015-2019) Source: World Bank computations. Level of education gains from partially improved efficiency in education spending can still be significant Figure 3.41. Gains from fully efficient spending Figure 3.42. Gains from partial improvement in spending efficiency 80 90 80 70 Level of Education (0 ()Lowest)- 100 Level of Education (0 ()Lowest)- 100 70 60 60 50 50 40 (Highest)) (Highest)) 40 30 30 20 20 10 10 0 0 o m a Tu l a ia n a Se s re ua na ga e di cc si al oo op na oi in ha ni ne m bo o ia d’ n a Se s er Et re a o Iv m a Tu l a pp hi et or ga e te G al G han di oo Ph occ si m op d’ na m oi in Et Vi M ili ni m ne bo Ca er Iv te Ca pp hi Ph et or te G G m Cô m Vi ili M ua Ca te Ca Cô Potential Partial Gains in Level of Education Potential Full Gains in Level of Education Actual Level of Education Actual Level of Education Source: World Bank computations. 3.2.2/ Infrastructure spending: Investing better to make up for the lost ground Ghana has major infrastructure needs, but the efficiency of its dedicated public spending is among the lowest across all EMDEs. Considering the quality of overall infrastructure and of electricity supply, Ghana sits very far from the respective spending efficiency frontiers. Notably, when it comes to the efficiency of public spending on the quality of electricity supply, Ghana’s score of 0.82 is lower than those of structural peers such as Cote d’Ivoire, Cameroon, Ethiopia, and Senegal. 3/ Reviewing Public Expenditure Trends and Overall Efficiency 99 Ghana’s public spending on infrastructure is far from the efficiency frontier Figure 3.43. Efficiency frontier: quality of overall Infrastructure NLD SGP 100 GBR PRT Quality of overall infrastructure 90 CZE 80 HRV CYP EMDEs 70 60 BIH AEs PRY 50 GHA RWA GMB NPL CIV ZMB GHA 40 30 DEA Frontier 20 FDH Frontier 10 500 1000 1500 2000 2500 3000 3500 4000 Orthogonalized Public Investment Figure 3.44. Efficiency frontier: quality of electricity supply 110 LUX ISL TWN FIN BHR SGP KOR HKG GBR PRT 100 CYP CZE Quality of electricity supply 90 BIH HRV 80 MDG GHAUGA GIN BFA NPL EMDEs PRY 70 AEs 60 50 GHA 40 DEA Frontier 30 20 FDH Frontier 10 500 1000 1500 2000 2500 3000 3500 4000 Orthogonalized Public Investment Source: World Bank analysis. Figure 3.45. Efficiency in public spending (outcome: quality of electricity supply 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 re a co m a l a ia n a s ga n ne di si al oo op na oi oc ha ni ne m bo pi Iv er hi et or Tu G te Se lip d’ m m Et Vi M ua Ca te i Ca Ph G Cô Source: World Bank computations. Among its peers, Ghana stands to gain the most in quality of electricity supply by enhancing the efficiency of public spending on infrastructure. Specifically, the indicator for quality of electricity supply could rise by 14.5 percentage points if Ghana achieved full spending efficiency and by 11.4 percentage points if it matched the efficiency score of the 90th percentile of Ghana Public Finance Review | Volume 2 / Detailed Analysis 100 developing countries—all while maintaining spending at current levels. Greater spending efficiency would also result in significant quality improvements for overall infrastructure, transport infrastructure at large, rail, and roads. On quality of electricity supply, Ghana’s gains from more efficient infrastructure spending could be the largest among peer countries Figure 3.46. Gains from fully efficient spending Figure 3.47. Gains from partial improvement in spending efficiency 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 re n a l co ia a a es na m na m re a n l co ia a a es ga ga si oo di al si oo di al op oi na op na in oc oi ha in ni oc ha ne m ni bo ne m bo Iv er pp Iv er hi pp Tu et or hi et Tu te or G G te Se d’ m Se d’ m m Et m Vi Et Vi ili M ua ili M ua Ca te Ca Ca te Ca Ph Ph G Cô G Cô Potential Full Gains in Electricity Supply Potential Partial Gains in Electricity Supply Average Electricity Supply (2017-2019) Average Electricity Supply (2017-2019) Source: World Bank computations. Greater efficiency in public investment can improve Ghanaian infrastructure across the board Figure 3.48. Gains from fully efficient spending Figure 3.49. Gains from partial improvement in spending efficiency 100 100 Infrastructure Quality Index (0: Lowest, 100: 90 90 80 80 70 70 60 60 50 50 Highest) 40 40 30 30 20 20 10 10 0 0 y y e y e y y y y y lit lit lit lit lit lit lit lit ur r tu ua ua ua ua ua ua ua ua ct uc ru Q Q Q Q Q Q Q Q r t st ity ity ad ad il il rt rt as Ra Ra ra po po ic ic Ro Ro fr f tr tr s In s In an an ec ec ll l al El El Tr Tr ra r ve ve O O Potential Full Gains in Infrastructure Quality Potential Partial Gains in Infrastructure Quality Actual Infrastructure Score (Average: 2017-2019) Actual Infrastructure Score (Average: 2017-2019) Source: World Bank computations. Note: Partial improvement is defined as achieving the spending efficiency score of the 90th percentile of developing countries. 3/ Reviewing Public Expenditure Trends and Overall Efficiency 101 3.3/ Conclusions and policy discussion Ghana needs to contain budget rigidities and increase its room for fiscal maneuver, notably by pursuing steadfast implementation of the three- year IMF Extended Credit Facility (ECF) arrangement, which includes reforms to improve spending efficiency and PFM. In the short term, a successful implementation of the planned fiscal consolidation and debt restructuring is imperative for establishing and sustaining macroeconomic stability. In the longer term, reforms are needed to help entrench fiscal discipline and control the accumulation of new debt. In a context of limited fiscal space, maximizing public spending efficiency is crucial. While improvements in education outcomes have occurred, spending efficiency remains low compared to other developing economies. Similarly, the efficiency of public spending in infrastructure also lags, hindering potential gains to meet massive infrastructure needs. Policy Priority 1: Rationalizing general government services spending. This expenditure category, linked to core government functions (territorial administration, financial and budgetary affairs, planning and statistics, administrative staff, and general services) has contributed to recent spending increases and should be the object of an in-depth review to identify levers for rationalization. Policy Priority 2: Addressing energy sector contingent liabilities. Ghana should fully implement the ESRP to address financial challenges in the power sector, enhance operational performance of ECG, and continue to implement tariff reforms with quarterly adjustments for cost recovery while safeguarding vulnerable households. The ESRP aims to contain growing fiscal costs from the energy sector, including clearing the stock of payables over seven years. Under the plan, quarterly reports will track the progress of payables clearance to prevent the accumulation of new payables. It also prioritizes renegotiating power purchase agreements, reforming subsidies, and devising a strategy for reducing distribution losses and improving collections. Policy Priority 3: Improving PIM to ensure that capital spending is well- targeted and effectively implemented. Ghana has a comprehensive PIM policy based on international best practice, outlining requirements for project design, approval, financing, and execution—but its implementation has been inconsistent. Areas for improvement include the evaluation and prioritization of public projects based on reliable data—including on duration, completion status, and cost overruns for legacy projects. Financial allocations should be determined before project approval to avoid financing mismatches that fuel payment arrears and add to the debt burden. Ghana Public Finance Review | Volume 2 / Detailed Analysis 102 Policy Priority 4: Improving budget controls through strengthened PFM systems. It is critical to expand GIFMIS coverage to enable tighter budgetary controls, more effective cash and debt management, and more timely and accurate expenditure reporting. Authorities should implement plans to rollout GIFMIS to all statutory funds and to IGF-reliant institutions. To support the full centralization of budgetary processes and to mitigate the risks of overruns and unrecorded expenditures, they should also complete the integration of GIFMIS with other government management systems to ensure real-time data exchange. Under the current system, a significant share of spending is classified as ‘unspecified’ under different categories within GIFMIS, making it difficult to fully review annual spending and overall fiscal policy. Ensuring proper tagging of transactions will help in rationalizing expenditures and identifying areas for budgetary review or reallocation. Policy Priority 5: Enhancing wage bill management. The wage bill requires a comprehensive approach focused on enhancing data management systems to ensure accuracy in wage expenditure forecasts and therfore reduce wage bill volatility and inefficiency. Prioritizing the strengthening of data management systems is imperative. Periodic assessments of the wage bill can provide the government with evidence-based insights, enabling more effective fiscal management to address volatility and fiscal pressures. Policy Priority 6: Enhance spending efficiency for human development and agriculture. A fair and sustainable fiscal adjustment will require not only to reduce spending but also to use existing resources more efficiently to continue delivering critical services and supporting growth. Ghana has relatively low levels of spending efficiency on education: it has the potential to significantly improve outcomes without additional spending. Benchmarking Ghana against best performers indicates that the country could make significant headways, for instance in secondary school enrollment. Finally, agriculture remains an important source of jobs and supports higher-value productive activities. Investing in its development, particularly around food and cash crops, will especially benefit rural areas and foster progress in poverty reduction and equity. 3/ Reviewing Public Expenditure Trends and Overall Efficiency 103 Table 3.2. Recommended public expenditure policy reforms Policy Priority Measures Timeframe Policy Priority 1: Improve data systems and properly classify and rationalize ‘unspecified’ Short Term Rationalizing general expenditures under general government services in the GIFMIS. government services spending Review and reduce goods and services spending on the executive and legislative Medium Term organs. Policy Priority 2: Sustain and deepen implementation of the ESRP. Short Term/ Addressing energy Medium Term sector contingent liabilities Policy Priority 3: Improve the evaluation and prioritization of public projects based on reliable data Medium Term Improving PIM to and determine financial allocations before project approval. ensure that capital spending is well- targeted and effectively implemented Policy Priority 4: See Chapter 4 – Improving budget controls through strengthened PFM systems Policy Priority 5: See Chapter 5 – Enhancing wage bill management Policy Priority 6: See Chapters 6 and 7 – Enhance spending efficiency for human development and agriculture 4/ Ghana Public Finance Review | Volume 2 / Detailed Analysis 104 Ghana Public Finance Review | Building the Foundations for a Resilient and Equitable Fiscal Policy Improving Public Financial Management for Better Spending Results 4/ Improving Public Financial Management for Better Spending Results 105 4.1/ Weaknesses in Ghana’s public financial management The recent economic crisis, characterized by a buildup of arrears, exposed systemic public financial management (PFM) challenges in Ghana, such as weak budget planning, preparation, and execution. This chapter reviews selected aspects of the institutional weaknesses that characterize Ghana’s PFM system and are relevant to the country’s efforts to restore macroeconomic stability. The following systemic weaknesses are prevalent throughout the PFM cycle: • The budget preparation schedule is routinely delayed and does not comply with the legal framework, and indicative budget ceilings are not strictly adhered to in the final expenditure allocation. • The Medium-Term Expenditure Framework (MTEF) and program-based budgeting (PBB) estimates do not inform the medium-term budget. • The lack of a coherent information technology (IT) ecosystem and overlapping mandates undermine interinstitutional collaboration and efficiency. • Cash management and commitment control is undermined by inadequate coverage of the Treasury Single Account (TSA) and the Ghana Integrated Financial Management Information System (GIFMIS). Ghana Public Finance Review | Volume 2 / Detailed Analysis 106 The chapter is organized as follows: the first section presents the history, recent reforms, and current challenges of PFM in Ghana; the next sections focus on two areas: budget credibility and the IT ecosystem. The final section presents recommendations for reform. Ghana’s early PFM reforms date back to more than two decades ago. In the late 1990s, the country developed an integrated Budget and Public Expenditure Management System, aiming to integrate the national budget’s preparation with financial accounting, reporting, and cash management. The attempt had limited success due to “major delays and setbacks that resulted from the lack of a coherent strategy and inadequate ownership among the key stakeholders.”55 A second wave of reform, dubbed Short and Medium- Term PFM Action Plan (ST/MTAP), took place between 2006 and 2009. The ST/MTAP introduced a coherent strategy for the implementation of PFM reforms, building on the lessons learned from previous attempts, and laid the foundation for the introduction of information and communication technology (ICT) tools to improve reform efficiency and transparency. Further reforms in 2015–2020 focused on establishing an integrated legal framework. These included the enactment of the PFM Act, 2016 (Act 921), preparation of the PFM Regulations, 2019 (L.I. 2378), as well as the repeal of the Financial Administration Act, 2003 (Act 645) and Loans Act, 1970. GIFMIS functions were expanded, and the PFM Strategy (2022–2026) was finalized. Despite these advances, several challenges remain such as the exclusion of internally generated funds (IGFs), statutory funds, extrabudgetary funds, and donor funds. Moreover, there is also weak adherence to the requirements of the PFM Act, including the lack of uniformity in the use of GIFMIS by budget entities. 55 World Bank. 2011. Financial management information systems: 25 years of World Bank experience on what works and what doesn’t. Washington, DC: World Bank 4/ Improving Public Financial Management for Better Spending Results 107 Figure 4.1. Snapshot of Ghana’s PFM reform journey since the 1990s 1997-99, 2006-2009 2010-2014 2015-2020 2022-2026 2002-03 Short and Medium- PFM Reform PFM Reform Project Term PFM Action GIFMIS Project PFM Strategy Program (PUFMARP) (PFMRP) Plan(ST/MTAP) Ghana’s first attempt Short and Medium- Improving the Developed based on The blueprint of at a more integrated Term efficiency and PFM Reforms Strategy Ghana’s PFM reform budget and public transparency of efforts between 2022- expenditure Ghana’s PFM using ICT 2026. managementsystem Corresponded based tools Objective was (BPEMS) with the 2006 PEFA improving budget Assessments of management financial Sets forth a series Ghana’s PFM systems Successful in control and reporting of strategic pillars, Objective of BPEMS operationalizing objectives and was to integrate GIFMIS in 33 MDAs and interventions to Ghana’s budget The short-term aspects 250 spending units and Aimed at building on consolidate and preparation with was to correct the 10 regional treasuries the PFM systems and sustain the gains made financial accounting, BPEMS implementation tools accomplished in in the implementation reporting and cash the GIFMIS project of the country’s PFM management GIFMIS, however, reforms over the past The medium-term unable to cover all aspect was to align the Finalized the PFM two decades. public funds such as The key modules were seven thematic areas internally generated Strategy (2022-2026) to enhance revenue of ST/MTAP to key funds (IGFs), statutory and laid the foundation management, aid and indicators of PEFA funds, extra-budgetary for its implementation debt management, funds and donor funds auditing, procurement, fiscal decentralization, legal and regulatory GIFMIS implementation framework and was not underpinned development of by a comprehensive integrated personnel PFM Reform Strategy and payroll database. PUFMARP suffered from major delays and setbacks resulting from lack of coherentstrategy and ownership amongkey stakeholders. Source: PFM Reform Strategy (2022–2026), World Bank elaboration. Despite several successes, historical reforms did not resolve all PFM challenges. Ghana’s limited fiscal space and large wage bill have caused overreliance on external resources for capital expenditure, while the financial reporting of extrabudgetary operations is insufficient. State-owned- enterprises (SOEs) have been a burden on the government’s fiscal position, as their contributions to the national budget are small, and most of them pay neither taxes nor dividends. Challenges throughout the PFM cycle concern budget credibility, public investment, budget preparation and execution, public procurement, and financial accountability. Over the years, Ghana has performed poorly on the Public Expenditure and Financial Accountability (PEFA) performance assessment, with inconsistent improvements and significant downgrades in certain indicators (Table 4.1). Ghana Public Finance Review | Volume 2 / Detailed Analysis 108 Ghana’s PEFA scores show inconsistency and setbacks in PFM progress Table 4.1. Ghana’s PEFA scores, 2006–2018 2006 2009 2012 2018 PI-1 Aggregate expenditure outturn B C↘ C→ D+ ↘ PI-3 Revenue outturn B+ B↘ C↘ D+ ↘ PI-4 Budget classification B C↘ C→ C→ PI-8 Performance information for service delivery D B↗ D↘ B+ ↗ PI-13 Debt management B C+ ↘ C+ → C↘ PI-16 Medium-term perspective in expenditure budgeting C C+ ↗ C+ → B↗ PI-17 Budget preparation process B A↗ B↘ C↘ PI-21 Predictability of in-year resource allocation C C→ C→ C→ PI-23 Payroll controls C+ C+ → C+ → C+ → PI-28 In-year budget reports C+ C+ → C↘ D+ ↘ Source: PEFA Assessments 2006, 2009, 2012, and 2018. Credits: Croberin Photographyon Pexels 4/ Improving Public Financial Management for Better Spending Results 109 4.2/ Ongoing reform efforts aim to close PFM gaps In April 2022, Ghana approved a new PFM Strategy for 2022–2026. The PFM Strategy sets forth strategic pillars, objectives, and interventions to consolidate and sustain the progress made over the previous two decades. Covering the entire PFM cycle, the PFM Strategy is structured around five key pillars: macro- fiscal framework, budget preparation and approval, control predictability and transparency in budget execution, accounting and reporting using GIFMIS, and external audit and parliamentary scrutiny (Figure 4.2). Figure 4.2. Pillars and strategic objectives of Ghana’s PFM Strategy (2022–2026) Pillar 1: Pillar 2: Pillar 3: Pillar 4: Pillar 5: Strengthen Enhance Control Predictability and Improve Enhance Strategic Budget Transparency in Budget Accounting and External Planning and Preparation Execution Fiscal Reporting Audit and Macro-Fiscal and Approval Using GIFMIS Parliamentary Framework Processes Scrutiny Strategic Objective 3.1: Improve and sustain domestic revenue mobilization Strategic Objective Strategic Objective 3.2: Improve Strategic Objective Strategic Objective 5 .1: Strengthen external resource mobilization 2.1: Strengthen 4 .1: Enhance the Independence and Processes for Strategic Objective 3.3: Enhance Integrity of Financial Capacity of the Budget Formulation procurement management and Data Ghana Audit Service oversight (GAS) Strategic Objective 3.4: Enhance commitment control Strategic Objective Strategic Objective 3.5: Improve 1.1: Strengthen public investment and asset Strategic Planning management and Macro-fiscal Forecasting Strategic Objective 3.6: Enhance management and performance of Strategic Objective SOEs Strategic Objective 4 Strategic Objective 2.2: Consolidate 2: Support Ongoing 5.2: Strengthen and Enhance Strategic Objective 3.7: Improve HR, Processes of IPSAS PFM Oversight Good Practices in payroll, and pensions management compliant Financial Capabilities of Legislative Oversight Strategic Objective 3.8: Strengthen Reports Parliament of the Budget cash, treasury, and debt management Strategic Objective 3. 9: Improve effectiveness of the internal audit Function Source: PFM Strategy (2022-26). Note: HR = Human Resource; IPSAS = International Public Sector Accounting Standards. Ghana has reinforced its commitment to implementing PFM reforms in the wake of recent debt and fiscal vulnerabilities. Priority areas include spending controls and prevention of arrears buildup, enhancement of the fiscal framework, and improvements in fiscal reporting and budget Ghana Public Finance Review | Volume 2 / Detailed Analysis 110 documentation.56 Notable achievements include the issuance of a directive in October 2023 mandating the use of the Ghana Electronic Procurement System (GHANEPS) by all procuring entities;57 the Audit Recommendations Implementation and Follow-up Instructions for Public Institutions, in June 2023;58 and the Emergency Expenditure Management Guidelines for Public Institutions, in June 2023.59 The Government of Ghana (GoG) has also recently published the Spending Arrears Clearance and Prevention Strategy with the objective of implementing reforms to pay arrears and outstanding debt obligations.60 Ghana’s efforts to reform the country’s PFM systems, while leading to some positive results, require broader stakeholder support to fully deliver. The establishment of GIFMIS, the TSA, and the gradual introduction of accrual accounting under the IPSAS all point to the GoG’s commitment to improve the management of the country’s finances. These technical solutions have, however, not gone far enough as discussed in this chapter. They have been largely undermined by nontechnical political economy challenges that require greater engagement with non-state actors such as civil society, thinktanks, and academia. Strengthening parliamentary oversight committees, such as the Public Accounts Committee, as well as focusing on control and preventive mechanisms, such as strengthening the internal audit capacity, could further improve transparency and accountability in the use of public resources. The GoG is already pursuing some of these measures. For example, in 2023 the GoG agreed to implement 15 actions under the Open Government Partnership to improve access to information, participation, accountability, and transparency (Box 4.1). Box 4.1. Selected GoG commitments under the Open Government Partnership • Publish a PFM Compliance League Table for Recommendations and Implementation public institutions and apply the necessary Instructions. sanctions as stated in the PFM Act for • Pass the Conduct of Public Officers Bill into noncompliance. law, ensuring that provisions on assets • Ensure effective implementation of audit declaration require verification and come recommendations from internal auditors, with severe sanctions for noncompliance. external auditors, audit committees, and the • Develop regulations to fully operationalize Public Accounts Committee on the reports of the Conduct of Public Officers Bill when the Auditor General and Management Letters passed into law. by public institutions by building the capacity • Uncap the National Health Insurance of internal audit units, audit committees, Authority (NHIA) funds to ensure prompt heads and boards of public institutions disbursement and release of NHIA to implement the new Audit Report allocations to primary health care centers. Source: Republic of Ghana 2023, Open Government Partnership: 5th National Action Plan. 56 Letter of Intent for the Extended Credit Facility (ECF); GoG. 57 https://ppa.gov.gh/wp-content/uploads/2023/11/Mandatory-Use-of-the-Ghana-Electronic-Procurement-System-1-1.pdf 58 https://mofep.gov.gh/sites/default/files/reports/economic/Audit-Recommendations-Implementation-and-Follow-up%20-nstructions-for-Public-Institutions.pdf 59 https://mofep.gov.gh/sites/default/files/acts/Emergency%20Exp.%20Management%20Guidelines%20for%20Public%20Institution.pdf 60 GoG 2024, Spending Arrears Clearance and Prevention Strategy. MoF: Ghana, p.4 4/ Improving Public Financial Management for Better Spending Results 111 4.3/ Ghana’s budget lacks credibility and transparency Ghana’s budget credibility is low, with aggregate revenue and expenditure outturns persistently below target. The government has had limited success with core reforms on the revenue side, with the country’s tax collection standing at 13 percent of gross domestic product (GDP) in 2021 (see Chapter 2 on domestic revenue mobilization). Revenue projections have consistently been overly optimistic (especially for domestic sources such as tax revenue, social contributions, and non-tax revenue), while expenditure and commitment controls have been ineffective. Combined with shortfalls in the implementation of PFM reforms, this dynamic has contributed to the accumulation of arrears— non-energy sector arrears stood at 5.8 percent of GDP as of end-2022.61 Revenue and grant slippages averaged 8.76 percent between 2016 and 2023, largely due to a shortfall in non-tax revenue. While the accuracy of expenditure projections has been mixed in the past, they have performed better in recent years, with an average deviation of 7.64 percent between 2016 and 2023. Overall, Ghana’s “initially approved budget may not be a good predictor of actual expenditures by the MDAs.”62 Actual expenditure and revenues can deviate significantly from the budgeted amounts Figure 4.3. Total expenditure (GHS, millions) Figure 4.4. Total revenue and grants (GHS, millions) 250,000 20% 160,000 0% 15% 140,000 200,000 10% 120,000 -5% 150,000 5% 100,000 0% 80,000 -10% 100,000 60,000 -5% 50,000 40,000 -15% -10% 20,000 0 -15% 2016 2017 2018 2019 2020 2021 2022 2023 0 -20% 2016 2017 2018 2019 2020 2021 2022 2023 Total Expenditure: Budget Total Expenditure: Outturn Total Revenue & Grants: Budget Total Revenue & Grants: Outturn Deviation (RHS) Deviation (RHS) Source: Budget Statements (2017–2024), GoG. The legal and institutional framework for the budget process is anchored in the PFM Act, 2016. Budget preparation begins with the circulation of the Budget Preparation Guidelines drafted by the Budget Division of the Ministry of Finance (MoF), a requirement under Section 20 of the PFM Act. The law requires the Minister of Finance to “circulate copies of the guidelines to each covered entity not later than the 30th of June of every year.” However, the guidelines are usually circulated with a delay of several months, leaving little time for ministries, departments, and agencies (MDAs) to prepare and submit 61 2023 Article IV Staff Report, International Monetary Fund (IMF). 62 PEFA Performance Assessment Report (2018). Ghana Public Finance Review | Volume 2 / Detailed Analysis 112 their estimates. Noncompliance with the statutory timelines hinders not only the MDAs’ work but also the ability of parliament to thoroughly scrutinize budget proposals. Sanctions for noncompliance, as set out in Section 96 of the PFM Act, are rarely applied. The government recognizes the problem and has signaled its commitment to strengthening the enforcement of sanctions under the PFM Act.63 The budget preparation process entails a lengthy bargaining phase. In its Budget Preparation Guidelines, the MoF provides indicative ceilings for each MDA, which however do not constrain final expenditure allocations. For example, in the 2023 budget, the overall allocation exceeded the indicative ceiling by 39 percent. Eight MDAs were allocated more than double the indicative ceiling amount, while only five received a below-ceiling allocation. The Electoral Commission was allocated 368 percent more than the indicative ceiling and, conversely, the Ministry of Employment and Labour Relations received 76 percent less (Table 4.2). The PEFA assessment also points out that the ceilings tend to be revised after the submission of budget proposals, even at the last minute. Moreover, the final allocation is ultimately at the discretion of the MoF, and the public is unaware of how the bargaining process determined any deviations from the indicative ceilings. MDAs that are familiar with the custom are not incentivized to submit budget requests within the indicative ceilings. Combined with the routinely delayed publication of budget preparation guidelines, this raises questions about the role the indicative ceilings are designed to play, the overall quality of projections, and the government priorities that inform the calculation of the indicative ceilings. Table 4.2. Largest positive and negative differentials between allocation and indicative ceiling, by MDA (2023 budget; GHS, millions) MDA Indicative Expenditure Difference MDA Indicative Expenditure Difference ceiling allocation (%) ceiling allocation (%) 1 Electoral 82 386 368.4 40 Ministry of 626 615 -1.7 Commission Environment, Science, Technology and Innovation 2 Ministry of Gender, 444 1,487 234.9 41 Ministry of Trade 603 587 -2.7 Children and Social and Industry Protection 3 Ministry of 271 788 191.1 42 Ministry of 152 141 -7.1 Communications Information and Digitalization 4 Ministry of Food and 915 2,153 135.3 43 Judicial Service 496 437 -11.8 Agriculture 5 Ministry of Fisheries 92 213 131.8 44 Ministry of 321 77 -76.1 and Aquaculture Employment and Development Labour Relations Sources: 2023–2026 Budget Preparation Guidelines, 2023 Budget Statement 63 Memorandum of Economic and Financial Policies; GoG. 4/ Improving Public Financial Management for Better Spending Results 113 IGF-reliant institutions are incentivized to underreport their revenue projections and often spend beyond their budget appropriations. IGFs are revenues generated by these institutions and can be used to finance their expenditures, depending on the respective capped retention rate. MDAs retain approximately 80 percent of their collected revenues and transfer the remainder into the consolidated fund. IGFs are allocated funds during the budgeting process; however, in practice, these MDAs spend based on the amounts of retained funds rather than the appropriated amounts. As higher projected IGFs tend to lower their allocation from the consolidated fund, MDAs are incentivized to underreport their IGF revenue projections. This combination of underreported IGF revenue projections and discretionary power to spend retained revenues leads to overspending. The Citizens Budget (CB)64 has been comprehensive, although actual engagement with citizens has been limited. The Collaborative Africa Budget Reform Initiative (CABRI) noted the accessibility of Ghana’s CB, which features easy-to-understand terminology, an index to easily find information, and availability in multiple languages. However, neither the citizens nor the government benefit from the comprehensiveness of the CB, mainly due to the limited time available for engagement. For example, the 2023 CB was released on December 14, one week after the parliament had approved the budget.65 In addition, the discontinuation of information workshops with Civil Society Organizations (CSOs) reflects the status of the CB as a mere dissemination tool for the approved budget, rather than an engagement tool. CSOs, during engagements with the World Bank, have raised concerns about the lack of information both in terms of quality and accessibility (that is, absence of reader friendly language), especially in areas such as climate change. The Sustainable Development Goals (SDGs) Budget Reports (recently renamed SDGs Budget and Expenditure Reports) are published inconsistently and with delay,66 but provide a platform for the government to share budgetary information on its SDG commitments and achievements with the public. 4.3.1/ Shortcomings in MTEF implementation have limited its contribution to budget credibility Ghana has a wealth of experience with MTEFs. Since its piloting in 1996 and implementation in 1999, Ghana’s MTEF switched from a three-year to a four- year rolling framework in 2018. The MTEF is recognized as an integral part of the PFM cycle, as stipulated in the PFM Act and other budget documents circulated to MDAs during the budget preparation process. 64 A CB is a document developed by the government exclusively for the public, presenting the budget in a simplified, less technical format to build a better understanding of how public finances are managed and used. This understanding is vital for public accountability and to foster inclusive civic participation (CABRI). 65 https://mofep.gov.gh/news-and-events/2022-12-14/2023-citizens-budget 66 2019 and 2020 reports are published on the MoF website while a dedicated website (https://sdg.mof-bism.com/) was launched in 2023. Ghana Public Finance Review | Volume 2 / Detailed Analysis 114 Despite a relatively well-established process, the MTEF does not currently inform the medium-term budget. MDAs prepare the MTEF as part of their PBB estimates, but indicative budget ceilings are often ignored or exceeded, as discussed previously. Out-year estimates are not binding, and they are not always used as a starting point for the development of the following year’s MTEF and budget. In fact, the MoF has never set its indicative budget ceilings on the basis of the previous year’s MTEF estimates.67 This disconnect means that MDAs have policies and plans that are not adequately costed or projects that are pipelined but not financially accounted for. As a result, the government does not ultimately have a reliable medium-term budget and is exposed to potential future liabilities that are not factored into medium-term projections. This practice also contributes to the accumulation of arrears. The MTEF is only comprehensive at the aggregate level, and an MDA- specific MTEF is not available. The Budget Statement provides a summary of the MDAs’ expenditure allocations for four years, including the budget year. However, the level of disaggregation of the budget is not consistent across MDAs. Some MDAs include relatively detailed breakdowns, while others only provide aggregate figures (Table 4.3). In addition, the MoF does not publish an MDA-specific MTEF for all MDAs. Table 4.3. Disclosure status of MDA-specific documents Number of MDAs 52 Of which with budget expenditure by subprogram 50 (96%) Of which with budget expenditure by department 0 (0%) Of which with budget details 32 (62%) Of which with PBB estimates 32 (62%) Sources: 2023 Budget Estimates of MDAs, 2023 PBB Estimates 4.3.2/ The PBB approach is not delivering on its promises PBB was introduced to foster a more strategic approach to budget management among Ghana’s MDAs (see Box 4.2). During the budget preparation process, the MoF requires MDAs to provide PBB estimates, including a brief narrative of the objectives and key services delivered by the respective budget programs and subprograms, and key performance indicators (KPIs) with targets that directly measure the delivery of the stated outputs. 67 Source: Budget Statements (2017–2023), GoG. 4/ Improving Public Financial Management for Better Spending Results 115 In practice, however, PBB in Ghana is not used to inform budget formulation and execution—it is merely presentational (see Box 4.2), and the estimates are neither prepared nor disclosed as designed. The policy outcome indicators and targets included in each PBB estimate are often output-based (such as number of staff trained or number of programs implemented) and do not provide sufficient information to allow for an objective assessment of performance. Some MDAs have set no baseline indicators at all. For example, the Ministry of Communications and Digitalization has 38 indicators, none of which has a baseline value; while input-based indicators such as ‘number of staff who participated in capacity development programs’ do not reflect the quality of services delivered to citizens. Also, the time horizon for policy outcome indicators is not consistent across MDAs, limiting the opportunities for comparing performance among agencies. Finally, budget allocations are not correlated with performance. Box 4.2. PBB implementation in Ghana remains a work in progress The GoG first introduced its activity-based performance information is presented in budget (ABB) before the introduction of MTEF. budget documents but is not intended The ABB was originally designed to categorize to (and does not) play a role in decision- inputs based on related activities but lacked making. In comparison, performance- clear definitions of activities and links between informed budgeting uses performance outputs and outcomes. In short, the MoF was information to indirectly affect budgetary unable to extract meaningful information from decision-making but does not determine the the descriptions of activities and outputs. In amount of resources to be allocated. Direct- response, the government began exploring performance budgeting uses performance PBB and implemented its pilot phase between information to directly determine the 2011 and 2013. PBB was then applied across all amount of resources allocated. MDAs in 2014 and has since been strengthened Ghana is aiming to mainstream performance- with improvements to GIFMIS and the informed budgeting and to emphasize a enactment of the PFM Act. direct link between planned expenditure and PBB can take three main forms: presentational clearly determined results. performance budgeting entails that Sources: Revised PBB Manual, MoF; Performance Budgeting: A User’s Guide, Organisation for Economic Co-operation and Development (OECD). The MTEF/PBB is not informed by Public Investment Plans (PIPs). MDAs are currently required to submit their PIPs using a template provided with the Budget Preparation Guidelines. However, the PIPs only include information (including code, contract, percentage of work completed, total contract value, actual payment, outstanding commitment, and allocation based on the latest MTEF) for ongoing projects.68 New and pipelined projects are not included in the PIPs, and, as a result, the out-year figures are either underestimated or lack specific plans and projects.69 Without PIPs that offer relevant and comprehensive data, MTEF/PBB may lack crucial information. 68 Budget Preparation Guidelines. 69 In part, this happens because the Budget Preparation Guidelines require MDAs to only list projects that already have regulatory approval and confirmed funding sources. New projects are considered for budget allocation within the MTEF after the requisite project preparation (that is, at least a concept note and/or a pre-feasibility study) has been conducted; in practice, however, they are seldom listed. Ghana Public Finance Review | Volume 2 / Detailed Analysis 116 4.4/ Commitment controls and cash management need significant enhancements The government has committed to addressing the causes of excessive expenditure commitments leading to arrears accumulation, including by strengthening commitment control and cash management. Weak commitment controls can lead to accumulation of arrears and restrict fiscal space for the provision of adequate service delivery. In addition, poor cash management does not allow for predictability of cash and constrains the ability of the government to spend in a timely manner. 4.4.1/ GIFMIS coverage should be expanded and its software infrastructure kept up to date GIFMIS is designed to be the backbone of Ghana’s management of all public funds. The use of GIFMIS for processing financial transactions is a legal requirement under Section 25 (6) of the PFM Act, 2016 (Act 921). As of May 2024, GIFMIS has been rolled out to 53 MDAs, 261 metropolitan, municipal, and district assemblies (MMDAs), 32 donor funds, 181 IGF-reliant institutions (out of an estimated 8,50070) and 5 statutory funds.71 Many IGF- reliant institutions still conduct their transactions through accounts held at commercial banks. Such transactions are neither recorded nor tracked by GIFMIS. GIFMIS runs on an outdated software version which creates data processing and management bottlenecks. As a result, various automated data quality controls are not available, thereby undermining data quality, back up functionality, and recovery capabilities. For example, a sample of 310,590 procurement-to-payment (P2P) transactions from 2022 includes 162 instances where the date on which the record was created precedes the invoice issuance date, which is a clear indication of false or incorrect data. The expenditure type is designed to handle categorical values to classify the types of expenditures, but the dataset also includes numerical values that do not fall under any of the categories. These loopholes in the system are compounded by insufficient knowledge and familiarity of the users. The absence of adequate updates and fixes combined with outdated IT infrastructure at the GIFMIS Secretariat make the simplest of tasks—such as running a query—time consuming and, in some cases, effectively impossible. GIFMIS still requires a significant amount of manual transaction for recording and reporting. The current interface between the Human Resource Management Information System (HRMIS) and the GIFMIS financials does 70 Most of these institutions are small facilities, such as regional health facilities, with minimal macro-fiscal impact. 71 Ghana Road Fund, Ghana Education Trust Fund (GETFund), National Health Insurance Fund (NHIF), District Assembly Common Fund (DACF), and Petroleum Fund. 4/ Improving Public Financial Management for Better Spending Results 117 not enable automatic transmission of data on compensation of employees and requires manual data reconciliation. Furthermore, certain types of expenditures such as pensions and interest payments remain outside of the system and require manual data reconciliation by the Controller and Accountant General’s Department (CAGD). The only type of transactions that are automatically captured is P2P, with other non-P2P transactions being manual journal entries entered by the National Accounts of the CAGD to capture the full public expenditure. Manual journal entries are prone to human errors, have significant time lags, and include large adjustments. Increasing the proportion of total expenditure and types of expenditures automatically captured on GIFMIS, while reducing that of the manual journal entries, will enhance the data quality of GIFMIS. 4.5/ Effective cash management requires full TSA implementation GIFMIS reforms should be complemented by the full implementation of the TSA. There are many bank accounts outside of the TSA. The TSA in Ghana is housed by the Bank of Ghana (BoG) and covers all bank accounts for processing consolidated funds budgeted with the MoF, released by the MoF, and executed by MDAs. The Minister of Finance, at any given time, has access to all details of the bank accounts hosted by the BoG. However, bank accounts at commercial banks—such as those held by IGF-reliant institutions—are outside of the TSA, preventing the MoF from extracting the overall cash position of the government, monitoring the details of available funds held by MDAs, or conducting ‘sweeps’ (that is, collecting all unused funds) from the accounts at the end of each financial year. Rationalizing all the public sector’s bank accounts is required to fully implement the TSA. The authorities should consider closing redundant accounts hosted by the BoG, closing redundant accounts at commercial banks, expanding systems such as the Ghana Interbank Payment and Settlement System (GhIPSS) for monitoring remaining commercial bank accounts, and ensuring the cash positions of MDAs, MMDAs, IGF-reliant institutions, and statutory funds are available. The government has prepared a TSA Strategy and committed to TSA reforms (Memorandum of Economic and Financial Policies, 2023); going forward the full and parallel implementation of the TSA and rollout of GIFMIS will allow the MoF to have an accurate, comprehensive, and timely view of the cash position. Ghana Public Finance Review | Volume 2 / Detailed Analysis 118 4.4.1/ Cash shortages weaken the government’s ability to make timely payments Weak commitment controls and cash management have led to the accumulation of arrears. While the accumulation of arrears is a result of multiple factors including revenue shortfalls, budget rigidity, price overruns, and so on, weak commitment controls and cash management are contributing factors of arrear accumulation in Ghana. This is evident from Ghana’s expenditure pattern where January and February, have consistently exceeded the projections while those during the latter half of the year have undershot them. For example, the capital expenditure in January 2022 was more than double the projection (GHS 1,651 million against the projection of GHS 672 million), while the expenditure was less than a fifth of the projection in December of the same year (GHS 634 million against the projection of GHS 3,410 million). This trend suggests that unpaid claims in the previous year as well as multi-year contracts emerge as payment obligations at the beginning of the following year. Expenditure tends to overshoot the budget in the beginning of the year and undershoot it at the end, indicating cash rationing Figure 4.5. Central government capital expenditure (GHS, millions) Figure 4.6. Central government expenditure on goods and services (GHS, millions) 3,500 1,800 1,600 3,000 1,400 2,500 1,200 1,000 2,000 800 1,500 600 400 1,000 200 500 - n Au ly st ct b pt ar ec ay ov r ne - Ap Ja Fe Ju gu O Se M D M N Ju n Au ly st ct b pt ar ec ay ov r ne Ap Ja Fe Ju gu O Se M D M N Ju 2022 Prog. 2022 Prov. 2022 Prog. 2022 Prov. 2021 Prog. 2021 Prov. 2021 Prog. 2021 Prov. 2020 Prog. 2020 Prov. 2020 Prog. 2020 Prov. Sources: Fiscal Data, 2022–2020. A third of transactions processed on GIFMIS in 2022 remain unpaid; with the majority being small transactions. Table 4.4 presents the payment status at the time of reporting of all P2P transactions processed on GIFMIS in 2022. As of May 2024, more than 16 months after the closing of the respective financial year, 33.5 percent of claims remain unpaid amounting to liabilities of GHS 2,160 million. These are claims of vendors who have fully delivered as per their contracts and whose payments have been fully approved by the 4/ Improving Public Financial Management for Better Spending Results 119 relevant institutions—the delay in payment is entirely due to the shortage of cash. As a result, payment is made at the discretion of the CAGD based on cash availability. The relatively smaller portion of unpaid claims, in value terms, compared to the number of claims indicates that larger claims have been prioritized over smaller claims, which may have come at the sacrifice of smaller vendors who have less ability to influence the government’s decision to pay on time. Table 4.4. Payment status of P2P processed on GIFMIS in 2022 (as of May 2024; GHS, millions) Number Amount Paid 206,169 29,638.63 (66.4%) (92.2%) Unpaid 103,941 2,160.40 (33.5%) (6.7%) Partially Paid 480 356.60 (0.2%) (1.1%) Total 310,590 32,155.62 Source: GIFMIS Secretariat; authors’ calculations. Box 4.3. Cash management and commitment controls - what works? Weak cash management and commitment buildup of arrears, restricting fiscal space and controls undermine the government’s ability affecting the ability to finance planned service to maintain overall fiscal discipline, maintain delivery. Poor recording of commitments and borrowing within agreed limits, and deliver arrears combined with cash-based reporting funds to spending units in a timely manner for can hide the scale of existing liabilities. A service delivery. There are three key areas in weak commitment tracking regime may cash management and commitment control: incentivize spending agencies to withhold information on contractual obligations Planning and forecasting. Poor forecasting or other contingent liabilities. Controlling leaves the Treasury with inaccurate information spending at the point of cash payment rather on cash flows and insufficient reaction time to than commitment can place a lot of pressure address cash management issues. This usually on Treasury officials and create gatekeeping leads to unplanned, short-term, and expensive roles. borrowing and to the accumulation of debt and arrears. Causes of poor forecasting may Functional TSA and banking arrangements. include over-optimistic revenue projections; A multiplicity of spending agency bank unrealistic budgets prepared with inadequate accounts or a partially implemented TSA will challenges by the MoF; poor forecasting result in resorting to borrowing unnecessarily and analytical skills within the Treasury; and and delaying or limiting payments despite breakdowns in institutional communication idle balances existing in government and data sharing. accounts. Furthermore, it may increase incentives for agencies to limit information Effective expenditure controls. Weak on cash balances and encourage rent-seeking commitments management can lead to a opportunities within agencies. Ghana Public Finance Review | Volume 2 / Detailed Analysis 120 Country examples of Integrated Financial Management Information System (IFMIS) implementation Initial Context Approach Summary of Results What Worked What Did Not West Bank and Gaza • Systemic • Simple forecast • Limited initial uptake • Data consolidation • Slower than overoptimistic tool (Excel) of the original tool - the existing simple anticipated. revenue forecasts developed by despite its simplicity. arrangements for • Tool has limited ability and volatile TA and updated • Challenge gaining banking/TSA and to affect allotments/ revenue inflows. monthly to broad understanding functional IFMIS gave commitments. • Weak fiscal inform quarterly of the problem led to a strong base for the • Greater resistance to framework and allotments, repeated false starts. cash forecasting tool to commitment control incremental including basic • Perceived resistance be developed. than CM from MDAs budget. prioritization of to cash forecasting in • Flexibility on CC and resulted in a reversal • No commitment payments and the face of very volatile revision of program to of the reform and controls. cash available by inflows and concerns focus on pilot MDAs only recently more • Functional IFMIS quarter, and cash of revealing inflow was important. progress. connected to TSA buffer. dependence. • A lot of leeway on • Linking CM and CC is - Central Bank in a • Link tool to IFMIS/ • Success in routine commitment control yet to be introduced. single commercial TSA monthly forecasting (very little intervention False starts on CC and bank. • Develop arrears achieved but does on limits) has made a fear of derailing cash • Relatively poor inventory and not transmit to it easier to introduce forecasting by linking demand for reform accounting tool. commitment control. reforms with MDAs. it to control is forcing and engagement • Develop • Revision of caution. despite having commitment commitment control • CC improvement some capacity. control functions tools to focus on 4 dependent on more later. pilot ministries after credible budget which broad resistance from is weak and largely MDAs. incremental. West Bank and Gaza • Expenditure • Extensive • Broadly understood • Transfer to IFMIS • Slower than controls primarily problem problem aided systems was anticipated. at payment rather identification development of a CM strengthened by • Lack of appropriate than commitment. through PFM Framework. collecting and skills to manage such • Fiscal pressures Strategy. • Inadequate modelling the full set a complex tool led including growing • Prioritization permanently assigned of data required in a to frustration and interest, expensive of expenditure capacity, despite prototype tool, finding reduced trust and elections, and was a primary general capacity issues. engagement with demand to expand demand. available in Treasury • Establishment of MDA technical assistance. infrastructure and • MDA cash led to delays. cash plans as part of • Tool ownership was services. plans to inform • Prototype tool was the system allowed not taken up until • Relatively strong allotments built too complex to be them to be built into transfer to IFMIS. IFMIS used by all in from the handed over to staff. the budgeting software, • Expectation for national MDAs, beginning. Strategy adjusted to improving ease of use multiple departments including for • Complex incorporate it in IFMIS and compliance and to engage with a budgeting. Prototype sooner. consolidation. complex prototype • Frequent in-year (GoogleSheets) • Successful integration • Alignment of budget, tool had limited budget deviations was built to of key elements in cash plan and allotment returns. and regular integrate monthly IFMIS though still is central to the • Lack of high-level supplementary MDA cash plans; lacking on analysis and design and now all engagement budgets. consolidation; automated controls. within one system. from leadership • Conceptual CM buffer • Weak leadership of Inclusion of a priority undermined progress understanding of and analysis CM committee due to expenditure protocol and left technical staff issues and high- functions; and competing priorities in enabled automatic to make decisions. level commitment prioritization AG office. tagging of payment • Pressure through a DLI through World controls. • Resistance to change requests based on to produce a cash plan Bank program. • Migration of in Treasury. CoA and pre-agreed led to a rushed and • No TSA in prototype of priorities, providing sub-par plan being operation despite a functions to IFMIS information to help prepared in parallel to long running effort intended after reduce short-term the prototype tool. already in place to the stability of decisions and automate • Misjudged develop the system function reached payments (still being importance of change and related links to in prototype. implemented). management among CBK and the IFMIS. Treasury staff. • No TSA, though efforts increasing. Source: Cash Management and Commitment Control: Principles and Problems in Practice. EFI Insight-Governance. Washington, DC: World Bank (2021) Note: TA = Technical Assistance; CC = Commitment Control; CM = Cash Management; CBK = Central Bank of Kenya ; AG = Accountant General; CoA = Chart of Accounts; DLI = Disbursement-Linked Indicator. 4/ Improving Public Financial Management for Better Spending Results 121 4.6/ More integrated IT infrastructure would strengthen PFM effectiveness The government has invested heavily in various IT systems, which were expected to address PFM issues. While the National Information Technology Agency (NITA) is mandated to create an enabling environment for the effective deployment and use of ICT in all sectors, and the MoF is mandated to lead on PFM reform, neither agency is responsible for coordinating and leading the government’s investment in IT systems. Ghana’s PFM is supported by a range of separate IT systems, operated and maintained by different institutions (Table 4.5). As a result, such systems are not fully interoperable (Figure 4.7), contributing to inefficient budget releases, weak commitment control, and poor cash management. Shortcomings in the IT ecosystem have important implications for the PFM cycle. Monitoring and evaluation (M&E) is a vital part of PFM and requires reliable and up-to-date data. However, the proliferation of IT systems designed to support M&E—none of which provides up-to-date information— does not allow public officials to obtain and present meaningful data to decision- makers. On a similar note, although the complete rollout of GIFMIS will ensure that all financial transactions and information are tracked and recorded in the system, this development will have a limited impact unless all public procurement is conducted through GHANEPS and data from the latter flows correctly into GIFMIS. Table 4.5. Ghana’s PFM cycle relies on a plethora of separate IT systems System Institution Audit Management Information System (AMIS) Ghana Audit Service (GAS) Ministry of Local Government, District Development Data Platform (DDDP) Decentralization, and Rural Development (MLGDRD) Ghana Electronic Procurement System (GHANEPS) Public Procurement Authority Ghana Development Cooperation Management Information System (Gh-DCMIS) External Resources Mobilisation Division, MoF Controller and Accountant General’s Ghana Integrated Financial Management Information System (GIFMIS) Department (CAGD) National Development Planning Commission Ghana Integrated Infrastructure Database (GIID) (NDPC) Ghana Integrated Tax Management and Information System (GITMIS) Ghana Revenue Authority (GRA) Controller and Accountant General’s Human Resource Management Information System (HRMIS) Department (CAGD) Controller and Accountant General’s Budget Preparation and Management System (Hyperion) Department (CAGD) Integrated Bank of Projects (IBP) Public Investment and Assets Division, MoF Debt Recording and Management System (Meridian) Debt Management Division, MoF National Development Planning Commission National Monitoring and Evaluation Information System (NaMEIS) (NDPC) Ghana Public Finance Review | Volume 2 / Detailed Analysis 122 4.6.1/ Key IT challenges concern interinstitutional collaboration, system compatibility, and automation The IT ecosystem suffers from a lack of interinstitutional collaboration. Insufficient interinstitutional collaboration and information sharing is a major challenge to the effectiveness, efficiency, and integration of the IT ecosystem. Hyperion and GIFMIS are the only active systems featuring some form of integration but they fall short of industry standards on information sharing. Government institutions tend not to proactively communicate with other agencies when planning or implementing their systems. Even at the intra- institutional level, coordination is limited or non-existent. For example, the NDPC manages and operates both NaMEIS and GIID, which have overlapping purposes. Moreover, the MoF houses multiple divisions responsible for a range of poorly integrated IT systems. Figure 4.7. PFM cycle and IT systems AMIS GITMIS AMIS GITMIS Gh-DCMIS Planning / Reporting / Resource Meridian Auditing mobilization Gh-DCMIS Planning / Reporting / Resource Meridian Auditing GIFMIS Hyperion mobilization Monitoring / Budgeting Accounting GIID GIFMIS Hyperion Monitoring / HRMIS NaMEIS Budgeting Accounting Budget GIID DDDP execution HRMIS NaMEIS IBP Connection established Budget GHANEPS Connection not establishe DDDP execution IBP Connection established GHANEPS Connection not established 4/ Improving Public Financial Management for Better Spending Results 123 Automation gaps hinder the efficient operation of certain systems. For example, the contract database currently in use (which is expected to be replaced by the IBP) relies on manually compiled Excel spreadsheets and does not allow for integration with other systems. Moreover, GIFMIS is not yet fully configured to facilitate payments to vendors through SWIFT. Such automation gaps leave the IT ecosystem vulnerable to human error, while the need for data transfers across systems raises transaction costs. Table 4.6. IT systems lack interoperability and hinder institutional collaboration System Challenges The IBP has the greatest potential for system integration, as it is still being prepared. However, the IBP could potentially IBP overlap with NaMEIS and GIID. The system requires users to manually input data at various stages of project preparation, including during pre- Hyperion feasibility and feasibility studies. Users must also manage such data in accordance with the CoA. A more streamlined system with fewer manual inputs will reduce the risk of incorrect data entries. GIFMIS lacks adequate integration resources and cannot receive real-time data. Only the Hyperion budgeting system GIFMIS interfaces with GIFMIS, through a remote server and secure file transfer protocol. GHANEPS rollout is underway. The Public Procurement Authority issued a directive in October 2023 mandating its use GHANEPS by all procuring public entities. The challenge for the government is to ensure compliance, as many public institutions have deliberately preferred to conduct procurement outside of GHANEPS. Data consistency across NaMEIS and GIID is required, and both systems should use the same data sources. NDPC and NaMEIS the MoF can also agree on which system is the holder and originator of all master data with reference to the IBP. The systems do not use the same unique project identifiers, creating the risk of duplicated entries and inconsistency. GIID Gh-DCMIS The lack of consistent data standards and protocols across institutions undermines data management and tracking. Data from departmental management is not necessarily consistent with data from other systems. As Meridian is Meridian licensed from the Commonwealth Secretariat, the extent to which it can be integrated with other systems is unclear. Box 4.4. Estonia’s journey over the past three decades showcases how technology can strengthen the PFM cycle to improve trust in government and enhance accountability. Estonia is regarded as one of the most Estonia is also among the frontrunners successful countries in embracing digital in PFM (Policy Paper 144, 2019; Center for transformation to leapfrog traditional Global Development) including adoption bureaucratic hurdles. Estonia’s GovTech of results-oriented budgeting, accrual maturity is assessed as very high (GovTech accounting, and accrual budgeting. Maturity Index 2022; World Bank). Since Digital solutions support the entire PFM gaining independence in 1991, Estonia has cycle, including systems such as: e-Estonia continuously invested in digitalization efforts, Dashboard, which provides real-time data including the groundbreaking X-Road platform on various aspects of public administration in 2001 which laid the foundation for data and financial management, helping policy exchange between the government and private makers to make data-driven decisions; sector entities. Since then, Estonia continued to Financial Management Information System promote digitalization so that today Estonians (FMIS), which integrates various financial can access a wide range of government management processes into a single digital services online through the e-Estonia portal, platform, enhancing their efficiency and from filing taxes to voting in elections. transparency; e-tax and customs, which Ghana Public Finance Review | Volume 2 / Detailed Analysis 124 allows for the electronic filing of taxes and supportive legal and regulatory environment, customs declarations; real-time economy, and digital solutions have allowed Estonia which processes real-time financial data, to significantly improve efficiency and improving accuracy of financial reporting and transparency in public administration. decision-making; and e-procurement, which Furthermore, improved service delivery is a digital platform for public procurement and the digitalization process fostered enhancing transparency, reducing corruption, greater citizen participation and resulted and increasing efficiency (Digital Innovation in in greater trust in government institutions. PFM, 2018; Bill and Melinda Gates Foundation). Consequently, the Corruption Perceptions Index improved significantly from its score of Digital solutions are backed by strong 64 in 2012 to 76 in 2023; Estonia now ranks political commitment and a supportive legal 12 out of 180 countries, making it one of the and regulatory environment which ensure least corrupt and most transparent in the that the systems deliver as intended. The world (Corruption Perceptions Index, 2023; combination of strong political commitment, Transparency International). Sources: e-Estonia; Digital Innovation in PFM, Bill and Melinda Gates Foundation; Corruption Perceptions Index, Transparency International; PFM and the Digitalization of Payments, Center for Global Development; GovTech Maturity Index 2022, World Bank. 4.7/ Policy recommendations for public financial management A stronger management of public finances hinges on progress in four key areas: first, greater budget credibility and transparency; second, implementing the MTEF and PBB in a way that meaningfully informs the budget; third, ensuring that all institutions are covered by and using the GIFMIS; and, finally, greater efficiency and connectivity within the IT ecosystem. The following recommendations have been developed and prioritized in line with the government’s ongoing reform efforts. Policy Priority 1: Improve budget credibility and transparency. Achieving this goal requires enforcement of sanctions under the PFM Act, better compliance with other frameworks relevant to the national budget, and the introduction of hard budget ceilings to replace the indicative ceilings circulated at the beginning of budget preparation, which are often ignored. Policy Priority 2: Implement the MTEF and PBB in a way that meaningfully informs the budget. Relevant measures include: the issuance of guidelines to streamline and standardize the preparation of MTEFs by MDAs; the use of outer-year estimates to inform allocations for subsequent years; streamlining policy outcome indicators and enhancing the focus on high-level strategic outcomes; and expanding the coverage of PIPs. 4/ Improving Public Financial Management for Better Spending Results 125 Policy Priority 3: Enhance the coverage and update the infrastructure of GIFMIS. This includes expanding the coverage of GIFMIS and the TSA to all budget institutions, including IGFs. In addition, as the importance of and reliance on GIFMIS increase, the infrastructure must be strengthened including conducting version updates, data fixes, patch updates, data backup, and hardware updates. Policy Priority 4: Increase the efficiency and connectivity of the IT ecosystem. Relevant measures include acknowledging the inefficiencies caused by a lack of interoperability among IT systems and building consensus on measures to overcome them; introducing a unified project identification number valid across systems; and investing in a shared government service bus and developing application programming interfaces (APIs) to automate data exchange solely through this service bus to avoid emergence of multiple systems. Credits: World Bank Ghana Public Finance Review | Volume 2 / Detailed Analysis 126 Table 4.7. Detailed recommendations for PFM Policy Priority 1: • Enforce sanctions under the PFM Act and improve compliance with Improve budget other frameworks relevant to the national budget, including through credibility and penalties for responsible MDAs and covered entities. Noncompliance transparency with budget rules undermines efficiency and budget credibility. • Introduce hard budget ceilings to replace the indicative ceilings circulated at the beginning of budget preparation, to strengthen the role of the ceilings and make the budget process more effective. The budget could be divided in two parts–one governed by hard ceilings, the other with more flexibility for unforeseen or emergency needs. MDAs should be held accountable for any difference between the indicative ceiling and the final expenditure allocation. Differences between the indicative ceiling and the final expenditure, especially those that are significantly larger than the average difference, need to be clearly explained and justified. Failure to do so undermines the credibility of the indicative ceilings and raises questions about their role. • To improve the budget’s alignment with climate resilient and low carbon development: ¬ Strengthen the implementation of the existing climate budget tagging system and increase transparency of climate related spending. ¬ Incorporate climate smart appraisal guidelines into the public investment management (PIM) regulations. ¬ Develop and implement guidelines for green public procurement. Policy Priority 2: • Issue guidelines to streamline and standardize the preparation Implement the MTEF of MTEFs by MDAs, potentially as part of the Budget Preparation and PBB in a way Guidelines to minimize administrative costs. The MDA-level MTEFs that meaningfully should also include PBB estimates to ensure compliance with current informs the budget requirements and consistency between the aggregate estimate and those submitted by individual agencies. • Use outer-year estimates to inform the allocations for subsequent years. Currently, MDAs have no incentive to provide accurate outer- year estimates, as they are neither binding nor used as a starting point for the budget process. To ensure that MDAs provide accurate outer-year estimates, provisions must be made to allow for additional allocations for new needs that may have arisen since preparation, with sufficient justification. • Streamline policy outcome indicators and focus on high-level strategic outcomes. The MoF should lead the review of policy outcome indicators to reduce their number and better focus them on key 4/ Improving Public Financial Management for Better Spending Results 127 elements. Baselines should also be established for all indicators, with annual targets. This will help obtain PBB estimates that are meaningful and useful to senior managers and policy makers to assess the budgetary implications of proposed policies. • Expand the coverage of PIPs. PIPs can better inform the medium-term budget by listing pipelined projects, indicating whether the project has been approved or not and the likelihood of its implementation. The template to be shared with MDAs at the beginning of budget preparation can be updated to include new and pipelined projects, as well as indicative cost estimates for the project period. Policy Priority 3: • Expand the coverage (and mandate the use) of GIFMIS and the TSA to Enhance the coverage all budget institutions. IGFs and donor funds, which are currently not and update the fully covered by GIFMIS, need to be prioritized. infrastructure of • The GIFMIS system (software and hardware) needs to be robust to GIFMIS support an increased demand. This includes conducting version updates, data fixes, patch updates, data backup, and hardware updates. Policy Priority 4: • Acknowledge the inefficiencies caused by lack of interoperability Increase the efficiency between IT systems and build consensus over priority actions to and connectivity of overcome them. The proliferation of overlapping systems and the the IT ecosystem fragmentation of responsibility over them need to be addressed at the national level, through interministerial meetings or committees and high-level dialogue among relevant institutions. This would help reach agreement on priority actions (for example, decommissioning, merging, or integrating systems). The regulatory and governance framework can then be revised. • Introduce a unified project identification (ID) number valid across systems. To enhance the interoperability of the IT ecosystem, a unified project ID should be assigned at project inception and used throughout its lifecycle, including planning, budgeting, procurement, implementation, and M&E. • Invest in a shared government service bus and develop APIs to automate data exchange exclusively through this service bus, thereby enhancing interoperability. 5/ Ghana Public Finance Review | Volume 2 / Detailed Analysis 128 Ghana Public Finance Review | Building the Foundations for a Resilient and Equitable Fiscal Policy Managing the Public Sector Wage Bill to Deliver Services to Citizens 5/ Managing the Public Sector Wage Bill to Deliver Services to Citizens 129 5.1/ The challenges of public sector employment and wages The public sector is key to Ghana’s growth, contributing to national development through economic and social policies, regulation, and the direct delivery of services to citizens. An effective public sector is integral to establishing and maintaining a policy environment that is conducive to economic growth (Rauch and Evans 2000), as well as to ensuring broad-based economic prosperity—as measured through social welfare and institutional quality indicators. Moreover, the public sector drives economic growth through public investment. Governments often face a challenge in balancing growth-enhancing expenditures with the provision of essential social services. The objective should be to empower the bureaucracy to efficiently deliver a range of public goods and services, including infrastructure development and social programs. However, organizational inefficiencies can lead to bloated public sector wage bills which may limit the resources available for citizen-oriented spending. Mounting fiscal pressures exacerbate such trade-offs. In the case of Ghana, government revenues (as a share of gross domestic product [GDP]) have remained relatively constant over the past decade, while expenditures have creeped upwards—a trend magnified by the COVID-19 pandemic, with public finances stretched to fund urgent public health needs, protect lives and livelihoods, and support economic stimulus measures. Such factors have intensified longstanding pressures for the government to do more with less, including by improving public sector productivity. Ghana Public Finance Review | Volume 2 / Detailed Analysis 130 Effectively managing headcount and compensation within the public sector is a critical government responsibility, with wide-ranging implications for fiscal sustainability, public sector productivity, and overall labor market competitiveness. Public sector salaries account for a significant proportion of overall public expenditures and have direct implications on a country’s fiscal health and expenditure efficiency. Wages also have a considerable impact on the recruitment, retention, and motivation of public sector employees, which, in turn, influence productivity—measured by the quantity and quality of government outputs per employee. Moreover, due to the size of the public sector’s workforce, adjustments in government wages have ripple effects throughout the broader labor market and can impact employment trends in the private sector. Employment and wage policies for the public sector should seek to maximize sectoral productivity within the constraints of fiscal sustainability, while maintaining equilibrium in the broader labor market. Governments must navigate complex technical and political trade-offs in their efforts to pursue a multitude of objectives: from ensuring the consistent delivery of essential services to sustaining the labor market when the private sector is underdeveloped or during economic downturns. Fiscal crises often function as catalysts for reform, prompting short-term measures—such as freezing or reducing public sector wages across the board and reducing headcount through voluntary or involuntary means—to meet fiscal targets. However, short-term solutions can have adverse effects on long-term growth, societal well-being, and political stability, as well as create unintended consequences (IMF 2016). For instance, freezing basic wages can result in the proliferation of hidden allowances and supplementary payments, leading to reduced transparency in wage structures, inequities in pay, and lower productivity. Even at times of fiscal strain, public sector employment and wage practices should consider potential impacts on staff recruitment, retention, motivation, and ultimately, productivity. This chapter is organized as follows. Section 5.2 presents an overview of Ghana’s public sector wage bill, comparing its performance on quality and sustainability of wage spending against three groups of peer countries.72 The next four sections delve into four additional dimensions of wage bill analytics: wage bill planning and controls, public sector size and composition, wage competitiveness, and wage equity and incentives. The chapter concludes with an accounting of Ghana’s successes with public sector reform and provides a set of recommendation for potential reform strategies. 72 Countries located within West Africa represent Ghana’s regional peers. Structural peers were selected from a subset of low-income and lower-middle-income economies with gross national income (GNI) per capita between US$1,000 and US$3,000; population between 10 million and 110 million; Human Capital Index (HCI) scores between 0.3 and 0.5; and Country Policy and Institutional Assessment (CPIA) scores between 3 and 4. Aspirational peers were selected from a subset of lower-middle-income and upper-middle-income economies with GNI per capita between US$2,000 and US$4,000; population between 10 million and 110 million; HCI scores greater than 0.4; and CPIA scores greater than 3.5. 5/ Managing the Public Sector Wage Bill to Deliver Services to Citizens 131 5.2/ Trends in the public sector wage bill Ghana’s public sector wage bill accounts for significant shares of government expenditures and revenues and has been highly volatile. The wage bill accounts for a substantial and relatively inflexible portion of government expenditures in Ghana, with significant ramifications for fiscal capacity.73 Wagner’s law (1890) dictates that as countries develop, their public sectors are called upon to perform more and increasingly complex functions, particularly regarding the provision of social services. Moreover, public sector wage expenditure tends to be sticky in nature, due to the political challenges associated with reducing headcount or adjusting salaries (Peacock and Wiseman 1979). In this context, the sustainability of Ghana’s public sector wage bill is influenced by two key factors. First, relative to its peer countries, Ghana has a higher wage bill but generates less tax revenue, causing an overall shortage of government income. Second, the government is likely to face additional pressure to provide more public services as the country continues to develop. With GDP and government revenues growing at a muted pace, the share of government resources devoted to servicing the public sector wage bill increased. Ghana’s public sector wage bill rose from 2 percent of GDP in 2000 to a peak of 8.8 percent in 2013 and then fell back to 6 percent as of 2019. The wage bill-to-GDP ratio temporarily spiked in 2020 as the COVID-19 crisis depressed GDP growth, but has since returned to pre-pandemic levels (Figure 5.1). Similarly, the wage bill accounted for as much as 41 percent of public expenditure in 2011, before declining to 23 percent by 2022 (Figure 5.2). This trend signifies the growing financial commitment directed toward salaries and wages in the first decade as the country developed, followed by a sustained downward correction owing to improvements in the government’s fiscal position. Specifically, the wage bill-to-government revenue ratio peaked at 71 percent in 2013, before receding to 42 percent in 2019; it rose again to 53 percent in 2020 (primarily due to falling government revenues) and then fell back to 41 percent as of 2022. 73 Unless otherwise stated, the public sector wage bill refers to public sector salaries and allowances, including deferred payments recorded in the budget. In this context, the public sector includes the central government as defined in the 1992 Constitution, and the public sector workforce comprises workers in all branches of the public administration, including noncommercial public enterprises. As a result, the wage data used in this analysis is slightly more comprehensive than those included in the budget. Ghana Public Finance Review | Volume 2 / Detailed Analysis 132 Muted GDP growth resulted in a hike in wage bill Shares of wage bill relative to public expenditures and revenues have spending in 2020 followed similar trends since 2013 Figure 5.1. Wage bill (% GDP), 2000–2022 Figure 5.2. Wage bill (percent of revenues and expenditures), 2000–2022 45% 80% 9% Wage bill (% of government revenues) Wage bill (% of public expenditures) 40% 70% 8% 35% 7% 60% Wage bill (% of GDP) 30% 6% 50% 25% 5% 40% 20% 4% 30% 15% 3% 20% 10% 2% 5% 10% 1% 0% 0% 0% 00 02 04 06 08 10 12 14 16 18 20 22 20 20 20 20 20 20 20 20 20 20 20 20 08 10 12 14 16 18 20 22 00 02 04 06 20 20 20 20 20 20 20 20 20 20 20 20 Public expenditures Government Revenues (RHS) Source: World Bank estimates based on data from Ghanaian authorities, World Bank Worldwide Bureaucracy Indicators (WWBI) and International Monetary Fund (IMF) World Economic Outlook (WEO), 2023. Although Ghana’s public wage bill-to-GDP ratio remains roughly in line with those of peer countries, its growth warrants closer examination. Ghana’s wage bill stood at 7.4 percent of GDP in 2020,74 approximately 1 percentage point higher than in its regional and structural peers and 2.5 percentage points below the level of its aspirational peers (Figure 5.4). While Ghana’s wage bill-to- GDP ratio is not an outlier, two critical observations emerge. First, as noted above, Ghana’s ratio has fluctuated significantly since 2000—in contrast with the relatively steady growth observed in most peer countries. The fluctuating burden of the wage bill may indicate challenges around the effective management of public sector personnel costs, potentially stemming from factors such as periodic adjustments in compensation policies or inconsistent workforce planning. Such instability can create uncertainty in budget projections and hinder the government’s ability to allocate resources strategically. It is imperative for Ghana to address such volatility to ensure a more predictable and sustainable fiscal management. 74 Ghana’s ratio fell to 6.5 percent in 2022, but contemporaneous data for peer nations is not available. Even using 2022 estimates, Ghana’s ratio remains 0.3 percentage points above the regional mean. 5/ Managing the Public Sector Wage Bill to Deliver Services to Citizens 133 Ghana’s wage bill-to-GDP ratio is broadly in line with most peers but has been more volatile Figure 5.3. Cross-national wage bill indicator (% GDP), 2020 Figure 5.4. Cross-national trend in wage bill (% GDP), 2000–2020 TUN CPV 12 10.0 MAR STP 9.0 Aspirational Peers LBR 10 BFA 8.0 VNM KHM 7.0 SLE 8 GAB GHA 6.0 TCD GNB ETH 6 5.0 COG PHL 4.0 Regional Peers MLI 4 Structural Peers 3.0 SEN TGO MRT 2.0 CAF 2 COD 1.0 CIV GTM CMR 0 - BEN GMB 00 02 04 06 08 10 12 14 16 18 20 20 20 20 20 20 20 20 20 20 20 20 GIN NER GNQ NGA Recession Ghana Aspirational Peer Regional Peer 0 2 4 6 8 10 12 14 16 18 Structural Peer Wage bill (% of GDP) Source: World Bank estimates based on World Bank WWBI and IMF WEO data, 2023. Second, Ghana has a high wage bill relative to government revenues, which raises concerns about its sustainability. Figure 5.5 shows that as a share of government revenues, Ghana’s wage bill is higher than in all the peer nations considered except the Democratic Republic of Congo, Ethiopia, and Tunisia, which, however, boast larger public sectors than Ghana. Importantly, the available data suggests that Ghana’s public sector is not oversized, pointing instead to challenges in the dynamics of government revenues. Although certain efficiency Credits: Langford Kwabena on Pexels improvements in public sector staffing and wage design may be warranted (as discussed in subsequent sections), a nuanced approach is required to achieve sustainability in the complex interplay between the wage bill and government revenue. Ghana Public Finance Review | Volume 2 / Detailed Analysis 134 Ghana has the fourth-highest wage bill as a share of government revenues among peers Figure 5.5. Wage bill (percent of government revenue), 2020 70% 60% Wage bill (% of revenue) 50% 40% 30% 20% 10% 0% N G V B LE ER CM r D A AB V VN r al P LI A A R TM F B RT IN al O N L N Q er AR R M H M D e ee CA PH CP CI ur ST N G LB H na BF M CO TC TU ET CO BE M SE on TG N Pe KH Pe S G N M G M N G G G lP G G tio ct gi ra ru Re pi St As Source: World Bank estimates based on World Bank WWBI and IMF WEO data, 2023. Ghana’s public wage bill is a potential driver of fiscal deficits and may be crowding out non-wage government expenditures. As the wage bill already absorbs around one-quarter of government spending, even slight increments in compensation or workforce headcount could markedly affect the fiscal balance, necessitating compensatory revenue generation or reductions in other expenditure. Indeed, Vector Autoregression (VAR) analysis indicates a notable correlation between the public sector wage bill and fiscal deficits in Ghana: a one-standard-deviation increase in the public sector wage bill increases the fiscal deficit, with effects lasting between two and three years. Over the long term, the shock dissipates as either the wage bill increase boosts economic activity that generates higher tax revenues or, more likely, the fiscal distress forces the government to reduce other forms of spending (Figure 5.6). In either case, this underscores the need for careful wage bill management within the broader context of Ghana’s historically variable public sector compensation trends.75 Additionally, Figure 5.7 illustrates that the magnitude of change in Ghana’s wage bill between 2015 and 2020 has surpassed all of its peer nations. 75 The team used a VAR model to investigate how fluctuations in wage bill spending can influence the trajectory of fiscal deficits. Through the VAR model, an impulse response function (IRF) was derived, which predicts the evolution of fiscal deficits following a wage bill spending shock equivalent to one standard deviation. The IRF graph depicted in Figure 5.6 illustrates the expected progression of fiscal deficits under such a scenario. At time t=0, the impact of the shock is generally expected to be zero because the shock has just occurred, and its effects have not yet been realized. Therefore, the initial value of the IRF often starts at zero, which should fall within the confidence interval. While VAR models can sometimes exhibit mechanical responses due to simultaneous shocks affecting both independent and dependent variables, the team conducted robustness checks to ensure the validity of findings. The analysis suggests that wage bill changes do influence fiscal deficits, although the impact of the shock and the predictive power of the analysis diminish over time 5/ Managing the Public Sector Wage Bill to Deliver Services to Citizens 135 A shock in wage bill spending has a strong impact on Shares of wage bill relative to public expenditures and revenues have the fiscal deficit followed similar trends since 2013 Figure 5.6. Impulse response function (IRF) showing Figure 5.7. Percentage change in nominal wage bill, 2015–2020 evolution of fiscal deficit after wage bill spending shock equivalent to one standard deviation GHA GHA ETH ETH COD COD KHM KHM 1 1 GMB GMB SLE SLE BFA BFA .5 .5 GIN GIN PHL PHL MLI MLI GNB GNB 0 0 TUN TUN STP STP SEN SEN NGA NGA Peer Peer Aspirational Aspirational -.5 -.5 MRT MRT Peer Peer Regional Regional GNQ GNQ GTM GTM Peer Peer Structural Structural -1 -1 CIV CIV TGO TGO CAF CAF LBR LBR 0 0 2 2 4 4 6 6 8 8 CPV CPV BEN BEN Periods (years) Periods (years) NER NER TCD TCD CMR CMR MAR MAR 95% 95% CI CI Orthogonalized Orthogonalized IRF IRF COG COG GAB GAB 0% 0% 50% 50% 100%100% 150%150% % change % change in wage in wage bill (2015 bill (2015 - 2020) - 2020) Source: World Bank WWBI, World Development Indicators (WDI), 2023 5.3/ Wage bill planning and controls Public sector workforce management requires consistent long- term policy and better operational systems. Ghana’s civil service is governed by a comprehensive regulatory system. The core government administration comprises 36 ministries (including the Offices of the President and the Prime Minister), as well as various statutory bodies and decentralized agencies. The Public Services Commission (PSC) and the Office of the Head of the Civil Service (OHCS) play a critical role in the recruitment and management of the public sector workforce. The PSC also oversees the establishment of guidelines on terms and conditions of employment in public services. Other authorities with a recruiting function include the Ghana Education Service (GES), the Ghana Health Service, and the Ghana Police Service (CID). The norms and procedures for recruiting civil servants are meritocratic and transparent. Section 4 of the Public Services Commissions Act of 1994 (Act 482) establishes efficiency, accountability, and integrity as the guiding principles for managing the civil service. Ghana Public Finance Review | Volume 2 / Detailed Analysis 136 The lack of a long-term policy framework on public sector employment hinders the effective management of the workforce. Ghana’s Medium-Term National Development Policy Framework (2022–2025) emphasizes building an effective and accountable public sector to meet growing demand for public services. It hinges on the adoption of a centralized, whole-of-government approach to managing public resources effectively. However, historical reforms aimed at centralization have yielded inconsistent outcomes.76 For example, although the implementation in 2007 of a Single-Spine Salary Structure (SSSS)—which aimed to harmonize civil servant pay scales and negotiating processes—did help to reduce wage dispersion, it also caused a significant increase in the wage bill (as salaries for underpaid segments of the civil service rose) (World Bank 2017), and its overall impact remains unclear. Moreover, under the Public Financial Management Act, salary negotiations in the public sector effectively initiate the budgeting process. The outcomes of such negotiations significantly influence the medium-term debt strategy and subsequent fiscal forecasts. The interplay between salary negotiations and fiscal planning underscores the need for a robust, forward-looking strategy to manage the public sector wage bill, aligning wage fairness with fiscal prudence and with Ghana’s developmental aspirations. Ghana has been an early adopter of digital technologies for the management of public sector staff, but there are shortcomings in the design, coverage, and implementation. The digitization of the civil service payroll started in the 1990s with the Integrated Personnel Payroll Database (IPPD) (World Bank 2019). Since 2014, the PSC is responsible for various human resource (HR) functions through the Human Resource Management Information System (HRMIS), while the Controller and Accountant General’s Department (CAGD) manages the successor to the IPPD, called IPPD 2; the HRMIS and IPPD 2 systems offer interoperability (Government of Ghana 2021). Also in 2014, the Economic Policy and Budget Statement of the Ministry of Finance (MoF) set out certain payroll controls including “measures to contain annual wage increases, limit the establishment of new positions (except in key areas such as education and health care), conduct a human resource audit and personnel headcount, and strengthen oversight of public employment and compensation by modernizing the Human Resource Management Information System.” (World Bank 2017, 90). However, as of 2018 (Government of Ghana 2018), the HRMIS and IPPD 2 only covered half of all civil servants, with processes for the remaining half still relying on manual, non-automated systems. Significant operational challenges have been impeding effective planning and control. Due to inconsistent recordkeeping and antiquated information systems, Ghana’s public sector lacks accurate and up-to-date personnel data and struggles to forecast its wage expenditure, while inadequate monitoring 76 For a full review of previous civil service reforms in Ghana, see Williams and Yecalo-Tecle (2019). 5/ Managing the Public Sector Wage Bill to Deliver Services to Citizens 137 and oversight mechanisms have enabled the persistence of ghost workers and payroll fraud. Notably, the 2022 Report of the Auditor General identified payroll irregularities within ministries, departments, and agencies (MDAs) amounting to GHS 14 million (approximately US$1.7 million) (Government of Ghana 2023), including 95 unaccounted-for workers in the Ministry of Health (MoH) costing GHS 1.9 million (US$0.2 million) annually (Government of Ghana 2023). Addressing such challenges calls for comprehensive reforms, including the modernization of data management systems to ensure an accurate database of workers, greater transparency in hiring practices, and the establishment of stringent auditing processes. Political dynamics and regional discrepancies in remuneration hamper efficiency and consistency in wage bill management. Decisions relevant to public sector employment are often reactive in nature and driven by political considerations, rather than by a calculated assessment of future organizational needs and fiscal resources. As a result, wage bill growth has outpaced employment growth within the civil service (Figure 5.8). For instance, under pressure from workers’ strikes, the government introduced a 15-percent Cost-Of-Living Allowance (COLA) for civil servants in 2022. Although still lower than the inflation rate, which exceeded 30 percent, such allowance is a testament to the significant negotiating power of employee bodies such as the teachers’ union. The average civil servant’s gross salary more than doubled—from GHS 1,730 (US$209) to GHS 3,542 (US$428) per month—between 2017 and 2022, largely through increments in allowances rather than in base pay (Figure 5.9). The reliance of government employees on allowances over base pay can diminish transparency and equity in remuneration, as well as government control over it. It creates an opaque salary system where disparities can easily arise unnoticed and unregulated. In addition, allowances do not count toward the calculation of pension contributions; there is a trade-off between present consumption and future, post-retirement consumption. Ghana Public Finance Review | Volume 2 / Detailed Analysis 138 Wage bill growth has outpaced public sector recruitment in Average compensation has risen, driven by allowances rather recent years than base salary Figure 5.8. Growth in the public sector workforce and emoluments Figure 5.9. Wage growth and structural transformation of wages 700 40 250 35 Civil servants ('000 workers) 600 230 Public sector wage bill (GHS, Billions) 30 210 Index (Jan 2017 = 100) 500 25 190 400 20 170 300 15 150 200 10 130 100 5 110 0 0 90 2017 2018 2019 2020 2021 2022 2017 2018 2019 2020 2021 2022 Wage bill (RHS) Public sector employment Base Salary Gross Salary Inflation Source: World Bank elaboration from Payroll data, CAGD, Ghana Budget (MOF), World Bank WWBI, IMF WEO, 2023. Credits: World Bank 5/ Managing the Public Sector Wage Bill to Deliver Services to Citizens 139 Allowances have been driving regional disparities in civil servant compensation, with Greater Accra and the Northern region at the opposite ends of the spectrum (Figure 5.11). While base salaries remain relatively uniform, allowances vary considerably in value across regions. This could be due a combination of factors, including geographical differences in cost of living and demand for skilled labor. However, such a trend can complicate the standardization of public sector wages and encourage regions to compete on allowances to attract skilled workers—potentially eroding a cohesive national approach to public sector remuneration and weakening administrative coherence. It is crucial for policy makers to ensure that regional variations in compensation do not create an unbalanced labor market, where certain regions struggle to attract and retain talent. Gross wages have been rising, with allowances making a Allowances are a major driver of geographical variance in significant impact average compensation Figure 5.10. Public sector workers’ compensation Figure 5.11. Allowances (as a share of total compensation) by geographical region 100% 4000 5,000 90% 4,500 3500 80% 4,000 Average monthly salary (GHS) Share of total compensation 3000 Average compensation 70% 3,500 2500 60% 3,000 50% 2000 2,500 40% 2,000 1500 30% 1,500 1000 20% 1,000 500 10% 500 0% 0 0 2017 2018 2019 2020 2021 2022 es th ti Ea nti As est ah e al st Ah n no st va th o W ccra or n Ce lta er no n N t rn as W Nor O er af N ter er pp ntr Ea Bo r Ea Sa or nn ha Vo pp Bo W te E th st A es er at U re U G Allowances and Supplements Basic Salary Gross Salary Source: World Bank elaboration from CAGD, Budget (MOF), WWBI, IMF WEO, 2023. Ghana Public Finance Review | Volume 2 / Detailed Analysis 140 5.4/ Size and composition of the public sector Ghana’s public sector is a Highly populated regions have more civil servants major domestic employer, Figure 5.12. Number of civil servants in Ghana, by region but relatively small by international standards. Upper East (Bolgatanga) The public sector is the largest employer in Ghana. The public Upper West (Wa) North East (Nalerigu) sector, which encompasses government institutions and Number of staff public service roles, employs Northern (Tamale) 82,616 more than 6 percent of Ghana’s Savannah labor market participants (Damango) and 25 percent of all salaried 4,419 workers77—equivalent to just over 900,000 individuals, of which around 600,000 are civil Oti Brong Ahafo Bono East (Dambai) servants (Figure 5.13). The (Sunyani) (Techiman) majority of civil servants are in the capital city, Accra, and its Ahafo surrounding regions (Figure (Ahafo Ashanti 5.12), due to the concentration of Goaso) (Kumasi) Eastern Volta government ministries, agencies, Western North (Koforidua) (Ho) and administrative offices in (Sefi Wiawso) these areas. The Southern and Ashanti regions also have a Central (Cape Coast) Greater Accra Western significant share of civil servants, (Sekondi Takoradi) (Accra) while the opposite is true in more remote and rural areas such as the Northern, Upper Source: World Bank elaboration from CAGD payroll records. East, and Upper West regions. However, the public sector is proportionally smaller in Ghana than in many of its peers. The public sector employs 6 percent of the workforce in Ghana, compared to 7 percent on average in its regional peers and even higher shares in its structural and aspirational peers (Figure 5.14). This is consistent with the general U-shaped relationship between public sector size and country income, regardless of cultural and societal differences.78 In emerging 77 Salaried employment excludes employers and self-employed workers, who are counted within total employment. The preceding sections utilized administrative datasets shared by the Government of Ghana (GoG) exclusively focusing on the civil servant population. The subsequent sections rely mostly on the 2021 round of the Annual Household Income and Expenditure Survey (AHIES) shared by the Ghana Statistical Service, which utilizes the broader concept of ‘public sector’ for employment identification, which includes a wider range of roles and is larger than the civil servant population. Further elaboration on the scope and differences between these approaches can be found in Annex 4. 78 While the general U-shaped relationship between the relative importance of the public sector within labor markets and economic development is widely recognized in economic literature, there are exceptions driven by cultural, historical, or geopolitical factors. For example, small (island) nations often maintain a larger public sector due to limited private sector opportunities. Similarly, Central Asian and Eastern European countries may continue to have a pronounced public sector presence as a legacy of their past economic systems. These variations highlight that while overarching trends exist, the trajectory of public sector employment is shaped by a country’s unique context and developmental path. 5/ Managing the Public Sector Wage Bill to Deliver Services to Citizens 141 economies, the public sector often accounts for a large share of employment; as economies mature, the private sector becomes the dominant employer. However, in high-income countries, the public sector expands to manage a broader range of sophisticated and specialized functions, particularly within social services. Although a growing public sector may be an intrinsic part of Ghana’s developmental journey, policies for public employment should focus on readiness for growth and on enhancing the sector’s efficiency and responsiveness to public demand for services. Although a large employer domestically, the public sector in Ghana is smaller than in most peer countries Figure 5.13. Public sector employment as a share of salaried employment Figure 5.14. Public sector employment as a share of total, salaried, and formal employment 70% 60% 60% Structural Peer 50% Aspirational Peer Public sector employment Public sector employment Regional Peer 50% 40% Other 40% 30% Ghana 30% 20% 20% 10% 10% 0% Structural Regional Aspirational Ghana 0% Peers Peers Peers 2.5 3.0 3.5 4.0 4.5 5.0 5.5 Log GDP per capita (Constant 2015 US$) total employment paid employment formal employment Source: World Bank elaboration on CAGD data, WWBI, WDI, 2022. Public sector workers in Ghana tend to be highly educated and employed in skilled roles Importantly, most of Ghana’s public sector workers are professional and technical staff in service delivery roles. As of 2021, nearly 76 percent of all public sector workers were employed within professional and technical occupational groups responsible for performing complex and technical functions (Figure 5.15)—for example, engineers, medical professionals, teachers and professors, economists and accountants, information and communication technology (ICT) workers, lawyers, judges, those involved in social sciences and humanities, as well as those responsible for government administration and regulation. Although managerial and clerical workers are essential for the efficient running of government organizations, professional and technical staff perform most of the day-to-day operations and thus contribute more directly to public service delivery. The public administration Ghana Public Finance Review | Volume 2 / Detailed Analysis 142 accounts for 16 percent of Ghana’s public sector workforce (including state- owned-enterprises [SOEs]), broadly in line with the average of its regional peers (21 percent) and below the global average of 35 percent. Approximately 35 percent and 15 percent of the public sector workforce is employed in education and health care, respectively (Figure 5.16). Finally, SOEs account for one-third of public employment, in sectors ranging from construction and infrastructure to public utilities. Most public sector workers are employed in professional and Education and health care are major employers within the technical roles public sector Figure 5.15. Public sector employment, by occupational group Figure 5.16. Public sector employment, by industry 100% 90% Share of total employment 80% 70% 60% 50% 40% 30% 20% 10% Managerial 0% Professional Structural Regional Aspirational Ghana Technical Peers Peers Peers Clerical Elementary Education Healthcare Public Administration SOE Source: World Bank estimates based on 2021 AHIES data, 2023. The Ghanaian public sector is an especially large employer of highly educated workers, albeit with significant variation across agencies. The share of Ghanaian public sector employees who have completed tertiary education stands at 63 percent, higher than in both Ghana’s private sector and the public sectors of most peer countries (Figure 5.17). This feature is especially pronounced in public education and health care, where 82 percent and 70 percent of the workforce, respectively, holds tertiary qualifications (Figure 5.18) (World Bank 2017). Overall, Ghana’s public sector employs 44 percent of the country’s labor market participants who have completed tertiary education. Although a significant presence of skilled personnel in the provision of critical public services is valuable, this employment pattern also raises concerns that require attention from policy makers—namely, around potential skills shortages in the private sector. 5/ Managing the Public Sector Wage Bill to Deliver Services to Citizens 143 A large share of Ghana’s public sector workers has tertiary education, especially in public education and health care Figure 5.17. Individuals with tertiary education (% of total) Figure 5.18. Share of tertiary educated workers across country groups 70% 100% 90% 60% Share of tertiary educated workers Share of tertiary educated workers 80% 50% 70% 40% 60% 50% 30% 40% 20% 30% 20% 10% 10% 0% 0% Aspirational Structural Regional Ghana Aspirational Structural Regional Peers Ghana Peers Peers Peers Peers Peers Public Sector Private sector Education Health Public Administration Source: World Bank elaboration from CAGD, AHIES, WWBI, 2023. Box 5.1. Ghana’s public sector is an important source of employment for women Credits: World Bank In Ghana, the public sector plays a pivotal role in fostering gender equality within the workforce by providing significant employment opportunities for women. Notably, 30 percent of all employed women in the country work in the public sector, accounting for 41 percent of all public sector jobs. In contrast, the 70 percent of employed Ghanaian women who work in the private sector only make up 33 percent of the private sector workforce. Female participation in the public sector workforce in Ghana exceeds the levels of the country’s structural and regional peers and is line with those of its aspirational peers (Figure 5.19). It is particularly high in public education and health care—sectors traditionally accessible to female workers in many middle-income countries (Yassin and Langot 2017)—where women account for 44 and 63 percent of the workforce, respectively (Figure 5.20). Ghana Public Finance Review | Volume 2 / Detailed Analysis 144 Ghana’s public sector falls just shy of parity in the ratio of male Female employment is especially high in public to female workers education and health care Figure 5.19. Women as a share of public workers over GDP per capita Figure 5.20. Women as a share of public sector workers, by industry 90% 70% 80% 60% 70% Public sector female employment 50% 60% 50% Ghana 40% 40% 30% 30% 20% Structural Peer 20% Aspirational Peer 10% 10% Regional Peer 0% 0% 2.5 3.0 3.5 4.0 4.5 5.0 Education Health Public Administration Log GDP per capita (Constant 2015 US$) Source: World Bank elaboration on AHIES data, WWBI, 2022. 5.5/ Wage competitiveness Public sector jobs in Ghana tend to be better paid than their private sector equivalents, especially for skilled and female workers The public sector in Ghana offers a wage premium relative to the private sector, of a magnitude consistent with its global and regional peers (Figure 5.21). Public sector wage levels are an important determinant of personnel quality and motivation—and, therefore, of state capacity. At the same time, they have significant impacts on expenditure efficiency, fiscal sustainability, and equilibrium outcomes throughout the labor market. In Ghana, on average the public sector offers a wage premium relative to the private sector—even after accounting for differences in professional experience, educational qualifications, gender, age, and location—which amounted to 20 percent in 2021. Even when limiting the comparison to formal private sector workers (to account for the fact that most public sector jobs are in industries such as insurance and health care, where equivalent private sector employment is typically formal), a 19 percent differential in gross wages persists. 5/ Managing the Public Sector Wage Bill to Deliver Services to Citizens 145 The public sector wage premium in Ghana is similar to those observed in peer nations Figure 5.21. Public sector wage premium relative to private sector, percentage 120% 100% Structural Peer Aspirational Peer 80% Regional Peer Public sector wage premium Ghana 60% 40% 20% 0% -20% -40% -60% 2.5 3.0 3.5 4.0 4.5 5.0 Log GDP per capita (Constant 2015 US$) Source: World Bank elaboration on AHIES and MoF data, WWBI, 2022. Box 5.2. Evolution and labor market impact of public sector wage policy in Ghana Background Impact on the Labor Market Ghana’s public sector compensation policy • Wage disparities: Initial policies created large pay has evolved significantly over the years, disparities within public services, affecting job affecting labor market dynamics and wage choices and competition for public versus private structures. The progression from the Prices sector roles. and Incomes Board (PIB) to the current Fair • Pay reform attempts: GUSS and SSPP aimed to Wages and Salaries Commission (FWSC) reduce disparities but faced challenges such as reflects the government’s efforts to create a partial implementation and enforcement issues. fair and responsive wage system. • Annual public sector salary adjustments: Key Milestones Conducted by the FWSC, they have not fully • 1972 - PIB: Established to oversee wage considered private sector wage structures, leading agreements but lost effectiveness over to misalignment with broader labor market time due to rigidity and external pressures. conditions. • 1991 - Fair Wages and Salaries Act Main Takeaways (Act 737): Led to the decentralization • Public sector influence: The government, as a of payrolls, resulting in varied salary major employer, sets a benchmark for wages, structures across services. which can either attract talent away from the • 1999 - Ghana Universal Salary Structure private sector or lead to a talent surplus and thus (GUSS): Attempted comprehensive pay drive qualified candidates away from the private reform but faltered due to opt-outs and sector. lack of enforcement. • Need for comprehensive reform and alignment • 2007 - Single Spine Pay Policy (SSPP): with market forces: Avoiding distortions while Introduced to establish a more equitable ensuring competitiveness and fiscal sustainability pay structure across the public sector, requires holistic wage policy reforms that account achieving mixed outcomes. for both public and private sector dynamics. Ghana Public Finance Review | Volume 2 / Detailed Analysis 146 Public sector wage premiums vary considerably depending on the workers’ educational background. The wage premium over the private sector amounts to 58 percent for employees with secondary education and to 22 percent for those with tertiary education (Figure 5.22)—underscoring the risk of overconcentration of highly educated individuals in public service. Conversely, public sector workers with no formal education or only primary education suffer wage penalties of 10 percent and 4 percent, respectively, relative to their private sector peers. Similarly, the wage premium generally grows along with occupational incomes. Workers in elementary occupations incur a 25 percent wage penalty, while those in clerical and technical jobs have marginal wage premiums of 3 percent and 1 percent, respectively (Figure 5.23). In contrast, professionals and managers in the public sector receive considerable wage premiums—57 percent and 17 percent, respectively—which, combined with the prevalence of professional workers among public sector employees, may contribute to explaining Ghana’s high wage bill spending. Notably, wage premiums for most professionals and managers in the Ghanian civil service are much higher than in virtually all peer countries. However, the highest-earning public sector workers—defined as those whose wages are in the top quintile of the sector— earn a more modest 8 percent wage premium. Overall, premiums in the public sector are significant for specialized, higher-educated roles but diminish in relative terms at the upper echelons of income. The public sector wage premium in Ghana is especially high for workers with secondary education and in professional and managerial roles Figure 5.22. Public sector wage premium, relative to private sector Figure 5.23. Public sector wage premium, compared to private sector 60% 60% 50% 50% 40% Public sector wage premium Public sector wage premium 40% 30% 30% 20% 20% 10% 10% 0% 0% -10% -10% -20% -20% -30% No Education Primary Secondary Tertiary Structural Regional Aspirational Ghana Education Education Education Peers Peers Peers Elementary Clerks Technicians Professionals Managers Source: World Bank elaboration on AHIES and MoF data, WWBI, 2022. 5/ Managing the Public Sector Wage Bill to Deliver Services to Citizens 147 In the public sector, women and education workers enjoy higher wage premiums than men and health care workers, respectively. Women in the public service in Ghana experience a 46 percent wage premium over female workers in the private sector (Figure 5.24), much higher than the premium earned by male public sector workers. However, these estimates of wage premiums have more to do with the opportunity costs for female employment in the private sector than the state of compensation in the public sector. Notably, the wage premium for female public education workers amounts to 105 percent, versus 31 percent for female public health care workers (Figure 5.25)—highlighting both the extremely low levels of pay for women working in private education and the significant power of public education workers (especially teachers) in wage negotiations. Ghana’s public sector wage premium is much higher for women than for men and for public education workers than for public health care workers Figure 5.24. Public sector wage premium by gender, Figure 5.25. Public sector wage premium by occupational group, percentage percentage 60% 140% 120% 50% Public sector wage premium 100% 40% 80% 60% 30% 40% 20% 20% 0% 10% Aspirational Structural Peers Regional Peers Ghana -20% Peers 0% -40% Structural Regional Aspirational Ghana Peer Peer Peer All females Females in the education sector Female teachers Females in the health sector Female Male Female medical workers Source: World Bank elaboration on AHIES data, WWBI, 2022. 5.6/ Wage equity and incentives The public sector’s wage structure is insufficiently tied to broader labor market dynamics and is not immune to gender-based inequity. Wage distribution trends in Ghana reveal that the public sector is an attractive employer for talent. Nearly two-thirds of public sector workers are in the top two quintiles of the national wage distribution (Figure 5.26), underscoring a disparity in remuneration with the private sector that may Ghana Public Finance Review | Volume 2 / Detailed Analysis 148 affect labor market dynamics and competition for talent. Moreover, such a concentration of salaries in the higher income brackets might indicate the need for a strategic review around wage equity and for more transparent compensation mechanisms throughout the public sector. Notably, within the public sector, the salaries of the top 10 percent of earners are about 6.2 times higher than those of the bottom 10 percent (Figure 5.27)—a wage compression ratio lower than in both Ghana’s private sector as well as the public sectors of regional and structural peers but higher than in the public sector of most aspirational peers. More than 60% of public sector workers are in the top 40% of The wage compression ratio in Ghana’s public sector is lower wage earners nationally than in regional and structural peers Figure 5.26. Government employees on national wage distribution, Figure 5.27. Relative wage of 90th percentile to 10th percentile of by quintile wage earners 14 40 12 35 Share of all public sector woerkers 30 10 Pay compression ratio 25 8 20 6 15 4 10 2 5 0 0 Poorest 2nd 3rd 4th Richest Private sector Public sector Aspirational Peers Structural Peers Regional Peers Ghana Source: World Bank elaboration on AHIES and MoF data, WWBI, 2022. Male public sector workers in Ghana earn an estimated 11 percent more than their female public sector colleagues (Figure 5.28). This is similar to the gap in Ghana’s regional and structural peers but wider than in its aspirational peers. Notably, after accounting for differences in age, education, and location, female public education workers earn 10 percent less than their male peers, while women working in public health care earn almost 20 percent more than men (Figure 5.29). In core public administration, public safety, and social security, the average gender wage penalty stands at 7 percent. 5/ Managing the Public Sector Wage Bill to Deliver Services to Citizens 149 Ghana’s public sector is much closer to gender wage parity than its private sector, but in most public sector functions a gender pay gap persists Figure 5.28. Relative wages of women to men Figure 5.29. Wage premium/penalty for women relative to men, by subsector 25% 1.0 0.9 20% Female to male wage ratio (using median) Gender pay gap in the public sector 0.8 15% 0.7 10% 0.6 0.5 5% 0.4 0% 0.3 -5% 0.2 -10% 0.1 0.0 -15% Aspirational Structural Regional Ghana Peers Peers Peers Health Core Public Administration Public Safety Social Security Private sector Public sector Education Source: World Bank elaboration on AHIES data, WWBI, 2022. Although far-reaching in the delivery of services, Ghana’s public sector suffers from shortcomings in resource allocation, talent distribution, and administrative capability. Despite efforts to streamline operations and bolster state capacity, the public sector continues to grapple with redundancy, inadequate ICT integration, and a remuneration system that struggles to reconcile wage competitiveness and equity. Disparities in remuneration underline gender and educational biases, while skewing the labor market to the detriment of the private sector. The wage premium offered by the public sector does attract essential talent but also imposes a long-term fiscal burden. Such challenges call for a recalibration of the civil service, with a focus on adjusting wages based on market dynamics; using technology to enhance productivity and efficiency; adopting a holistic approach to reform; and prioritizing transparency, meritocracy, and inclusivity. 5.7/ Policy recommendations for public wage bill management This chapter has examined Ghana’s public sector wage bill, finding evidence of its volatility and issues around wage competitiveness and equity and weak control and planning mechanisms. Ghana’s public sector wage bill is relatively high compared with peer countries and subject to significant fluctuations, with negative impacts on its fiscal sustainability. The lack of a long-term framework for public employment policy, as well as of Ghana Public Finance Review | Volume 2 / Detailed Analysis 150 comprehensive, accurate, and up-to-date personnel data, hinders the design and implementation of effective mechanisms to forecast, plan, and control the wage bill. Furthermore, public sector wages are not informed by a benchmark analysis of private sector pay levels, creating distortions in the labor market while unnecessarily inflating the wage bill. The analysis also shows a need to ensure that salary criteria are fair and transparent across all levels of the public sector. To manage its wage bill in a fiscally sustainable manner, Ghana needs to focus on four main areas of reform. The analysis of Ghana’s public sector wage bill points toward the following areas for reform and evidence-based actions: (a) reinforce wage bill planning and control mechanisms, (b) move toward more strategic HR management, (c) adopt more competitive and equitable public sector compensation practices, and d) strengthen existing mechanisms for cost-of-living adjustments and inflation indexation. Policy Priority 1: Reinforce wage bill planning and control mechanisms to guarantee cohesive and data-driven wage bill planning and execution. This objective can be achieved through a combination of strategic measures and legislative actions: (a) develop a long-term framework for public sector employment policy and (v) enhance existing data management systems by implementing legislation that mandates all public sector entities to submit comprehensive payroll data, including all forms of compensation, to a central database managed by the MoF. Building on a cohesive policy, underpinned by a medium-term fiscal framework and strategically aligned with the nation’s development goals, would support individual organizations to consistently set their medium- and long-term strategies. On the other hand, HR data management systems need to be strengthened by incentivizing the use of existing HR data management systems to monitor and audit wage bill compliance regularly, with disbursements linked to compliance with this mandate. Strengthening HR data management systems to enable precise tracking of employee profiles, roles, and remuneration will ensure accurate and timely payroll data, mitigate wage volatility, and improve wage bill forecasts. Moreover, improved data management can support more accurate HR practices, fostering public service efficiency and fiscal prudence. Policy Priority 2: Move toward more strategic and transparent HR management to better equip the public sector workforce and respond to future needs. This could be achieved through (a) strengthening existing establishment controls, (b) development of an updated job catalog linked to a robust competency framework, (c) institutionalizing transparent, competency- based recruitment practices, and (d) establishment of an independent body to oversee recruitment processes. The high volatility of the Ghanaian wage bill raises questions about the public sector’s use of systemic workforce planning processes for identifying and addressing human capital needs and gaps. These measures would help public organizations achieve the correct balance 5/ Managing the Public Sector Wage Bill to Deliver Services to Citizens 151 between personnel headcount, skills, cost, and contract type, informing Ghana of a measured expansion of the public sector in the future. To achieve this, it is imperative to strengthen the establishment list of positions in the public sector, develop an updated job catalog for the public sector, and create a robust competency framework for key job families within the civil service that underpin the core and technical competencies required for those positions. This also provides the foundational components for operationalizing a meritocratic recruitment process, through the publication of job descriptions, salary ranges, and selection criteria. Additionally, the establishment of an independent audit body to oversee recruitment processes and report on compliance with these standards can further reinforce greater meritocratic practices within the civil service. This increased transparency can also help to depoliticize the civil service by reinforcing public trust and engagement. Policy Priority 3: Adopt more competitive, equitable, and fair public sector compensation practices to maximize public sector productivity in a fiscally sustainable manner without distorting the labor market. This could be achieved with the following set of measures: (a) amend public salary laws to require full disclosure of all forms of compensation, including base salaries and all supplements, (b) establish a cap on non-transparent supplements to prevent excessive and hidden payments, (c) conduct regular audits and assessments of the wage bill to detect wage bill irregularities and ensure compliance with these laws and publicly report the findings, (d) benchmark salaries against the private sector to ensure balanced labor market outcomes, (e) review compensation levels regularly to attract and retain talent and promote more equitable remuneration, and (f) publish a public sector compensation report annually for greater transparency of the compensation policy in the civil service. The development of a robust HR data management platform with a centralized payroll system, tracking all facets of public sector employment and compensation can further help reduce payroll irregularities (for example, ghost workers, multiple post-holding, and employment past the retirement age). Similarly, the assessment and benchmarking exercises can help ensure that the remuneration for roles is in line with the prevalent rates across the broader labor market, and the government can prevent excessive talent migration from the private to the public sector and offer compensation packages that are both competitive and fiscally sustainable. Additionally, publishing a public sector compensation report annually will enhance transparency and accountability, fostering public trust and ensuring that compensation practices remain equitable and fair. Policy Priority 4: Strengthen existing mechanisms for cost-of-living adjustments and inflation indexation. This can be done through strengthening existing mechanisms that allow for a uniform and annual adjustment of civil servant wages that are more in line with the inflation experienced in the economy. The current pay scheme does have a central systematic mechanism for adjusting salaries in response to changing market Ghana Public Finance Review | Volume 2 / Detailed Analysis 152 conditions and increased cost of living. The result is ad hoc wage increases based on collective bargaining across job families that result in inequitable pay adjustments for different categories of workers. This further weakens the ability of the SSSS to provide equitable wages for all civil servants since the pay scheme does not account for realized inflationary pressures over the years. This has resulted in real wage growth for management and key personnel but a fall in real wages for administrative and support staff. Additionally, this indexation activity can allow the government to remain cognizant of prevailing market conditions as well as fiscal obligations that ensure that workers receive a fair wage for their work, while mitigating the ballooning of the wage bill. Instead, such a process would be a fiscally more conservative option compared with the current system of ad hoc wage adjustments. Table 5.1. Measures to achieve more cost-effective wage bill management Policy Priority Measures Timeframe Policy Priority 1: Measure 1.1. Define a long-term framework for public sector employment Short Term Reinforce wage bill policy to support public organizations for cohesive strategy design and planning and control implementation. mechanisms Measure 1.2. Mandate the development, improvement, and use of existing Medium Term data management systems with robust HR data integrated with payroll data to support a more evidence-based strategic planning of workforce (see Measure 2.1), recruitment (see Measure 2.3), meritocratic progression and talent retention, and fiscally sustainable management of the wage bill (see Measures 3.1, 3.2, 3.3, 3.4, and 3.5). Policy Priority 2: Measure 2.1. Strengthen establishment controls by moving toward strategic Medium Term Addressing energy approaches to workforce planning to effectively identify and address gaps sector contingent between the current workforce and future human capital needs, based on robust liabilities HR data. Measure 2.2. Develop an updated job catalog and a robust competency Short Term framework for key public sector job families, ensuring that each position's core and technical competencies are clearly defined and aligned with the requirements of the role. Measure 2.3. Guarantee more transparent recruitment practices to improve Medium Term public service delivery while reinforcing public trust and engagement. Measure 2.4. Establish an independent body to oversee recruitment Medium Term processes, ensuring compliance with transparency and merit-based standards. Policy Priority 3: Adopt Measure 3.1. Amend public sector salary laws to require full disclosure of all Medium Term more competitive, aspects of worker compensation. equitable, and fair public sector compensation practices Measure 3.2. Establish a limit on the non-transparent (non-core) component Medium Term of total wage, including supplements to prevent dilution of base wages as a key segment of total compensation and prevent hidden, excessive, and inequal wage growth. 5/ Managing the Public Sector Wage Bill to Deliver Services to Citizens 153 Policy Priority Measures Timeframe Measure 3.3. Conduct periodic audits and assessment of the wage bill to Short Term identify drivers of wage bill growth, detect irregularities, ensure compliance with wage laws, and devise evidence-based responses to wage bill volatility and fiscal pressures. Measure 3.4. Benchmark salaries against the private sector to prevent Short Term excessive talent migration of managers and professionals from the private to the public sector and offer compensation packages that are both competitive and fiscally sustainable. Measure 3.5. Regularly review compensation levels based on changes in the Short Term cost of living due to inflation (see Measure 4.1), job market trends, changes in the public sector wage premium, and broader evolution of the workforce, to promote more equitable remuneration to guarantee that workers in similar jobs and with similar skills, tenure, and performance are paid equally. Measure 3.6. Publish annual report on public sector compensation policy for Short Term greater transparency in the civil service. Policy Priority 4: Measure 4.1. Strengthen wage adjustment mechanisms to allow for Medium Term Strengthen existing evidence-based wage increases that are both in line with prevailing market mechanisms for cost-of- conditions and in cognizance of the government’s fiscal obligations, ensuring that living adjustments and workers receive a fair wage while not ballooning the wage bill. inflation indexation Ghana Public Finance Review | Volume 2 / Detailed Analysis 154 / References Government of Ghana. 1991. Fair Wages and Salaries Act (Act 737 of 1991). Republic of Ghana. Government of Ghana. 1994. Public Services Commissions Act of 1994 (Act 482 of 1994). Republic of Ghana. Government of Ghana. 2007a. Fair Wages and Salaries Commission Act, 2007 (Act 737 of 2007). Republic of Ghana Government of Ghana. 2007b. Single Spine Pay Policy (SSPP) Act (Act 190 of 2007). Republic of Ghana Government of Ghana. 2014. Ministry of Finance’s Economic Policy and Budget Statement. Republic of Ghana Government of Ghana. 2016. Public Financial Management Act (Act 921 of 2016). Republic of Ghana Government of Ghana. 2018. Public Expenditure and Financial Accountability (PEFA) Performance Assessment Report: Final Report. Republic of Ghana Government of Ghana. 2021. Five Year Public Financial Management (PFM) Strategy: 2022–2026. Republic of Ghana Government of Ghana. 2023. Report of the Auditor-General on the Public Accounts of Ghana: Ministries, Departments and other Agencies for the Year Ended 31 December 2022. Republic of Ghana IMF (International Monetary Fund). 2016. Managing Government Compensation and Employment: Institutions, Policies, and Reform Challenges. Washington, DC. Peacock A.T., and J. Wiseman. 1979. “Approaches to the Analysis of Government Expenditure Growth.” Public Finance Quarterly 7 (1): 3–23 Rauch, J.E., and P.B. Evans. 2000. “Bureaucratic Structure and Bureaucratic Performance in Less Developed Countries.” Journal of Public Economics 75 (1), 49–71. Wagner, A. 1890. Finanzwissenchaft, Leipzig: Winter, C. F. Williams and Yecalo-Tecle. 2019. “Civil Service Reform and Performance Management in Ghana and Zambia since 1990.” IGC Working Paper World Bank. 2017. Ghana Public Expenditure Review: Chapter 3: Managing the Public Sector Wage Bill to Maintain Fiscal Stability. Washington, DC: World Bank. World Bank. 2019. Ghana Digital Economy Diagnostic. Washington, DC: World Bank. Yassin, S., and F. Langot. 2018. “Informality, Public Employment and Employment Protection in Developing Countries.” Journal of Comparative Economics 46 (1): 326–348. Credits: Zeal Creatives 5/ Managing the Public Sector Wage Bill to Deliver Services to Citizens 155 6/ Ghana Public Finance Review | Volume 2 / Detailed Analysis 156 Ghana Public Finance Review | Building the Foundations for a Resilient and Equitable Fiscal Policy Enhancing Human Development Spending Efficiency for Service Delivery 6/ Enhancing Human Development Spending Efficiency for Service Delivery 157 Ghana’s education system has evolved overtime Figure 6.1. Major education reforms in Ghana over the past 30 years 1995 FCUBE 6.1/ Improving spending efficiency in education 2002 SHS Subsidies Ghana’s education system comprises basic (that is, kindergarten, primary, 2005 Introduction of Capitation Grants and lower secondary), secondary (that is, upper general secondary/technical/ vocational), and tertiary levels, as well as 2012 Two years of KG included in FCUBE Complementary Basic Education complementary or non-formal education. The Ministry of Education (MoE) provides policy guidance and systemic oversight with 2016 Reform to convert Polytechnics to Technical Universities its Education Strategic Plan (ESP), which sets out medium- and long-term goals, objectives, and targets (Box 6.1). The Ghana Education 2017 Free SHS and TVET Policy Service (GES) is the MoE’s implementing Doubling of Capitation Grant agency at the pre-tertiary levels. The Council for Technical and Vocational Education Pre-Tertiary Curriculum Reform 2018 Double Track for SHS and Training (CTVET) sets out policy for Strategic Plan for TVET Transformation and provides oversight of technical and vocational education and training (TVET), 2019 National Pre-Tertiary Learning Assessment while the Ghana TVET Services (GTVETS) Framework Early Childhood Education Policy oversees implementation of TVET at the pre- tertiary level. The Ghana Tertiary Education Commission (GTEC) provides oversight for 2020 Education Regulatory Bodies Act National Research Fund Act tertiary institutions, including technical universities. Basic and secondary public Source: World Bank 2022, Education Public Expenditure Review in education is free for all beneficiaries, while Ghana. Note: FCUBE = Free, Compulsory, Universal Basic Education; SHS = public tertiary education is tuition-free but Senior High School. entails other fees. Ghana Public Finance Review | Volume 2 / Detailed Analysis 158 Box 6.1. The Education Strategic Plan 2018–2030 The government’s strategic framework for secondary level, focus is on increased use of education is outlined in its ESP 2018–2030. quality teaching and learning materials and equipment and improved learning outcomes Thematic Areas for girls in all subjects and for all students in 1. Improved equitable access to and STEM. At the TVET level, focus is on strong participation in inclusive quality legal, governance, and regulatory frameworks education at all levels. At the basic for greater coherence and accountability. level, focus is on increasing enrollment, At the tertiary level, focus is on improving particularly in disadvantaged communities quality of teaching and learning resources, and addressing gender parity in access. At strengthening STEM and TVET education, and the secondary level, focus is on implementing improving the ratio of students in sciences the Free SHS and improving access for versus humanities to 60:40. disadvantaged groups. At the TVET level, 3. Sustainable and efficient management, focus is on expanded and upgraded teaching, financing, and accountability of education learning, and training infrastructure and service delivery. At the basic level, focus increased enrollment, for females, persons is on strengthening financial management, with disability (PWDs), and disadvantaged coordination, and accountability. At the groups. At the tertiary level, focus is on secondary level, focus is on strengthened increasing admission places available and supervision, management, and accountability. increased participation by women, PWDs, and At the TVET level, focus is on expanded and disadvantaged groups. upgraded teaching, learning, and training 2. Improved quality of teaching and learning infrastructure and increased enrollment, for and Science, Technology, Engineering, females, PWDs, and disadvantaged groups. and Mathematics (STEM) at all levels. At At the tertiary level, focus is on harmonized the basic level, focus is on using quality policy and legislative framework for effective teaching and learning materials, improved supervision and regulation and improved and learning assessment, improved quality, and sustained funding. relevance of STEM, among others. At the 6.1.1/ Although the enrollment rate is on the rise, there has been an overall decline in education spending Ghana has made significant progress in the education sector, but since 2021 its allocations for expenditure on education have fallen short of international benchmarks. Education spending amounted to 24 percent of total public spending in 2018 but has fallen significantly since 2021, down to 14 percent of total spending budgeted for 2024 or 3.1 percent of gross domestic product (GDP). This is less than the United Nations minimum recommendation of 15 percent of total government expenditure and 5 percent of GDP, although it aligns closely with the mean figures of 3.2 percent of GDP observed in both Sub-Saharan Africa (SSA) (excluding high-income countries) and lower-middle- income countries (LMICs) in the year 2022. It is also well below the benchmark of the Global Partnership for Education (GPE) of 20 percent of government allocations/expenditure in the education sector. In terms of dollars, the expenditure on public education decreased from around US$3.2 billion in 2018 to US$2.3 billion in 2024 and has failed to keep pace with inflation. Notably, 6/ Enhancing Human Development Spending Efficiency for Service Delivery 159 in 2022 the average inflation rate amounted to 32 percent and remained elevated in 2023, but the budgetary allocation to education grew by only 3 percent in 2023. Concurrently, school enrollment remains high at the primary level and increased at the secondary level of education. Gross enrollment rates (GERs)79 at the primary level shifted from 111 percent in 2016–17 to 99 percent in 2020–21 (Figure 6.2), and simultaneously, net enrollment rates (NERs) declined from 91 percent to 79 percent during the same period (Figure 6.3). Yet, the 2021 population and housing census showed that 1 million children in the 4–18 years age cohort (9 percent of the cohort) had never attended school. At the junior high school (JHS) level, the GER dropped from 87 percent in 2016–17 to 84.6 percent in 2020–21. Gross enrollment in secondary education has also increased over the years—especially after the introduction of the free secondary education policy in 2017.80 Indeed, at the secondary level, the GERs increased from 56 percent in 2016–17 to 66 percent in 2020–21 while NERs shifted from 29 percent to 34 percent in this timeframe. Before 2017, 26 percent of the students placed in secondary school did not enroll, mostly because of cost barriers; yet this rate reduced to 12 percent in 2021. Moreover, Ghana has achieved significant strides in promoting gender equity in education across all levels, resulting in a balanced ratio of girls to boys at pre- primary, primary, and secondary levels, now standing at one-to-one. The fall in education allocations and the increases in enrollment point to a declining unit cost of education and likely explain the low learning achievement at the basic education level. GERs and NERs in primary and junior secondary schools have been declining Figure 6.2. GER at the basic level Figure 6.3. NER at the basic level 140% 100% 90% 120% 80% 100% 70% 80% 60% 50% 60% 40% 40% 30% 20% 20% 10% 0% 0% 2016/17 2017/18 2018/19 2019/20 2020/21 2016/17 2017/18 2018/19 2019/20 2020/21 KG GER Prim GER JHS GER KG NER Prim NER JHS NER Source: Ghana Education Sector Progress Reports (2016–2021) 79 The GER is calculated by dividing the number of students enrolled in a specific level of education (regardless of age) by the population in the grade-specific age group. The GER can exceed 100 percent because of over-age or under-age students and/or grade repetition. The NER is calculated by dividing the number of enrolled students in the age group corresponding to the grade, by the population in the grade-specific age group. 80 The free secondary education policy covers a range of costs previously borne by parents (e.g., for books and uniforms, as well as for food and accommodation for boarding students). Ghana Public Finance Review | Volume 2 / Detailed Analysis 160 6.1.2/ As Ghana’s education sector faces growing demand, constrained resources are disproportionately allocated to the secondary and tertiary levels Education spending is largely geared toward the secondary and tertiary levels (Figure 6.4). At the basic education level, Ghana’s public spending per student as a percentage of per capita GDP is equal to just over half the average of its aspirational peers. In 2020, a distribution of 27 percent of government education expenditure was designated for the pre-primary and primary levels.81 The junior and senior secondary levels received a larger share, accounting for 39 percent of the total government spending on education, whereas technical and tertiary education received 24 percent. Notably, public investment in primary education in Ghana falls below that of comparable countries, while allocations for secondary and tertiary education surpass those of comparators. Recognizing the significance of foundational learning and skills, it is crucial to emphasize that pre-primary and primary education play a critical role, even as investments in secondary and tertiary levels contribute to workforce preparation in line with economic development. Since the pupils-to- teacher ratio (PTR) in basic education is close to the policy target of 35:1 and a significant proportion of spending goes toward staff compensation, lower levels of spending per student indicate an insufficient allocation of resources to non-salary recurrent expenditures and/or lower average salary for teachers. Public expenditure on education prioritizes secondary and tertiary levels Figure 6.4. Share of public education expenditure by level, 2021 Seconday 22.79% Tertiary 22.50% Primary 18.42% Junior High 16.41% Pre-school 11.35% Management & Subvented 5.11% Tech & Voc 2.93% Non Formal Special Edu Source: Ghana Education Sector Progress Reports - 2021. 81 Pre-primary spending increased from 5.6 percent in 2015 to 11.4 percent in 2021, due to the government’s recent focus on expanding preschool access. 6/ Enhancing Human Development Spending Efficiency for Service Delivery 161 Table 6.1. Trends in education spending by subsector, 2014–2020 (GHS, millions, constant) 2014 2015 2016 2017 2018 2019 2020 Preschool 873 706 774 803 1,427 1,506 1,803 Primary 2,516 2,026 2,185 2,624 2,298 2,445 2,902 JHS 1,835 2,627 1,572 2,145 2,051 2,194 2,632 SHS 2,554 3,213 3,240 3,886 3,615 3,856 4,261 TVET 425 326 640 278 242 343 709 Tertiary 1,852 3,209 2,965 2,840 4,062 3,666 3,602 NFED 56 22 — 1 46 45 53 SPED 51 48 35 49 15 25 28 Management 1,262 1,187 645 575 1,337 1,496 1,638 Total 11,424 13,363 12,056 13,200 15,093 15,577 17,628 Source: Ghana Education Sector Progress Reports 2014–2021. Note: NFED = Non-formal Education Division; SPED = Special Education Division. The increasing allocation to the tertiary level, as a share of total public education spending, raises concerns about equity (Table 6.1). The GER in tertiary education was estimated at 17.2 percent in 2019, well above the SSA average of 9 percent but below the LMIC average of 24 percent. The free secondary and TVET policy could boost demand for tertiary education to an extent incompatible with its high unit costs, while prompting a further concentration of education resources at the secondary and tertiary levels. A recent assessment by the government found that Ghana’s tertiary education institutions required GHS 897 million (US$146 million) in capital investment in 2019, which was 2.5 times more than the capital budget allocated to them that year. Moreover, given that tertiary students are less likely to come from disadvantaged backgrounds, greater public investment in tertiary education is likely to increase inequity in education financing. 6.1.3/ In an inflationary environment, major funding has been devoted to staff compensation Ghana boasts a sizable teaching workforce reflected in the wage bill. Ghana’s teaching workforce is large: teachers account for 2.4 percent of all workers between ages 15 and 64 and for 16 percent of all wage workers. There are almost 300,000 teachers (2020) excluding the tertiary level and other types of workers. Most teachers are male, reside in urban areas (61.4 percent), and work in public schools (82.1 percent). The earnings of the average teacher are twice as high as Ghana’s per capita GDP, while those of the average wage worker are 1.2 times as high. Teachers work on average 34 hours per week— well below the average of 50 hours per week for all wage workers—and nearly Ghana Public Finance Review | Volume 2 / Detailed Analysis 162 27 percent of teachers report having a second job.82 The median monthly teacher salary of US$656 (in purchasing power parity [PPP]) in Ghana is higher than in most of its West African neighbors, and the country allocates a greater share of its recurrent public education spending to wages and salaries than neighboring Sierra Leone and Liberia.83 Ghana’s education expenditure, particularly the portion allocated from the central government’s budget, largely goes toward staff compensation. In 2020 and 2021, more than 70 percent of the education budget was allocated to staff compensation. This is a greater share than in comparator countries such as Kenya (51 percent in 2019), Sierra Leone (56 percent in 2020), and Liberia (67 percent in 2020). At the basic education level (covering pre-primary, primary, and JHS), staff compensation absorbed more than 95 percent of the budget (2020)—which, considering a standard ratio of 35 students per teacher, seems adequate. However, this allocation leaves very little for non-salary expenditures on teaching and learning materials and for improvement and maintenance of school infrastructure. At the junior/senior secondary level, 60 percent of total spending is on human resources (HR), while at the tertiary level the proportion is 51 percent (2020). The allocations are also very low for children with disabilities and for TVET. Considering the dominant role of the wage bill, external financing plays a crucial role in supporting non-salary recurrent costs and investments. In 2020, external financing, included in the on-budget category, comprised 4 percent of the total public expenditure. Expenditure on goods and services and on capital remains relatively low for pre-primary and primary levels. Spending on goods and services, encompassing textbooks, additional learning materials, and maintenance, constituted 18 percent of the education budget (2020). Breakdown by education levels reveals that 4 percent of the funding for pre-primary and primary education was designated for goods and services, in contrast to 12 percent for junior and senior secondary levels and 23 percent for technical and tertiary levels. The proportion of total spending on goods and services allocated to basic education decreased from 10 percent in 2015 to 4 percent in 2021, while the share allocated to secondary education saw an increase from 43 percent in 2015 to 57 percent in 2021. Capital or investment expenditures, constituting 12 percent of the overall government education expenditures in 2020, were primarily channeled through the Ghana Education Trust Fund (GETFund), sustained by an earmarked tax. Specifically, 1 percent of the funding allocated to the pre-primary and primary levels was for investments, contrasting with 28 percent at the junior and senior secondary levels, and 26 percent at the technical and tertiary levels. 82 Evans, D., Yuan, F., and Filmer, D. 2020. “Are Teachers in Africa Poorly Paid? Evidence from 15 Countries.” CGD Working Paper 538. Washington, DC: Center for Global Development. https://www.cgdev.org/publication/are-teachers-africa-poorlypaid-evidence-15-countries. 83 Idem. See Section 5.3 (Wage Bill Planning and Controls) and Section 5.4 (Size and composition of the public sector) for a related discussion on wage bill challenges. 6/ Enhancing Human Development Spending Efficiency for Service Delivery 163 Education expenditure has been declining both in relative and real terms Figure 6.5. Education expenditure relative to various aggregates Figure 6.6. Annual education expenditure growth vs. annual average inflation 40% 30% 35% 30% 20% 25% 20% 10% 15% 10% 5% 0% 0% 16 17 18 19 20 b b b 21 22 23 20 20 20 20 20 17 18 19 20 b b b 20 20 20 21 22 23 20 20 20 20 20 20 20 GoG (% of GDP) GoG (% of Expenditure) Annual Edu Expenditure Growth GoG (% of Revenue) Edu exp as % of GDP Edu exp as % of total exp Edu exp as % of Revenue Average Inflation (t-1) Sources: Ghana Education Sector Progress Reports, National Budgets, and Bank of Ghana (BoG). Box 6.2. Impacts of inflation and debt servicing on education spending Inflation and the capitation grant for basic GHS 37 would require an additional US$10.2 schools. In 2005, the capitation grant (that is, million. To achieve its policy objectives, as the public per-student funding allocated to stated in the ESP 2018–2030, the government public basic schools in lieu of school fees and would have to continue to increase education charges) amounted to GHS 3 per student per spending by 2 percent per year in real terms, year, and as of 2023 it stands at GHS 10 per while seeking substantial efficiency gains.84 student per year. The grant’s annual growth In 2023, the allocation for capitation grants has not matched inflation, which averaged amounted to approximately US$10 million, 13.7 percent between 2016 and 2022 (Ghana a figure that can be contrasted with the total Statistical Service). Raising the annual grant government expenditure on goods and services to GHS 16.6 per student would require an in the education sector, reaching the equivalent additional US$2.5 million and raising it to of US$580 million in 2020. Figure 6.7. Public spending on education in nominal and real Figure 6.8. Ghana capitation grant, real growth scenarios terms 10% annual Increase 15% annual increase Actual 40 37.13 30 20 16.68 10 10.00 0 5 7 9 1 3 5 7 9 1 3 0 0 0 1 1 1 1 1 2 2 20 20 20 20 20 20 20 20 20 20 Source: Ghana Education Sector Progress Reports, National Budgets. 84 The objectives are improved equitable access to and participation in inclusive quality education at all levels; improved quality of teaching and learning of STEM at all levels; and sustainable and efficient management, financing, and accountability of education service delivery. Ghana Public Finance Review | Volume 2 / Detailed Analysis 164 The impact of growing debt servicing costs on the education budget The increasing share of debt service costs in 2016 but grew to 13.1 percentage points in 2023. Ghana’s budget has continuously narrowed the Considering the total debt service cost (that is, room for education spending. The gap between interest and amortization), the gap doubled education spending and interest costs in the from 12.3 percentage points in 2016 to 24.8 budget amounted to 3.3 percentage points in percentage points in 2023. Debt service vs. education expenditure, as shares of total expenditure 50% 45% 40% 39% 35% 30% 30% 28% 25% 21% 20% 15% 17.8% 14.4% 10% 5% 0% 2016 2017 2018 2019 2020 2021 b 2022 b 2023 b Interest % of Expenditure Debt Service % of Spend Edu % of Expenditure Source: Ghana Education Sector Progress Reports, National Budgets. Ghana allocates a greater share of recurrent education Actual spending on wages has been consistently higher than budgeted expenditure to wages than Liberia and Sierra Leone Figure 6.9. Composition of recurrent expenditures on Figure 6.10. Education budget execution rates education 100% 148% 150% 90% 21% 33% 80% 44% 100% 70% 21% 60% 50% 18% 39% 25% 19% 50% 12% 14% 6% 7% 0% 0% 40% 79% -2% 67% -16% -22% 30% 56% -30% -50% -38% -42% -45% 20% 10% -100% -87% -100% 0% Ghana (2020) Liberia (2018- Sierra Leone -150% 2020) (2017-2019) 2017 2018 2019 2020 2021 non salary recurrent expenditures Education Expenditure Education Wages Wages and Salaries Capital Expenditures Goods and services Expenditure Source: Education Sector Progress Reports for Ghana, Source: Education Sector Progress Reports for Ghana, Liberia, and Sierra Liberia, and Sierra Leone. Leone. 6/ Enhancing Human Development Spending Efficiency for Service Delivery 165 Compensation costs have also driven overspending in the execution of the education budget. In the last five years for which both the full education budget and actual expenditure data are available (2017 to 2021), the budgetary allocation toward wages was overspent, while those toward capital expenditures as well as goods and services were usually underspent. This is an area of concern, since the budgetary allocations to capital expenditures and to goods and services were already tight, and this trend can foster the buildup of expenditure arrears (notably, in the 2023 budget, the government reported arrears for all sectors in the amount of GHS 28.8 billion, equivalent to 4.6 percent of GDP for 2022). 6.1.4/ Public expenditure on education: the potential for greater efficiency, equity, and effectiveness While primary education would benefit from targeted non-wage spending, a growing share of students has been reaching SHS Figure 6.11. Sectoral education expenditure by category, 2021 Figure 6.12. Sectoral education expenditure by category, 2020 4% 7% 3% 1% 0% 0% 3% 4% 2% 2% 0% 3% 100% 2% 100% 1% 2% 9% 4% 0.9% 1.5% 2.1% 6.8% 90% 1% 16% 90% 18% 15% 8.9% 80% 80% 31.4% 38% 25% 70% 54% 70% 27.3% 65% 39% 60% 43.2% 60% 50% 98% 50% 96.4% 94.1% 96.1% 95% 92% 96% 96% 93.2% 88.3% 40% 40% 20% 65% 67.0% 30% 61% 30% 58.0% 17.8% 20% 45% 20% 38.5% 10% 26% 10% 17.5% 0% 0% c du D y h S ED d ol ry S ET D y S d ol ry Vo ar SH ig JH te ar FE SH te ho FE ia ho ia TV lE SP H im en im en rt N & rt N sc ia sc or Te Pr bv Te Pr ch bv ec e- e- ni Su Te Pr Su Sp Pr Ju t& t& en en em em ag ag an an M M Compensation Goods & Services Investment Compensation Goods & Services Investment Source: Education Sector Progress Reports for Ghana, Liberia, and Sierra Leone. With a large share of spending going toward wages, the allocation of resources could better reflect policy priorities. Close to 50 percent of the budget at the secondary level (SHS and TVET) is spent on staff compensation, and 95 percent or more at the basic level (preschool, primary, and JHS). Public spending on inputs such as textbooks is inadequate to meet the targets set out in the ESP for 2030. Pupils-to-textbook ratios for English, mathematics, and science in public primary schools are just shy of 2:1, far above the ESP’s prescription of one book per child. Strategic teacher deployments, improving teacher governance (reduction in absenteeism), and increasing teacher capacity for improved classroom teaching and learning can help Ghana Public Finance Review | Volume 2 / Detailed Analysis 166 enhance spending efficiency, while any additional funding at the basic level should be strategically allocated toward capitation grants, the procurement and distribution of textbooks, and the construction, rehabilitation, and maintenance of school facilities. Public spending per primary level student in Ghana is lower than in all other African LMICs… Figure 6.13. Comparative public spending per primary student in LMICs, structural peers, and aspirational countries 20.0% 15.0% 10.0% 5.0% 0.0% Sao Tome and… Dominican… Cameroon Cabo Verde Senegal Ghana Mauritania Benin Mauritania Jordan Cameroon Myanmar Paraguay Eswatini Ecuador Comoros Colombia Zimbabwe Peru Kenya Kenya LMICs Structural Peers Aspirational Countries Source: World Bank - World Development Indicators (WDI), data sourced in January 2024 for latest year available. .... but public spending per secondary level student is comparatively higher than in almost all African LMICS, all structural peers, and almost all aspirational countries Figure 6.14. Comparative public spending per secondary student in LMICs, structural peers, and aspirational countries 30.0% 20.0% 10.0% 0.0% Sao Tome and… Myanmar Ecuador Dominican Republic Cameroon Nicaragua Cameroon Paraguay Cabo Verde Eswatini Senegal Belarus Comoros Ghana Colombia Mauritania Mauritania Benin Zimbabwe Jordan Peru LMICs Structural Peers Aspirational Countries Source: World Bank - WDI, data sourced in January 2024 for latest year available. 6/ Enhancing Human Development Spending Efficiency for Service Delivery 167 6.1.5/ Enhanced spending on primary education would boost social equity, but secondary and tertiary education absorb greater resources The concentration of public spending on higher levels of education has implications for social equity (Figure 6.15). The poor benefit the most from public spending at the primary level. On the other hand, households with parents who attended school benefit more from expenditure on higher levels of education. Spending per pupil varies significantly by level of education and is greater for higher and technical education. Although this is to be expected— as teachers at higher levels of education tend to be more qualified and better paid—the magnitude of the variation may have negative impacts. Notably, a recent study estimates that universal access to secondary education is unlikely to be achieved in countries where the ratio of per-student spending on secondary relative to primary education is greater than 3:1, as limited funding at the basic level negatively affects student progress to the secondary level.85 In Ghana, this ratio stands at 4:1. Public spending on primary education is most effective at benefiting the poor Figure 6.15. Incidence of public spending in Ghana relative to the bottom 2 wealth quintiles and the educational attainment of fathers and mothers, respectively 0.90 0.84 Primary Secondary Tertiary 0.80 0.73 0.70 0.66 0.59 0.60 Share of Students 0.60 0.50 0.44 0.42 0.40 0.35 0.29 0.30 0.20 0.10 0.00 Bottom 2 wealth quintiles Father educated mother educated Source: Ghana Living Standard Survey (GLSS) 7, 2017. Note: Father, mother educated implies the father or mother attended school. Scores vary from 0 to 1, with 1 equal to 100 percent benefiting from public spending. Despite the elimination of some school fees, education financing in Ghana still places a significant burden on households, with spending remaining a substantial portion of government expenditure per student. Household expenditures on education carry considerable weight, with key public spending goals aiming to diminish financial barriers to access services 85 Mastercard Foundation, 2020. Secondary Education in Africa: Preparing Youth for the Future of Work. https://doi.org/10.15868/socialsector.35972. Ghana Public Finance Review | Volume 2 / Detailed Analysis 168 and alleviate the financial burden on households in financing education. In 1995, the government abolished school fees for pre-primary, primary, and junior secondary levels, and extended this initiative to secondary and technical education in 2017. Despite these policy changes, households persisted in making out-of-pocket (OOP) payments for various purposes, encompassing remaining fees, uniforms, textbooks, school supplies, transportation, food, and lodging. According to a 2017 household survey, spending on education expenses at the preschool level accounted for approximately 40 percent of government spending per student, while this ratio rose to 50 percent at the primary and junior secondary levels. Over half of this household expenditure was allocated to food and lodging costs. In conjunction with the elimination of school fees, initiatives such as capitation grants to schools and the Ghana School Feeding Program (GSFP) have been implemented to alleviate the burden on households, though substantial resources are needed for a more significant reduction in household education expenses. Data on household education spending at the senior secondary and technical levels since the 2017 fee removal are not yet available. In 2020, annual public expenditure per pre-tertiary student amounted to GHS 1,730 (approximately US$277), significantly higher in real terms than in 2016. In contrast to the general pattern of greater spending at higher levels, spending per student at the pre-primary level was 1.7 times higher than at the primary level, reflecting a growth in investment after two years of kindergarten were added to FCUBE. Spending per student at the secondary level stood at GHS 3,657 (US$585), four times more than at the primary level; while spending per TVET student amounted to GHS 9,972 (US$1,596), more than double the average for secondary high school students. Spending per TVET student nearly doubled between 2019 and 2020, due to a major expansion in TVET infrastructure. School enrollment across all education levels feature wide income-based disparities and a clear urban-rural divide. In 2017–18, 12 percent of the urban employed population had no education, contrasting with 28 percent in rural areas. Within the poorest wealth quintile, 67 percent of primary school- age children were attending school, whereas the figure rose to 94 percent in the highest wealth quintile. Given the long-term benefits of early childhood education, relatively low enrollment rates among poorer households could exacerbate disparities in social and economic outcomes later in life. Higher levels of public spending at the secondary and tertiary levels contribute to equity concerns, as wealthier households tend to benefit more from increased educational opportunities. Persistent challenges in learning outcomes, particularly at the primary level, are evident. In 2018, 43 percent of fourth- year primary students performed below the minimum competency level in English, a slight change from 42 percent in 2013. Similarly, in Mathematics, the proportion was 48 percent in 2018, compared to 43 percent in 2013. At the secondary level, although the majority (84 percent) pass the final examinations 6/ Enhancing Human Development Spending Efficiency for Service Delivery 169 at the end of JHS, a lower success rate (60 percent) is observed at the end of SHS. Disparities in learning outcomes are apparent, with only 5 percent of children (ages 7–14 years) in the poorest wealth quintile demonstrating foundational reading skills, compared to 50 percent in the highest wealth quintile (2017–18). Efficiency gains will be necessary to achieve the government’s goals as set out in the ESP, even with an expanded resource envelope. Relevant measures include: (a) reducing the number of underage and overage children in kindergarten and increasing the PTR in kindergarten from 31:1 to 35:1 over five years; (b) raising the PTR in primary schools from 31:1 to 35:1 over five years and reducing primary repetition and dropout rates by 1 percentage point per year; (c) increasing the PTR in JHS from 16:1 to 25:1 by 2025; (d) strengthening teacher management and improving teacher capacity to deepen teaching and learning in classrooms; and (e) increasing the PTR in SHS from 21:1 to 25:1 by 2025. Notably, such efficiency gains would require drastic changes in teacher deployment in JHS and SHS. The government could also explore targeting the free SHS policy toward beneficiaries in lower income groups. This would ensure that the government only supports the secondary education of the poor, while allowing for private participation in the funding of secondary education. Credits: Lawrence Baganiah on pexels Ghana Public Finance Review | Volume 2 / Detailed Analysis 170 6.1.6/ Educational outcomes remain suboptimal at both primary and secondary levels Learning outcomes remain problematic, particularly at the basic level. According to the Human Capital Index (HCI) for 2020,86 the average child in Ghana can expect to receive 12.1 total years of schooling, which is, compared to SSA and LMIC averages, relatively high. However, due to low test scores, this represents only six learning-adjusted years of schooling (LAYS), similar to the regional and lower-middle-income average. The gap between expected years of schooling and LAYS in Ghana is among the 10 largest across all LMICs (World Bank 2022 Education Public Expenditure Review). Moreover, the 2018 National Education Assessment (NEA) found that 43 percent and 48 percent of students in the fourth year of primary school performed below the minimum competency levels in English and Mathematics, respectively— up by 1 percentage point and 5 percentage points, respectively, since 2013 (Figure 6.16). In 2018, 47 percent of students in the sixth year of primary school scored below the minimum competency level in English, up from 31 percent in 2013 (Figure 6.17). The only consistent improvement observed is in the mathematics scores of students in the sixth year of primary school, with the share of those below the minimum competency level falling from 43 percent in 2013 to 34 percent in 2018. Proficiency scores in English and mathematics in primary school have largely declined Figure 6.16. NEA P4 assessment results Figure 6.17. NEA P6 assessment results 100 100 19 16 11 28 25 22 22 25 25 22 80 37 80 39 60 33 33 60 28 41 50 30 32 35 46 44 34 30 40 40 20 42 43 43 45 48 20 47 43 31 39 34 29 29 0 0 2013 2016 2018 2013 2016 2018 2013 2016 2018 2013 2016 2018 English Mathematics English Mathematics Proficiency Proficiency Minimum competency Minimum competency Below minimum competency Below minimum competency Source: Ghana Education Sector Progress Reports - 2019. 86 Ghana’s HCI stands at 0.45 in 2023, surpassing the SSA average of 0.40 but falling below that of LMICs at 0.48. This metric suggests that a child born in Ghana is expected to be 45 percent as productive in adulthood as s/he could be with full education and optimal health. Notably, this index value in 2023 remains relatively stable compared to the estimated score of 0.44 in 2017. 6/ Enhancing Human Development Spending Efficiency for Service Delivery 171 While most students pass the final examinations at the end of JHS, fewer succeed at the end of SHS. All students in the third year of JHS sit for the Basic Education Certificate Examination (BECE), and more than 84 percent of them passed it for English, mathematics, and integrated sciences in 2022. However, in the same year, the success rate among third-year SHS students in Ghana that took the West African Senior School Certificate Examination (WASSCE) in English, mathematics, and sciences stood at 60 percent. Although data on learning outcomes for TVET is limited, nearly 50 percent of employers reported, in surveys, that TVET graduates lacked practical skills (for example, ability to use relevant tools and equipment), while one-third of employers claimed that graduates lacked advanced technical skills.87 6.1.7/ Policy recommendations for enhancing educational spending efficiency and outcomes Policy Priority 1: Increase the share of non-salary expenditure in the education budget and improve teacher management at the basic education level. In basic education, salary spending significantly exceeds non-salary expenditures. The government could reduce the wage bill by ensuring that enrollment in Colleges of Education is aligned with the teacher headcount that is required or with a broader Workforce Planning Strategy. Further, implementing measures to improve teacher accountability and performance in the classroom is critical to support improvement in learning outcomes. Policy Priority 2: Ensure adequate budgetary resources. Education spending should be maintained at 20 percent of the government budget, in line with the GPE benchmark. This will ensure adequate budgetary resources are available to achieve the policy objectives stated in the ESP 2018–2030. Policy Priority 3: Sustain and enhance financial support for primary-level education. Given its pivotal role in shaping learning outcomes, allocating resources to primary education ensures a strong foundation for students, contributing significantly to their overall academic success. This involves not only maintaining current funding levels but also exploring opportunities for increased investment in teaching materials, infrastructure, and teacher training, thereby fortifying the quality of primary education. Policy Priority 4: Implement targeted interventions, particularly focusing on programs designed to support out-of-school children. Recognizing the unique challenges faced by children who are currently outside the formal education system, such interventions should include initiatives to identify and address barriers to enrollment, provide flexible learning options, and offer 87 Commission for Technical and Vocational Education and Training & Ford Foundation (2020), Ghana’s Healthcare, Logistics & Transport and Textiles & Apparel Sectors: A Skills Gap Analysis and Audit Report. University of Ghana Printing Press, Legon, Ghana. Ghana Public Finance Review | Volume 2 / Detailed Analysis 172 tailored support to reintegrate these children into formal education settings. By prioritizing the needs of out-of-school children, Ghana can work toward ensuring inclusive and accessible education for all. Policy Priority 5: Prioritize direct investments in evidence-based interventions that clearly strengthen learning outcomes. These include providing in-service teacher training; improving pedagogical practices at primary schools through targeted instruction, structured pedagogy, continuous teacher coaching and mentoring, and universal design for learning; expanding teacher capacity for play-based learning; and ensuring a conducive learning environment in kindergarten. Table 6.2. Measures to achieve policy priorities for the education sector Policy Priority Measures Timeframe Policy Priority 1: Measure 1.1. Ensure that enrollment in Colleges of Education is aligned with the Short Term Increase the share of teacher headcount that is required or with a broader Workforce Planning Strategy. non-salary expenditure in the education budget Policy Priority 2: Ensure Measure 2.1. Ensure that education spending does not fall below 20 percent of Medium Term adequate budgetary the government budget. resources Policy Priority 3: Sustain Measure 3.1. Maintain current funding levels while exploring opportunities for Short Term and enhance financial increased investment in teaching materials, infrastructure, and teacher training. support for primary- level education Policy Priority 4: Measure 4.1. Identify and address barriers to enrollment. Short Term Implement targeted interventions, particularly focusing on programs designed to support out-of-school Measure 4.2. Provide flexible learning options. Medium Term children. Measure 4.3. Offer tailored support to reintegrate out-of-school children into Medium Term formal education settings. Policy Priority 5: Measure 5.1. Provide in-service teacher training. Medium Term Prioritize direct investments in evidence-based interventions that clearly enhance learning outcomes Measure 5.2. Improve pedagogical practices at primary schools through targeted Medium Term instruction, structured pedagogy, continuous teacher coaching and mentoring, and universal design for learning. Measure 5.3. Expand teacher capacity for play-based learning. Medium Term Measure 5.4. Ensure a conducive learning environment in kindergarten. Medium Term 6/ Enhancing Human Development Spending Efficiency for Service Delivery 173 6.2/ Improving spending efficiency in health Ghana has made substantial progress toward universal health coverage and the country’s health outcomes compare well with those of regional and economic peers. In the current context of economic crisis and fiscal consolidation, it is important to better understand financing of the health sector and how the country’s gains can best be protected. Public funding, through the Ministry of Health (MoH) budget and the National Health Insurance Scheme (NHIS), is the major source of financing for the health sector in Ghana, accounting for about 50 percent of total health spending. Out-of-pocket payments by households for health services were estimated to constitute approximately 35 percent of total health expenditures as of 2016. Despite a moderate reduction in recent years, these payments remain significant. Development assistance for health accounted for the remaining 15 percent of total health spending.88 Debt service costs have crowded out government health spending. Government health spending increased between 2018 and 2021 but then declined so that by 2024 it was 14 percent lower than its 2018 level, in real terms (Figure 6.18).89 In dollar terms, government health spending fell from approximately US$1.9 billion in 2018 to US$1.6 billion in 2024. Government health spending declined from 14 percent of the total budget in 2018 to 10 percent in 2024. This was largely driven by the need to meet the government’s ballooning debt service costs, which consumed more than half of government revenues in 2022. In real terms, government health spending has declined since 2021 Figure 6.18. Government health spending in real and nominal terms, 2015 to 2024 25,000 20,000 GHS, millions 15,000 10,000 5,000 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Nominal Real (base year 2013) Source: World Bank staff analysis of government data. 88 2016 National Health Accounts. 89 There is a large difference in nominal GHS and GHS in real terms due to high inflation—32 percent in 2011 and 42 percent in 2023. Ghana Public Finance Review | Volume 2 / Detailed Analysis 174 Public spending on health in Ghana is slightly lower than would be expected, given its economic level, but higher than in other countries in SSA (excluding high-income countries). In 2018, the government’s spending on health was equivalent to 2.9 percent of GDP. This declined slightly to 2.8 percent of GDP in 2021, during the COVID-19 pandemic, and has significantly decreased to 2.1 percent of GDP in the 2024 budget. The latter falls below the expected proportion, considering the country’s GDP level in a global context (Figure 6.19), but aligns with the SSA (excluding high-income countries) average of 2.1 percent and surpasses the average of 1.5 percent observed in LMICs. Overall, government health spending lost considerable ground in comparison to economic growth over the 2018–24 period, during which Ghana’s economy grew by 20 percent in real terms. Government health spending in Ghana as a proportion of GDP is slightly lower than would be expected, given its economic level Figure 6.19. Domestic government health expenditure as a % of GDP vs. GDP per capita Sources: WDI and World Health Organization (WHO) Global Health Expenditure Database (December 2022 version). The NHIS accounts for a significant but recently declining proportion of public spending on health. Public financing through the NHIS is largely channeled to government health services through the payment of claims for services delivered to patients enrolled in the scheme. In practice, this financing is used by government health services to cover non-salary recurrent costs, including medicines and diagnostics, with health worker salaries paid directly from the MoH budget. As a proportion of total public health spending, NHIS expenditures declined to 14 percent in 2023, reflecting under-financing of the scheme (discussed further below) (Figure 6.20). External financing has declined as a proportion of total public spending on health but remains important for capital investments and non-salary expenditures. In 2022, on-budget external financing constituted 12 percent 6/ Enhancing Human Development Spending Efficiency for Service Delivery 175 of public spending, marking a consistent decrease from its 2015 level of 20 percent. External financing plays a significant role in funding investments and non-salary costs. In 2020, about 20 percent of capital expenditures and 30 percent of non-salary recurrent costs were financed from external sources. Over half of the public resources of the health sector are allocated to community, primary, and secondary levels of care. The community and primary levels play a crucial role in delivering highly impactful and cost- effective interventions, addressing various health challenges. Simultaneously, the secondary level of care, vital in addressing high-priority health issues such as maternal mortality, also provides these essential interventions. The allocation of more than half of public resources to these levels of health care, through the MoH and the NHIS, aligns with Ghana’s demographic and health profile. NHIS expenditures are an important part of total public financing for health, averaging about 20 percent of public health spending over the period 2015 to 2023 Figure 6.20. Composition of public health spending: MoH vs. NHIS 120% 100% 18% 17% 13% 14% 24% 25% 22% 20% 23% 80% 60% 40% 82% 83% 87% 86% 76% 75% 78% 80% 77% 20% 0% 2015 2016 2017 2018 2019 2020 2021 2022 2023 Total MoH exp ( GHC) Norminal Total NHIA exp ( GHC) Norminal Source: World Bank staff analysis of government data. Despite a shift from activity-based budgeting to program-based budgeting (PBB), the MoH’s budget remains largely input or line-item based, offering limited flexibility for discretionary spending. Moreover, the process of budget planning and allocation for the NHIS runs parallel to that of the MoH, without much effort to balance the allocation of budget between compensation (mainly from MoH budget) and operational expenditure for health facilities (mainly from NHIS). For example, while MoH spending (mainly on salaries) has increased significantly in nominal terms in recent years, NHIS spending (mainly on non-wage recurrent items) has been comparatively flat. Goods and services, encompassing items like vaccines, medicines, diagnostics, and maintenance, constituted 23 percent of overall public spending on health in 2022. This marked a decrease from the range of 30–35 percent observed in Ghana Public Finance Review | Volume 2 / Detailed Analysis 176 preceding years. Payments of claims, from the NHIS to health facilities, play a significant role in covering non-salary recurrent costs, accounting for 40 percent of such expenditures in 2022. The government allocated 17 percent of its budget for health (excluding the NHIS) to investments in 2022. This marks an increase from previous years when the proportion ranged from 10 to 12 percent. Expenditures on HR dominate the MoH’s budget accounting for about 60 percent of the total health budget (Figure 6.21). There are around 170,000 workers in the health system, including health staff and other types of workers, on the government payroll. Despite a rising number of health workers relative to the size of the population over the past five years, the health workforce remains insufficient to meet the targets of universal health coverage and the Sustainable Development Goals (SDGs). Ghana counts 3.79 medical staff (that is, physicians, nurses, and midwives) per 1,000 people—about 15 percent below the threshold of 4.45 per 1,000 people set out in the SDGs, but above the WHO’s threshold of 2.5 per 1,000 people. Moreover, the health workforce is unevenly distributed across the country. Compensation has represented, on average, over half of total MoH expenditure over the period 2015 to 2022 and has not recovered to pre-COVID levels Figure 6.21. Economic composition of the MoH budget 120% 100% 11% 11% 11% 8% 11% 12% 17% 80% 38% 34% 30% 24% 35% 37% 41% 23% 60% 23% 40% 58% 59% 65% 60% 54% 52% 48% 20% 39% 0% 2015 2016 2017 2018 2019 2020 2021 2022 Comp G&S Capex Source: World Bank staff analysis of government data. 6.2.1/ NHIS: financing shortfalls undermine progress Since the launch of the NHIS in 2003, Ghana has been at the forefront of health financing reform in Africa, but the scheme has been under-funded in recent years. A transition from MoH-led, supply-side financing toward a purchaser-led, demand-side approach is widely considered an appropriate reform in middle-income countries globally. Ghana made strides in this direction during the first 15 years of operation of the NHIS—reflected in robust 6/ Enhancing Human Development Spending Efficiency for Service Delivery 177 institutional strengthening and a meaningful impact on financial protection for beneficiaries—but the momentum has waned more recently. The NHIS is primarily financed by an earmarked tax. The NHIS is largely financed by the National Health Insurance Fund (NHIF) which, in turn, is funded by the National Health Insurance Levy (NHIL), which is a 2.5 percent tax on goods and services collected on top of the value-added tax (VAT). The NHIL, plus 2.5 percent of the contributions to the Social Security and National Insurance Trust (SSNIT) paid by formal employers, together account for about 90 percent of NHIS financing. Additional funding sources include returns on NHIF investments, premia paid by NHIS subscribers in the informal sector, and external support. The NHIS is a highly subsidized health insurance scheme, with no premia payments at participating facilities for those aged under 18 years and those 70 years or older, as well as the ‘indigent’,90 SSNIT contributors and pensioners, pregnant women, and infants under three months along with their mothers. The indigent, pregnant women, and women with young infants do not pay registration or renewal fees. NHIS expenditures have declined in real terms (although a significant increase is budgeted for 2024) Figure 6.22. NHIS expenditures in real and nominal terms, 2015–2024 7,000 6,000 5,000 GHS, millions 4,000 3,000 2,000 1,000 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Nominal Real (base year 2013) Source: World Bank staff analysis of government data. Note: 2024 is budgeted amount. 90 The National Health Insurance Authority (NHIA) defines an indigent as an individual who (a) “does not have any visible source of income,” (b) “does not have a fixed place of residence,” (c) “does not live with a person who is employed and has [a] fixed place of residence,” and (d) “does not have a consistent source of support from another person.” The NHIA currently relies on the Ministry of Gender, Children, and Social Protection (MOGCSP) to identify indigent persons. Ghana Public Finance Review | Volume 2 / Detailed Analysis 178 Credits: freepik Two distinct financing gaps explain recent stagnation in NHIS spending (Figure 6.23). First, the NHIS no longer receives its full NHIL allocation, due to a capping law passed in 2017 that limits flows to statutory funds as a share of total government revenues. Initially set at 25 percent of total revenues, the ceiling was lowered to 17 percent in late 2022. As a result, in 2023, the NHIS’s budget was cut by 25 percent relative to 2022 (more than other statutory funds) and amounted to just 54 percent of the projected NHIL revenues. This development undermines the implicit social contract whereby citizens pay the NHIL with the understanding that it will finance health insurance. Although limiting the use of statutory funds to protect the pre-eminent role of ministries, departments, and agencies (MDAs) may be appropriate in other sectors, it is less so in the case of the NHIS, whose model of ‘purchaser-provider split’ with the MoH is consistent with best practice in health financing across middle-income countries. The government’s 2024 budget includes a significant increase in the planned allocation to the NHIS (although as described below, there has been a gap between planned allocations and actual financial releases). 6/ Enhancing Human Development Spending Efficiency for Service Delivery 179 The second shortfall in NHIS spending derives from the gap between budgeted allocations and actual cash received from the Ministry of Finance (MoF). Between 2020 and 2022, transfers to the NHIS amounted to between 50 and 60 percent of the budgeted allocations. Along with the other funding gap discussed above, this trend has been affecting the scheme’s ability to reimburse providers in a timely manner, threatens the effectiveness of the scheme by incentivizing informal payments by patients, and ultimately imposes a financial burden on households. Financing gaps between (a) revenues of the earmarked tax and the NHIS budget allocation and (b) NHIS budget allocation and actual financial transfers account for stagnation in NHIS spending Figure 6.23. Sources of NHIA financing 6,000 5,000 4,000 3,000 2,000 1,000 - 2016 2017 2018 2019 2020 2021 2022 2023 NHIS budget allocation (SSNIT & NHIL) Actual cash transferred (SSNIT +NHIL) NHIL & SSNIT projected revenues Source: World Bank staff analysis of government data. Note: GHS amounts are current/nominal. Under-financing has caused significant distortions in the NHIS’s balance sheet. Claim outlays declined from 85 percent of revenues in 2009 to 59 percent in 2022, suggesting that claim reimbursements (the core mandate of the NHIS) were considered a lower priority than other expenses—for example, transfers from the NHIS to the MoH for preventive care in 2020 (equivalent to more than 10 percent of total NHIS outlays) and support to district offices (equivalent to about 2.5 percent of the scheme’s budget). Second, arrears in claim reimbursements to providers exceeded GHS 1 billion (close to US$90 million) in 2023. The redirection of NHIS funds to other purposes while claim arrears accumulate points to a worrying pattern, whereby the NHIS has been deviating from its main mission: ensuring financial protection for households. On a more positive note, the NHIS is making major investments in its information technology (IT) infrastructure, which should enhance its strategic purchasing capacity in the years ahead. Ghana Public Finance Review | Volume 2 / Detailed Analysis 180 The NHIS’s role as strategic purchaser can be reinforced if revenues to the NHIS refocus on claim reimbursement. The NHIS reimburses public and private health care providers for the variable costs of direct patient care, using a fee-for- service model for drugs and diagnostic-related groups (DRGs)91 for inpatient and outpatient services. Most of the NHIS’s claim payments go to district hospitals. Only 17 percent of claim reimbursements are paid to facilities at the sub-district level or lower, although these make up 82 percent of all NHIS-accredited facilities and provide approximately 40 percent of outpatient services.92 Furthermore, among all types of facilities, the rejection rate of NHIS claims is highest among frontline primary health care facilities, which could be due to low capacity to correctly process claims and/or submission of claims for services above the facility’s prescribed scope.93 More broadly, the ongoing transition to electronic claim payments should enable significant improvements to the efficiency and quality of service delivery, including through data analytics, fraud control, and medical audit interventions. A related priority should be to update the tariff schedule, so that it more accurately reflects actual costs. In 2022, 60 percent of the population was enrolled in the NHIS, but its coverage of poor and vulnerable groups can be enhanced. NHIS enrollment has increased in absolute numbers across all membership categories but with marked regional disparities. Moreover, coverage rates for indigents and free maternal care have declined, likely due to challenges in registering new entrants and in renewing membership for the indigent population already enrolled. Although the Ghana National Household Registry (GNHR) aims to collect and maintain a list of the poor and vulnerable, it lacks nationwide coverage and effective linkages to the NHIS database. As this registry improves, it will provide a platform to enhance coverage of disadvantaged socioeconomic groups—that is, through selective exemption from premium payments. Box 6.3. Financial protection and equity: Past achievements at risk The NHIS has protected households from (provided by government and empaneled private the financial burden of health care costs. providers) for enrolled individuals. Introduction There are two main mechanisms to reduce of the NHIS in 2003 led to substantial decreases the financial burden on households for health in household OOP payments for health care.94 care. The first is free-of-charge provision More recently, analysis of 2017 household survey by government health services of selected data found that both enrolled and non-enrolled interventions, notably reproductive and child households incurred OOP expenses for health health services. The second is the NHIS, which care, but those enrolled in NHIS had lower costs, covers 60 percent of the population (2022) and and the benefits of the NHIS were greater for the aims to cover the costs of a larger set of services poor.95 91 DRG is a prospective, fixed payment per hospital admission, whereas fee-for-service entails the retrospective reimbursement of all itemized costs incurred by health care facilities for each patient. 92 A district hospital is the top-tier facility within the primary health care category, usually located in district capitals. Sub-district health facilities are polyclinics, health centers, Community-based Health Planning and Services (CHPS), and maternity homes that focus on the treatment of minor ailments and provide close-to- client preventive health services. 93 Different levels of health facilities have limits to the services for which they can be paid in accordance with the NHIS’s credentialing guidelines. 94 Garcia-Mandico S., A. Reichert, and C. Strupat. 2020. “The Social Value of Health Insurance: Results from Ghana.” Journal of Public Economics 194: 1–17. 95 Raju D., and S. D. Younger. 2022. “The Financial Risk Reduction Provided by Ghana’s National Health Insurance Scheme.” World Bank Policy Research Working Paper 10073. 6/ Enhancing Human Development Spending Efficiency for Service Delivery 181 NHIS members, especially among the poor, have lower OOP payments for health care than non-members Figure 6.24. Average annual OOP of members as a % of non-members, by decile 120% 109% 105% 103% 100% 82% 87% 75% 77% 80% 72% 71% Percentage (%) 56% 60% 40% 20% 0% 1 2 3 4 5 6 7 8 9 10 Decile Source: Raju and Younger (2022) based on GLSS 7. However, achievements in financial OOP payments remain common and account for protection for households may be eroding. a growing share of the revenues of health care According to the global Findex survey, the share facilities. Notably, 42 percent of insured patients of Ghanaian households that reported having in the poorest quintile of the socioeconomic borrowed to pay for medical care rose from 10 distribution reported making OOP payments for percent to 16 percent between 2017 and 2021, health care services, while informal co-payments and the increase was concentrated among the appear common in urban areas. poor. Despite the expansion in NHIS enrollment, The share of OOP payments in the revenues of health care facilities has been expanding Figure 6.25. Composition of internally generated funds (IGFs) Figure 6.26. Composition of IGFs for tertiary facilities for primary and secondary facilities 100% 100% 90% 21% 90% 24% 24% 27% 80% 34% 80% 70% 70% Share of IGFs (%) 70% 69% 72% 73% 72% 72% 74% 60% 60% 50% 50% 40% 79% 40% 76% 76% 73% 30% 66% 30% 20% 20% 30% 31% 28% 27% 28% 28% 10% 26% 10% 0% 0% 2017 2018 2019 2020 2021 2015 2016 2017 2018 2019 2020 2021 NHIS Out-Of-Pocket Payments NHIS Out-Of-Pocket Payments Source: World Bank staff analysis of government data. Ghana Public Finance Review | Volume 2 / Detailed Analysis 182 6.2.2/ Results of public financing for health: Improving outcomes but continuing challenges with equity and quality Health and nutrition outcomes have seen steady improvements, although some indicators have plateaued in recent years. While life expectancy in Ghana (64 years) (2021) is lower than would be expected given the country’s income level, maternal (263 per 100,000 live births) (2020) and under-five (40 per 1,000) (2022) mortality are at levels consistent with the size of the economy; and stunting among under-five children (18 percent) (2022) is lower than would be expected (Figure 6.27). Health and nutrition outcomes have shown consistent improvements over time, some faster than others (Figure 6.28). Fertility has been slow to change in recent years, as the total fertility rate declined from 4.4 in 2003 to 3.9 in 2022, for a decrease of just 11 percent in two decades.96 Child mortality and nutrition outcomes in Ghana are similar or better than would be expected given its economic level Figure 6.27. Under-5 child mortality and stunting relative to GDP per capita Source: WDI. 96 The total fertility rate is the estimated number of children a woman would have, given current age-specific fertility rates. (With low child mortality, the rate at which the population would stay constant is 2.1). 6/ Enhancing Human Development Spending Efficiency for Service Delivery 183 Health outcomes in child mortality and malnutrition have steadily improved in Ghana, despite slowing recently for under-5 stunting Figure 6.28. Prevalence of under-5 mortality and under-5 stunting in Ghana, 1993–2021 140 33 35 stunting prevalence (% under-5 children) 31 120 28 30 119 111 under-5 mortality rate (per 1,000 live births) 100 108 25 80 19 18 20 80 60 15 60 40 10 40 20 5 0 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Under-5 mortality (per 1,000) Under-5 stunting (%) Source: Ghana Demographic and Health Surveys. Coverage levels of basic health services have reached relatively high levels, although progress on some has slowed and there are challenges with inequality. While access to skilled delivery care steadily increased from 46 percent of mothers in 2003 to 88 percent in 2022, child immunization coverage seems to have slightly declined in recent years, from 79 percent of children (ages 12–23 months) receiving all basic antigens in 2008 to 73 percent in 2022. Inequalities in health outcomes are evident but have become less pronounced for access to basic services as coverage levels have reached higher levels. For example, among health outcomes, in 2022, among the lowest wealth quintile, 23 percent of girls ages 15–19 years had been pregnant, compared to 6 percent among the highest quintile (and 11 percent overall). At the same time, as coverage of antenatal care has reached 98 percent, there is little difference in access between socioeconomic groups. Nonetheless, urban-rural and socioeconomic differences persist for some indicators; for example, full child vaccination coverage is 77 percent in urban areas, compared to 70 in rural areas, while it is 65 percent among the lowest quintile, compared to 84 percent among the highest (2002).97 The number of health care facilities has risen since 2017, but gaps in quality of care remain. As of 2020, there were over 9,300 health facilities in Ghana versus 3,500 facilities reported in 2017. In one example of qualitative shortcomings, an emergency obstetric and newborn care (EmONC) survey 97 Ghana Demographic and Health Surveys. Ghana Public Finance Review | Volume 2 / Detailed Analysis 184 conducted in 2020 showed that a significant proportion of health care facilities did not meet EmONC quality standards. The survey revealed wide regional disparities, with some regions reporting no facilities that meet relevant standards. In many cases, essential equipment was unavailable or non- functional, particularly in primary health care facilities. Moreover, the gap in availability of health care workers is more prominent for specialist doctors than for general nurses and midwives. 6.2.3/ Policy recommendations for sustainable health sector financing Public financing for health has not kept pace with development of the economy, putting past gains at risk. In the past, Ghana’s relatively high public health spending, coupled with NHIS financing, contributed to gains in financial-risk protection and a good macro-level performance of the health system relative to peer countries. Such gains, however, have been eroding in recent years, due to inadequate financing of the NHIS and muted growth of the health budget in real terms. To regain lost ground and ensure that the sector is sustainably financed, there is need for strategic prioritization of actions that can bring about the necessary transformation and health outcomes. This requires the MoH to emphasize critical non-wage expenditures, such as vaccines and essential medicines; enhance the allocation and transfer of earmarked funds to the NHIS; strengthen the primary health care service delivery system—particularly at the sub-district level and below; improve the utilization of existing services; expand NHIS coverage with a focus on the poor; improve equity in health care utilization and outcomes; and enhance consolidated budget planning and reporting. Policy Priority 1: Emphasize critical non-wage expenditures, such as vaccines and essential medicines, which need to be identified and financed. In the health sector, ensuring an adequate supply of vaccines and essential medicines is vital for health outcomes and the financial protection of households. However, in a situation of fiscal consolidation, while wages tend to be protected, non-wage expenditures are susceptible to budget cuts, both directly and indirectly through the under-financing of the NHIS. Policy Priority 2: Enhance the allocation and transfer of earmarked funds to the NHIS. There is need for advocacy and engagement with the MoF to facilitate the allocation and transfer of earmarked funds to the NHIS. The MoH and NHIS, with support from civil society and development partners, can engage with the MoF to ensure timely allocation and distribution of resources to the health sector. The NHIS is aligned with good practice in health financing applicable to most middle/high-income countries. Therefore, it would be appropriate to exempt the NHIS from the requirements of legislation capping 6/ Enhancing Human Development Spending Efficiency for Service Delivery 185 transfers to statutory funds, which threatens its sustainability and run contrary to the social contract that underpins the NHIL. Policy Priority 3. Strengthen the primary health care service delivery system—particularly at the sub-district level and below—by enhancing the allocation of resources to frontline facilities and developing networks of practice. This will entail increasing the MoH’s budgetary allocation to primary health care facilities and shifting the resources deriving from the IGFs of district hospitals and health centers toward preventive and promotive services at the district level. It will also require reviewing the Ghana Essential Health Service Package and aligning it with the NHIS benefits package.98 Policy Priority 4: Improve the utilization of existing services. To reverse the fall in its share of spending on claims, the NHIS can examine its capacity to purchase additional services (based on actuarial analysis) and gradually shift expenditures toward claim payments and away from operational overheads. In addition, the funding prospects for vaccines and other essential health care commodities call for dialogue between the MoF, MoH, and NHIS. Policy Priority 5: Expand NHIS coverage with a focus on the poor. This will enhance the pooling function of the NHIS and prioritize the financial protection of vulnerable populations. It entails, among other aspects, identifying barriers to registering and renewing membership for the indigent population, through interventions that include linking the NHIS database to the GNHR; collaborating with the MOGCSP; and focusing resources on enhancing enrollment in lagging regions. It will also be important to investigate the prevalence of informal co-payments among both NHIS members and non- members and take steps to minimize them. Policy Priority 6: Improve equity in health care utilization and outcomes. Although Ghana has made great strides in maternal and child health outcomes, key indicators such as prevalence of stunting and under-five mortality reveal persistent inequality by socioeconomic status, region, gender, and between urban and rural areas. Similarly, access to common preventive and curative childhood and maternal health services (for example, antenatal care) is concentrated among wealthier households. While the coverage levels of basic health services in Ghana have achieved relatively high standards, some have shown signs of stagnation in recent years. Addressing the inequities in access and utilization of health care services will require a mix of strategies to improve demand for essential health services through social behavioral change communication and community engagement, targeted service delivery to disadvantaged groups, as well as enhancing financial access through improved NHIS coverage of the poor and rural populations. 98 The Ghana Essential Health Service Package describes the recommended health care services that should be delivered at the various categories/levels of health services. Ghana Public Finance Review | Volume 2 / Detailed Analysis 186 Policy Priority 7. Enhance consolidated budget planning and reporting. A more transparent process for on-budget reporting will improve efficiency in planning and execution, reducing double counting and underreporting and, in turn, the fragmentation of external financing. The MoH, Ghana Health Service, and NHIS should consider ensuring the regular production of the National Health Accounts; publishing timely annual financial reports; reviewing the 2015 Health Financing Strategy; revising the guidelines for the use of IGFs; developing an implementation plan with measurable goals and timelines for the transition away from external financing for critical commodities and activities; strengthening resource mapping and expenditure tracking to achieve greater resource mobilization; and deploying a government integrated financial management system (IFMIS—with integrated or interoperable resource mapping and expenditure tracking tools—at the district level of health care in the short term and at the sub-district level in the medium term. The MoH should also explore accelerating the development and implementation of the Health Information Management Strategy, prioritizing the integration of health information systems. Table 6.3. Measures to Achieve Policy Priorities for Health Sector Financing Policy Priority Measures Timeframe Policy Priority 1: Measure 1.1. Ensure an adequate supply of vaccines and essential medicines. Short Term Emphasize critical non- wage expenditures Policy Priority 2: Measure 2.1. Engage with the MoF to ensure timely allocation and distribution of Medium Term Enhance the allocation resources to the health sector. and transfer of earmarked funds to the Measure 2.2. Exempt the NHIS from the requirements of legislation capping Medium Term NHIS transfers to statutory funds. Policy Priority 3: Measure 3.1. Enhance the allocation of resources to frontline facilities. Short Term Strengthen the primary health care service delivery system Measure 3.2. Shift the resources deriving from the IGFs of district hospitals and Short Term health centers toward preventive and promotive services at the district level. Measure 3.3. Develop networks of practice. Medium Term Measure 3.4. Review the Ghana Essential Health Service Package and align it with Medium Term the NHIS benefits package. Policy Priority 4: Measure 4.1. Revisit the NHIS’s benefit package and tariffs. Medium Term Improve the utilization of existing services Measure 4.2. Collaborate with health service delivery agencies. Medium Term Policy Priority 5: Expand Measure 5.1. Identify barriers to registering and renewing membership for the Medium Term NHIS coverage with a indigent population, through interventions that include linking the NHIS database focus on the poor to the GNHR. Measure 5.2. Collaborate with the MOGCSP Medium Term Measure 5.3. Focus resources on enhancing enrollment in lagging regions. Medium Term Measure 5.4. Investigate the prevalence of informal co-payments among both Medium Term NHIS members and non-members and take steps to minimize them. 6/ Enhancing Human Development Spending Efficiency for Service Delivery 187 Policy Priority Measures Timeframe Policy Priority 6: Measure 7.1. Ensure the regular production of the National Health Account. Medium Term Improve equity in health care utilization and outcomes Medium Term Priority 7. Enhance Measure 7.2. Publish timely annual financial reports. Medium Term consolidated budget planning and reporting Measure 7.3. Review the 2015 Health Financing Strategy. Medium Term Measure 7.4. Revise the guidelines for the use of IGFs. Medium Term Measure 7.5. Develop an implementation plan with measurable goals and Medium Term timelines for the transition away from external financing for critical commodities and activities. Measure 7.6. Strengthen resource mapping and expenditure tracking. Medium Term Measure 7.7. Deploy a government IFMIS, with integrated or interoperable Short Term- resource mapping and expenditure tracking tools, at the district and sub-district Medium Term level of health care. 6.3/ Improving performance and impact of social protection Improved performance of Ghana’s social protection programs would make a significant impact on poverty and human capital. At 1.4 percent of GDP, Ghana’s spending on public social protection programs is lower than the SSA average. Due to the small size of their outlays, Ghana’s social assistance programs have had modest effects on poverty and inequality. Most social assistance programs offer limited coverage of the population, and the average value of social benefits is low relative to a wide range of benchmarks—for example, international standards, the average consumption levels of beneficiary households, and Ghana’s extreme and overall poverty lines. In 2016/17, benefits from the Livelihood Empowerment Against Poverty (LEAP) program were equal, on average, to 12.8 percent of the total annual consumption of a beneficiary household; those from the GSFP were equal to 5.2 percent; and those from the NHIS were equivalent to 3.6 percent. Conversely, SSNIT pensions averaged 60.3 percent of the total annual consumption of beneficiary households. Moreover, in recent years, high inflation has further eroded the value of social benefits as a share of household consumption. The 2023 doubling of the LEAP benefit brought its level up to 9.3 percent of household consumption of the extreme poor, from 6.7 percent in 2022. The 2024 national Budget Statement has committed to progressively raise the LEAP benefit to 20 percent of household consumption of the extreme poor—a welcome decision for adequacy and subsequent impact. Simulations suggest that, for example, Ghana Public Finance Review | Volume 2 / Detailed Analysis 188 increasing the LEAP benefit level from its 2023 level (approximately GHS 79) to 20 percent of pre-program household consumption would lift 200,000 people out of extreme poverty. Given that there are close to half a million extremely poor households in the country, Ghana has an opportunity to leverage social protection programming to eradicate extreme poverty, especially if expanded coverage of existing programs is realized. 6.3.1/ Background Ghana has put in place a favorable policy environment for social protection. The National Social Protection Policy (NSPP), introduced in 2015, defines social protection as a range of actions to provide relief to vulnerable and impoverished populations. The NSPP envisages a ‘social protection floor’ of basic health care and minimum income security for children, working- age people, and the elderly. The MOGCSP has primary responsibility for the implementation of the NSPP, while SP delivery is provided by several ministries and the decentralized government structures. The country has activated a wide range of social protection programs. The NSPP classifies five major programs as its flagship interventions of Ghana’s social protection basket: (a) the Livelihood Empowerment Against Poverty (LEAP) program; (b) the Labor-Intensive Public Works (LIPW) program; (c) the Ghana School Feeding Program (GSFP); (d) the exempt category of the National Health Insurance Scheme; and (e) capitation grants—that is, per- student subsidies to public basic schools, which mainly go toward covering the cost of teaching and of learning materials. The NSPP does not classify the SSNIT pension scheme as a key social protection program, but it recognizes its relevance as a component of social insurance. This chapter assesses the SSNIT pension scheme and all interventions included in the abovementioned social protection basket, with the exception of capitation grants for basic schools, which—despite the NSPP’s classification—pertain more to the domain of public education than to social protection. Ghana’s social assistance programs target the poor with some accuracy, but the inadequacy of their benefits limits their impact. LEAP, LIPW, and GSFP are social assistance programs, while SSNIT pensions and the NHIS are part of the social insurance framework. The social assistance programs use a variety of targeting mechanisms to reach the poor, such as identifying certain categories of vulnerable people (for example, orphans, the elderly, pregnant women, mothers of infants, and the disabled), adopting a proxy means test, and targeting geographical areas with high poverty rates. The SSNIT, on the other hand, almost exclusively benefits formal workers, very few of whom are poor, while the NHIS is meant to be universal. The government has received technical and financial assistance from various international organizations to design and implement social welfare and protection programs,99 and has 6/ Enhancing Human Development Spending Efficiency for Service Delivery 189 drawn on a large body of research in the field. The targeting of the LEAP program and GSFP, in particular, is both technically sound and effective at reaching the poor. However, such programs have had a limited impact on poverty and inequality, due to the small size of their outlays and their erosion in real terms caused by inflation. Social insurance programs are regulated by law, while social assistance programs are not. LEAP, LIPW, and GSFP are not regulated by law. On the other hand, the NHIS was established through the National Health Insurance Act of 2003 (Act 650) and is currently regulated by the National Health Insurance Act of 2012 (Act 852), while the SSNIT pensions scheme was established in its current form through the National Pensions Act of 2008 (Act 766). Moreover, the Labor Act of 2003 (Act 651) and the National Health Insurance Act of 2012 mandate that employers provide for sickness and maternity benefits, respectively. Finally, per the Workmen’s Compensation Act of 1987 (Act 187), employers must provide disability, medical care, survivor, or funeral benefits, as applicable, in the event of work-related injuries. Lack of regulation of social assistance programs exposes beneficiaries to uncertain payments of benefits, especially in cases where disbursements fall short of approvals. 6.3.2/ The coverage of social protection programs is often suboptimal LEAP’s coverage has grown over time but remains limited. LEAP provides unconditional cash transfers to households in impoverished geographic areas. It is run by the LEAP Management Secretariat (LMS) under the MOGCSP. At the end of 2023, LEAP covered 350,000 households across 260 (out of 261) districts in Ghana, equivalent to 6.6 percent of the national population.100 Over the four-year period from 2018 to 2021, more than 50 percent of beneficiary households were concentrated in five of the country’s 15 regions: Northern, Upper East, North East and Savannah, and Upper West.101 However, data from the 2017 GLSS 7 seem to understate the coverage of LEAP, placing it at 1.5 percent of Ghanaians in 2017 versus a 4.1 percent estimate based on administrative data. The LIPW program, similarly, has a relatively modest reach. The LIPW program offers income opportunities to poor households through temporary labor during the agricultural off-season—namely, working on the construction, 99 These include the African Development Bank (AfDB), the European Union (EU), the International Labour Organization (ILO), the United Kingdom Foreign, Commonwealth, and Development Office or UK FCDO (formerly the United Kingdom Department for International Development or UK DFID), the United Nations Children’s Fund (UNICEF), the United Nations Development Programme (UNDP), the United Nations High Commissioner for Refugees (UNHCR), the United Nations Population Fund (UNFPA), the United States Agency for International Development (USAID), the World Bank, and the World Food Programme (WFP). 100 This assumes that LEAP beneficiary households, whose number is estimated from the GLSS for 2016/2017, have 6.3 members on average. 101 Regional classification per the 2010 population and housing census. Ghana Public Finance Review | Volume 2 / Detailed Analysis 190 rehabilitation, or maintenance of public or community infrastructure. The program is regulated by the National Labor-Intensive Public Works Policy, which was approved in August 2016 and took effect in January 2017. Responsibility for administering the program lies with the Rural Development Coordination Unit (RDCU) under the Ministry of Local Government, Decentralization, and Rural Development (MLGDRD). The LIPW program was launched in 40 districts across northern regions in 2011. Between 2018 and 2022, the LIPW program aimed to cover a cumulative 30,000 beneficiaries. At project closing in December 2022, however, coverage stood at 34,579, exceeding its target across in the northern and sothern Ghana across all regions. In terms of benefit adequacy, the LIPW daily wage, pegged to the daily national minimum wage and indexed to inflation compares favorably to public works programs in Comoros, Cote d’Ivoire, and the Democratic Republic of Congo and is in line with programs in Egypt, Laos, and Tunisia.102 However, since beneficiaries in Ghana’s LIPW only participate in the program for a maximum of two years, the program’s impacts on poverty reduction is limited. The GSFP has the broadest coverage among Ghana’s social assistance programs. According to the country’s National School Feeding Policy (approved and effective since 2016), the GSFP primarily seeks to increase school enrollment, attendance, and retention in poor, rural communities; improve the nutrition of school-age children; encourage local food production and consumption; and boost rural income. The program was launched as a pilot in 2005, covering approximately 1,900 students in 10 schools (one in each region), and has been rapidly scaled up since. As of 2022, it covered 3,620,468 pupils, out of a total of approximately 5,100,000 pupils in public schools, across all of Ghana’s 16 regions and 261 metropolitan, municipal, and district assemblies (MMDAs), according to administrative data. Survey data understates coverage and indicates that, as of 2017, the GSFP covered 10 percent of all pupils classified as extremely poor. However, among public pre- primary and primary school students in areas covered at the time, coverage rates stood at 61 percent overall and at 64 percent for the extremely poor. Challenges persist with regard to coverage of social insurance schemes (Figure 6.29). NHIS coverage is 60 percent of the population. The NHIS is a highly subsidized social health insurance program that pays for health services included in its benefits package for individuals covered by the scheme. (See Section 6.2 on the health sector for an extended discussion on NHIS). The SSNIT mainly focuses on formal employees and thus covers a small percentage of the total labor force. The National Social Security Scheme is a defined benefit pension scheme managed by the SSNIT, a public trust. All workers in Ghana are eligible to join the scheme: in the formal sector, employers are required to register their employees and make stipulated contributions on their behalf; in the informal sector, however, registration is voluntary and rare. 102 World Bank. 2023. “Do Public Works Programs Have Sustained Impacts: A Review of Experimental Studies from LMICs.” https://documents1.worldbank.org/ curated/en/099531206062341552/pdf/IDU00fb5fa420c9af04f5d0b7fd0809361fc027d.pdf 6/ Enhancing Human Development Spending Efficiency for Service Delivery 191 The National Social Security Scheme offers four types of benefits: retirement pensions, invalidity pensions, survivors’ pensions (paid as a lump sum), and an emigration benefit for retirees who leave Ghana. The program’s coverage increased from 8–9 percent of the total labor force between 2005 and 2013 to 10–12 percent for the period 2014–2020—a modest share explained by the small size of the formal sector in Ghana.103 Specifically, the number of SSNIT pensioners increased steadily from 99,000 in 2009 to 227,000 in 2020, a cumulative growth of 131 percent at an annual rate of 8 percent.104 The program covers 5.2 percent of the population aged 60 years or older, based on GLSS 2016/17 survey data. However, SSNIT pensions largely fail to reach the poor: until 2020, they were only available to formal sector workers, and although efforts have been made to draw in more informal workers, the response has been minimal. This trend and experience from the NHIS offer a lesson: since the government probably cannot and will not fund a universal pension, any expansion in SSNIT membership will require actuarially fair premia payments from new members which, however, will likely keep them from joining. Credits: Langford Kwabena on Pexels 103 Based on GLSS 2016/17 data, 25 percent of workers were wage employees; among them, 44 percent had a written contract and 35 percent had employer- provided social security (Nxumalo, M., Dhushyanth, R. 2020. Structural Transformation and Labor Market Performance in Ghana. Jobs Working Paper;No. 55. © World Bank, Washington, DC.). Considering these conditions (written contract, social security coverage) as indicators of formal employment, roughly 10 percent of all workers in Ghana were formally employed. 104 The nominal and real values of SSNIT pensions rose by 542 percent and 89 percent, respectively, between 2009 and 2020. The average nominal pension payment amounted to GHS 14,524 per person per year in 2020, versus GHS 11,551 in 2017. Ghana Public Finance Review | Volume 2 / Detailed Analysis 192 Most social protection programs in Ghana have limited reach Figure 6.29. Beneficiaries benefitting from various social programs a. LEAP beneficiary households b. LIPW beneficiaries 400 70.0 62.3 344 335 330 59.3 324 350 60.0 53.5 300 50.0 Number (thousands) Number (thousands) 43.0 250 197 195 40.0 32.9 32.7 200 30.0 140 30.0 150 23.6 20.0 77 100 73 74 69 7.9 39 50 10.0 17 2.6 2 0 0.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 c. Students benefiting from GSFP (program disrupted in 2020 due to d. NHIS beneficiaries the COVID-19 pandemic 4 14 3.6 12.3 3.4 11.8 3.5 12 11.3 11 10.6 10.8 10.7 10.8 2.9 3 9.6 2.6 10 8.9 Number (millions) Number (millions) 2.5 8 7.4 2 1.6 6 1.5 4 1 0.5 2 0 0 2017 2018 2019 2020 2021 2022 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 e. SSNIT pensioners 250 227.4 215.9 200 200 189.5 174.2 Number (thousands) 156.3 142.1 150 128.5 119.3 107.3 112.5 98.7 100 50 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Dadzie et al. 2023;105 Government of Ghana (GoG) Budget Statements. 105 Raju, D., Younger, S. and Dadzie, C., 2023. Social protection program spending and household welfare in Ghana. World Bank Publications 6/ Enhancing Human Development Spending Efficiency for Service Delivery 193 6.3.3/ Social protection spending draws on a variety of domestic and external funding sources but remains low by international standards. 106 LEAP benefits are jointly financed by the government and international donors.107 The LEAP program receives partial funding from external sources, constituting 50 percent of its financing in 2023. In 2017, spending on LEAP benefits amounted to GHS 93 million (US$20.5 million equivalent), equivalent to 0.035 percent of GDP and 0.19 percent of overall spending from both the government and donors. In 2022, benefit spending had risen to GHS 162 million (US$35.7 million). While expenditures for 2023 were not available at the time of this writing, the budget allocation for LEAP in 2023 increased to GHS 395 million (US$35.4 million or 0.046 percent of GDP). In 2024, the national budget allocated GHS 720 million (US$51.1 million or 0.068 percent of GDP) to the LEAP program. In terms of GDP, the 2024 allocation is nearly double the 2017 level, demonstrating increased commitment to the social program by the GoG. The LIPW program is fully financed by the World Bank and implemented by the MLGDRD. Spending levels were very low in 2011, when the program was launched, and close to or at zero in 2018 and 2019, when donor financing was unavailable (Figure 6.30, Panel b). Benefit spending is divided between the labor and non-labor components of the projects that employ temporary workers. In years with meaningful spending, the share of labor payments ranged from a low of 41.6 percent of total benefit spending (in 2017) to a high of 70.1 percent (in 2021). In 2017, spending on the LIPW program was equivalent to around US$9 million, while in 2023, the budgeted amount was US$24 million equivalent. In 2021, total benefit spending under the program amounted to GHS 50 million (US$8.1 million), which was equivalent to 0.011 percent of GDP and 0.029 percent of overall government spending. Unlike the LEAP and LIPW programs, the GSFP has not received donor financing in recent years, relying on government funding from domestic sources.108 In 2019, spending on GSFP benefits amounted to GHS 445 million (US$79.3 million), equivalent to 0.12 percent of GDP and 0.6 percent of overall government spending. The World Bank will contribute to the program in 2024–25. The NHIS is primarily funded through the NHIL—that is, an earmark of 2.5 percent on top of the VAT—and by the SSNIT, which pays NHIS premia and 106 This section considers benefit spending relative to GDP and to overall government spending across years up until 2021, the latest year for which actual GDP and overall government spending statistics are available. Data for all programs is from the relevant implementing agencies. For all programs, except SSNIT pensions, yearly fluctuations in benefit spending are explained to a large degree by delays in the flow of funds to program-implementing agencies. For the LIPW program, they also stem from the availability of donor financing. Across programs, periods of rising spending on benefits are largely explained by growth in the number of beneficiaries; and in the case of SSNIT pensions, also by nominal increases in the value of pension payments. 107 Donor funds are also channeled through the government. 108 Under an ongoing Additional Financing to the Ghana Productive Safety Net Project 2 (GPSNP 2, P175588), the GSFP received support from the World Bank in 2023. Ghana Public Finance Review | Volume 2 / Detailed Analysis 194 fees on behalf of its contributors and pensioners. The premia and fees paid by other NHIS members are a further, but small, source of funding, given their low level as well as numerous exemptions. SSNIT benefits are funded by contributions from members (that is, salaried employees) and their employers. In 2017, total spending on SSNIT pension benefits amounted to GHS 2,189 million—84.6 percent of which went toward monthly pension benefits and 12.4 percent toward lump-sum payments— equivalent to 0.83 percent of GDP; as of 2020 it had risen to GHS 3,303 million, equivalent to 0.84 percent of GDP. Given the SSNIT’s funding model, the government’s direct financing is limited to the contributions that it pays on behalf of its own employees. Overall, social assistance spending in Ghana is very low relative to the levels observed in international comparators. Between 2016 and 2019, the combined benefit spending under LEAP, LIPW, and GSFP was equivalent to 0.15–0.2 percent of GDP and to 0.8–1.0 percent of overall government spending, with the GSFP accounting for at least two-thirds of the total (Figure 6.30). Even after the 2023 reforms to the LEAP and GSFP benefit levels, social assistance spending, at 0.23 percent of 2024 GDP, remains below the corresponding averages in SSA and LMIC countries (for which estimates of social assistance spending based on household survey data are available). In these two groups of countries, the average level of social assistance spending stands at 1.55 percent of GDP.109 Credits: Bigshow Lamar Campton on Pexels 109 These international averages are likely to be significantly underestimated, as total spending is solely estimated based on relevant data from household surveys (that is, without any corrections for discrepancies in coverage or benefit level in relation to administrative data or for programs that may not have been accounted for). Household surveys tend to capture relevant information on programs that offer regular cash transfers over extended periods of time; they often do not capture information on programs that offer monetary benefits over a short period or on programs that offer in-kind benefits such as food transfers. 6/ Enhancing Human Development Spending Efficiency for Service Delivery 195 Benefit spending makes up a small share of both GDP and overall government spending Figure 6.30. Expenditure as a percent of GDP and overall government spending, by social program a. LEAP b. LIPW 0.2 0.3 0.21 0.126 0.20 0.19 0.2 0.15 0.089 Percent 0.085 0.083 Percent 0.13 0.079 0.1 0.12 0.067 0.1 0.029 0.029 0.044 0.027 0.041 0.035 0.035 0.035 0.034 0.020 0.017 0.016 0.016 0.015 0.013 0.014 0.011 0.003 0 0.0 2016 2017 2018 2019 2020 2021 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 % of GDP % of overall govt. spending % of GDP % of overall govt. spending c. GSFP d. NHIS 1.0 5 4.4 4.2 0.8 3.7 0.7 4 3.5 0.8 3.4 3.0 2.9 2.8 2.8 0.6 2.6 3 0.5 0.6 Percent Percent 2.2 0.4 2 0.83 0.84 0.83 0.17 0.80 0.81 0.16 0.67 0.12 0.59 0.56 0.48 0.10 0.44 0.44 0.2 1 0.0 0 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 % of GDP % of overall govt. spending % of GDP % of overall govt. spending e. SSNIT f. LEAP + LIPW + GSFP 2 6 5.3 4.9 4.8 3.9 4 3.3 1.0 1.0 2.9 Percent 2.9 Percent 2.6 1 0.8 0.8 2.0 1.6 2 0.67 0.66 0.63 0.61 0.56 0.49 0.48 0.50 0.22 0.33 0.20 0.27 0.17 0.15 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 0 2016 2017 2018 2019 % of GDP % of overall govt. spending % of GDP % of overall govt. spending Source: Dadzie et al. 2023;110 110 Raju, D., Younger, S. and Dadzie, C., 2023. Social protection program spending and household welfare in Ghana. World Bank Publications. Ghana Public Finance Review | Volume 2 / Detailed Analysis 196 6.3.4/ Analysis of public expenditure on social protection 6.3.4.1/ SSNIT pensions offer the most generous benefits among all social protection programs This section explores the adequacy of SSNIT pensions, NHIS, LEAP cash grant, GSFP school meals, and LIPW wage payments as a function of (a) consumption levels and (b) the poverty line. The first measure is expressed as the total benefits from a given program as a percentage of total household consumption, averaged across beneficiary households (henceforth, average percentage of consumption). The second measure is expressed as the total benefits from a given program as a percentage of the household-level poverty line, averaged across beneficiary households (henceforth, average percentage of the poverty line). Separate percentages are calculated based on the overall and extreme poverty lines.111 Moreover, this section discusses potential measures to expand the coverage and enhance the targeting of LEAP and their effect on adequacy. Adequacy relative to 2017 household consumption is highest for SSNIT pensions (60.3 percent) and lowest for the NHIS (3.6 percent). After falling to 6.7 percent of household consumption in 2022 from 12.7 percent in 2016/17, the GoG doubled the LEAP benefit in 2023, raising it to 9.4 percent of household consumption. The 2024 budget announcement promises to bring the LEAP benefit to 20 percent of consumption of the extreme poor in the medium term. The 2024 budget allocation for LEAP implies the 2024 benefit level will rise to approximately 12 percent of household consumption. For the GSFP, the 2017 average stood at 5.2 percent and has since been eroded due to high inflation. For the LIPW program, benchmarking the average total payment per participant in 2017 from administrative data against average total annual consumption of poor, rural households in 2016/17 shows that the average total payment in 2017 was equivalent to 8 percent of household consumption. SSNIT pensions also exhibit the highest adequacy levels relative to both overall and extreme poverty lines, at 226 percent and 404 percent, respectively. On the other hand, the adequacy levels of LEAP, GSFP, and NHIS range between 4 percent and 19 percent, depending on the program and the poverty line considered (overall or extreme). LIPW payments are equivalent to 51 percent of the annual extreme poverty line per adult equivalent and to 28 percent of the annual overall poverty line per adult equivalent. 111 The household poverty line for each household is obtained by multiplying the stipulated individual poverty line by the number of adult equivalents in the household. 6/ Enhancing Human Development Spending Efficiency for Service Delivery 197 To make a significant impact on poverty, the LEAP program needs to continue expanding in coverage and value of its benefits. Figure 6.31 shows simulations of reforms to the LEAP program to assess potential gains from changes in reach and benefit levels. The results show that more-generous LEAP benefits, holding the number of beneficiaries equal to their current level (350,000), have the potential to lift 200,000 people out of extreme poverty. Combining the benefit increase (to the medium-term target of 20 percent of household consumption) and coverage increase (to 450,000 households) LEAP is estimated to lift 300,000 people out of extreme poverty. Increased LEAP benefits can lift individuals out of extreme poverty Figure 6.31. Estimated effects on poverty, of increases in value of LEAP benefits a. Changes in percentage of poverty b. Changes in numbers of poor Source: World Bank estimates based on data from the GLSS 2016/17. Note: Figure shows simulated changes in the extreme and absolute poverty rates and numbers at different levels of the LEAP benefit. The dotted red vertical line shows the point at which the benefit is at 20 percent of household consumption and the dotted red horizontal lines show the corresponding changes in percentage point (left) and total numbers (right). Although some social assistance programs target the poor well, the overall distribution of benefits skews toward the non-poor. This section assesses the equity of social assistance programs in Ghana. Specifically, it examines the distributions of program beneficiaries and program benefits by poverty status. LEAP and GSFP are the programs most effective at reaching the poor. The extremely or moderately poor make up 74 percent of LEAP beneficiaries, compared with 23.4 percent of the total population (Figure 6.32, Panel a). Almost 18 percent of LEAP beneficiaries are nearly poor and another 8.1 percent are far from the poverty line. GSFP beneficiaries are also disproportionately concentrated among the poor, with 46.1 percent of them classified as either extremely or moderately poor. On the other hand, 91.1 percent of SSNIT pension beneficiaries are far from the poverty line, while Ghana Public Finance Review | Volume 2 / Detailed Analysis 198 another 5.5 percent are nearly poor. Among NHIS beneficiaries, 17.0 percent are nearly poor and 63.0 percent are far from the poverty line. Moreover, although the share of extremely or moderately poor among NHIS beneficiaries classified as ‘indigent’ stands at 45.7 percent (versus 23.4 percent among the general population), 42.2 percent of indigent beneficiaries are far from the poverty line (Figure 6.32, Panel b). While LEAP and GSFP predominantly cover the poor, other programs do not Figure 6.32. Distribution of program beneficiaries, by poverty status a. By program b. NHIS, by membership category 100 100 17.9 8.1 80 42.2 32.2 56.6 80 59.5 61.4 62.4 68.0 59.5 60 63.0 Percent 89.3 95.5 17.5 12.1 60 21.6 36.7 91.1 Percent 40 19.1 17.1 7.8 13.0 16.8 19.4 6.110.2 15.7 40 20 9.5 14.8 8.2 15.2 26.1 28.2 17.1 7.3 11.9 17.0 5.8 20 0 37.3 8.2 15.2 7.8 12.3 20.1 id id nt s s C id p. ar ar FM pa pa pa ge Po 5.5 ye ye di 18 70 In 0 IT er lf N e< oy Se e SS Ag Ag Pop. LEAP GSFP NHIS SSNIT pl Em pensions Extreme poor Moderate poor Near poor Other nonpoor Extreme poor Moderate poor Near poor Other nonpoor Source: Dadzie et al. 2023.112 Note: Panel (a) shows the distribution of beneficiaries by poverty status (extremely poor, moderately poor, nearly poor, and ‘other nonpoor’, that is, far from the poverty line) and by program. Panel (b) shows the distribution of NHIS beneficiaries by poverty status across various beneficiary groups. Bars with values lower than 5 percent are not labeled. FMC = Free Maternal Health Care. The distributions of program benefits and beneficiaries by poverty status reveal largely consistent patterns. Notably, across programs and NHIS membership categories, the share of benefits that go to the ‘other non-poor’ (that is, to beneficiaries who are far from the poverty line) exceeds the share of benefits allocated to the poor or near-poor (Figure 6.33)—indicating that average program benefits are collectively lower for the latter groups. 112 Raju, D., Younger, S. and Dadzie, C., 2023. Social protection program spending and household welfare in Ghana. World Bank Publications. 6/ Enhancing Human Development Spending Efficiency for Service Delivery 199 A significant share of benefits goes to beneficiaries who are not poor Figure 6.33. Distribution of program benefits, by poverty status a. By program b. NHIS, by membership category 100 100 18.2 80 80 39.0 54.7 63.6 18.6 70.1 60 73.8 78.4 84.6 Percent 72.7 94.4 60 84.6 97.9 Percent 21.2 95.7 40 8.4 31.5 40 17.1 17.4 20 16.6 11.6 11.4 23.2 9.0 12.1 19.9 8.6 10.2 6.5 20 13.4 0 5.1 6.8 31.7 9.0 9.0 16.6 nt s s e C id id id ar ar pa FM pa pa pa ge 5.1 4.9 2.8 ye ye 0 1.3 n. di 1.3 8 70 co In er IT 1 e< lf N HH con. LEAP GSFP NHIS SSNIT oy H e Se SS H Ag Ag pl pae pensions Em Extreme poor Moderate poor Near poor Other nonpoor Extreme poor Moderate poor Near poor Other nonpoor Source: Dadzie et al. 2023.113 Note: Panel (a) shows the distribution of program benefits by poverty status and by program. Panel (b) shows the distribution of NHIS benefits by poverty status across various beneficiary groups. Bars with values lower than 5 percent are not labeled. HH con. pae = Household consumption per adult equivalent. 6.3.4.2 Ghana’s social assistance programs have varied impacts on poverty and inequality, with LEAP and SSNIT pensions at opposite ends This section considers the effectiveness of Ghana’s social assistance programs, that is, the extent to which they reduce poverty and inequality.114 Effectiveness is measured by comparing the actual changes induced by each program with those prompted by (a) a perfectly targeted transfer with the same financial outlay (‘impact effectiveness’) or (b) a perfectly targeted transfer that makes the same impact but entails a smaller outlay (‘spending effectiveness’). Overall, LEAP is the most effective program at reducing poverty and inequality (Table 6.4). LEAP is 69 percent as effective at reducing the Gini index as a perfectly targeted program would be. It is 65 percent as effective as a perfect program at reducing the poverty gap115 but only between 33 percent and 35 percent as effective at reducing poverty severity116 (with both measures based on the overall poverty line). An assessment of the program revealed that the overall household consumption, with food consumption being the most significant component, witnessed a two-thirds increase among LEAP 113 Raju, D., Younger, S. and Dadzie, C., 2023. Social protection program spending and household welfare in Ghana. World Bank Publications. 114 Based on the Gini index. The LIPW program is not discussed, as GLSS 7 did not collect sufficient information on LIPW beneficiary households to enable many of the estimations conducted for other programs. 115 Poverty gap is a measure of how far the poor are from the poverty line. 116 Severity of poverty is the square of the poverty gap. It accounts for the relative distribution of poverty among the poor, assigning greater weight to the poorest among them. Ghana Public Finance Review | Volume 2 / Detailed Analysis 200 beneficiaries from 2010 to 2016.117 In 2017, support to beneficiary households by the LEAP program was the equivalent of 13 percent of (pre-transfer) household consumption expenditure. The effectiveness of the GSFP is less pronounced: this program is 57 percent as effective as a perfect program at reducing inequality, 48 percent as effective at reducing the poverty gap, and between 24 percent and 28 percent as effective at reducing poverty severity (both based on the overall poverty line). The NHIS is only 28 percent as effective as a perfectly targeted transfer at reducing inequality, 22 percent as effective at reducing the poverty gap, and between 11 percent and 16 percent as effective at reducing poverty severity (both based on the overall poverty line). Finally, SSNIT pensions have a negative effect on inequality reduction (that is, they increase inequality) and are entirely ineffective at reducing poverty. Table 6.4. Effectiveness at reducing poverty and inequality varies significantly across programs Inequality (Gini index) Poverty gap Poverty severity Impact Spending Impact Spending Impact Spending (percent) (1) (2) (3) (4) (5) (6) a. By program LEAP 69.2 69.3 65.1 65.1 35.1 33.4 LEAP, in LEAP areas 38.0 36.7 64.3 65.1 39.6 36.6 GSFP 57.4 57.1 47.8 47.8 27.7 24.2 GSFP, in GSFP areas 49.5 48.6 48.0 47.8 29.4 24.9 NHIS 28.7 27.5 22.1 21.9 16.0 10.5 SSNIT pensions -24.5 0.0 1.0 1.0 0.4 0.2 b. NHIS, by membership category Indigent 47.9 48.1 45.5 46.1 27.0 26.4 FMC 29.7 30.0 21.0 20.2 9.1 8.4