Finance Minister warns banks to demand contract budgets from MDAs

The Finance Minister, Mr Seth Terkper, has charged banks to conduct due diligence on loan applications by contractors and suppliers who seek to raise funds to pre-finance government contracts.

He said that would inform the banks about whether the awarding government agencies have the budget to pay for the contract when the certificate is presented for payment.

Mr Terkper said this at the third in the series of this year’s quarterly Graphic Business/Stanbic Bank Breakfast Meeting, themed, “Election Year Budget: Implications for Macro-economic Stability,” in Accra.

“Often times, some of these agencies which do not have the funds or might have exhausted their budget to execute a project, will still go ahead to award a contract awaiting the next disbursement, thus exerting pressure on government finances”, he said, disputing the claims that the government embarks on unplanned expenditure in election years, which results in a cycle of budget overruns.’’

In 2012, when the country last went to the polls, the budget deficit doubled to one of the highest rates in Africa as the ruling National Democratic Congress ramped up spending on civil service wages. Politicians and economists, however, say there is no evidence of a repeat of that spree this time around.

That could allay widespread market fears of the country crashing out of its three-year International Monetary Fund programme, despite President Mahama and Seth Terkper having repeatedly stated their commitment to the deal.

IMF terms

The IMF said in its last review that the government had been sticking to the terms of the deal worth up to US$918 million aimed at restoring economic balance and curbing the deficit.

Ghana has consistently, in every election year, overspent its budget, leaving the country in difficult economic times the subsequent year.

The country’s debt usually increases during election years due to the commissioning of many infrastructure projects as well as other unbudgeted expenditure during the period.

There have been calls from the International Monetary Fund (IMF), as well as some economists and civil society organisations for the government to stay within its budget during this period.

But Mr Terkper said that a lot of those contracts awarded by some government agencies either had no funding or have had their budgets exhausted, so some contractors are compelled to pre-finance, thereby placing an additional burden on the central government.

Proper due diligence on the part of the commercial banks who supply the funds to the contractors as loan will reveal whether that awarding agency had the budget for the project, he said.

“We’ll advise that the banks and other financial institutions conduct thorough due diligence on contractors and suppliers when they apply for loans to pre-finance a government contract for an agency,” adding that most often those agencies don’t have the funds.

Since President John Dramani Mahama’s narrow victory in 2012, Ghana has lost its reputation as one of Africa’s hottest investment destinations, as global commodities slump reduced revenue from exports of gold, oil and cocoa.

Inflation, the deficit and public debt rose. The country also faced years of power rationing, which has now largely ended.

But Mr Terkper says the government is committed to following the US$918-million bailout even in an election year when the government often spends more cash.

Not government’s fault

The Minister said the budget overruns have not always been caused by government spending.

He noted that every deficit experienced by the country, particularly in election years, had been attributed to high government spending, without giving the government the benefit of the doubt.

Mr Terkper explained that although the pattern over the years had shown an increase in budget deficits during election years, other factors, such as external shocks (for instance, the fall in commodity prices), had accounted for some of the overruns.

He assured that  the crisis was over, pointing to 4.9 per cent GDP growth in the first quarter of 2016, up from 4.5 per cent in the same period last year. At the same time, the deficit has halved since 2014 to around five per cent of GDP.

Even so, the downturn, which raised unemployment, provides ammunition for Nana Akufo-Addo, whose party, if elected would face the same fiscal constraints as the current government.

The New Patriotic Party (NPP) has launched its manifesto with plans to reallocate 20 per cent of current capital expenditure to pay for its policies on poverty alleviation, rather than borrow, and it vows to impose strict fiscal discipline.