A case of fiscal complacency:(3) Vanishing arrears-offsets, depletion and amortization

Business News of Thursday, 12 September 2019

Source: thebftonline.com


Seth Terkper, Former Finance Minister


Part III begins with a discussion of the adequacy of the provision for arrears that keeps dwindling from end-2016 and eventually gets to zero (0) in the Medium-Term Expenditure Framework (MTEF) in 2021 and 2021—after an uptick in 2020, an election year. The article argues that a zero (0) amount of arrears or commitments is not technically feasible as it assumes that there will be no work-in-progress on capital projects, in particular.

It also discusses the classification of the increase of Ghc5,199.4 million in energy sector arrears as “amortization” in the Mid-Year Review, Supplementary Budget and Appropriation. The Government Finance Statistics (GFS) of the International Monetary Fund (IMF) defines amortization as repayment of the principal element of a debt—which comes after contingent liabilities crystalize as arrears or commitment and leads to borrowing and debt accumulation.

Revised 2019 Budget and Revised Budget

The unconventional treatment of outstanding commitments keeps the provision for arrears (Ghc730 million) and fiscal balances unaffected by the energy sector arrears that has been building up since 2017. Besides arrears, instead of showing exceptional expenditures in the main paragraphs (Table 7 to 10), the Mid-Year Review relegates them to Appendices 7 to 12.

Table 1 uses Appendices 11 and 12 to summarize the adjustments in the 2019 Mid-Year Review as well as Supplementary Budget and revised Appropriation.

Table 1: Summary of Adjustments in Supplementary Budgetary

the Review mentions significant energy sector arrears (over Ghc5.1 billion)—and other official acknowledgements of outstanding commitments (e.g., contractors and pension) but keeps the provision for arrears at Ghc730 million.

Nonetheless, the Supplementary and Appropriation (Appendix 11, pp 67-68) reflect the related inflows and outflows of Ghc162.9 million from the increase in ESLA levies.

The question is whether to amortize energy arrears in the Review and Appropriation. Further, the President acknowledged significant pension arrears on May Day but Table “offsets” the Ghc300 million provision for social contribution with an equivalent amount in wages.

Inadequate yet dwindling provision for “arrears”

The Review (pp35-36, par. 159-169) refers to ongoing financial sector restructuring but Table 2 reduces the 2019 Budget provision of Ghc3.0 billion to zero (0) and widens the fiscal gap created by the low provision (Ghc730 million) for arrears (Table 1) in the 2019 Budget.

Table 2: No provision for banking sector Bailout Costs

Table 3 summarizes the provisions for arrears in the MTEF (2020-22) and shows that fiscal gap could widen instead of the false impression of projected fiscal consolidation.

Table 3: MTEF (2020 to 2022), including arrears

The widening gap is the result of dwindling provision for arrears, with the total amount for three (3) years of about Ghc3.8 billion—Ghc2.3 billion (2017); Ghc858 million (2018); and Ghc730 million (2019)—being less than the “inherited” end-2016 arrears of Ghc7 billion arrears. Table 4 continues with the Memorandum items in the 2019 Budget, which have included the exceptional items in the fiscal tables since 2018.

Table 4: Memorandum items showing exceptional expenditures

The provision increases to Ghc1.550 million (2020), obviously to cater for extraordinary 2020 election expenditures.

However, the arrears decline to zero (0), which is not technically feasible because it is not feasible to zero (0) claims on work-in-progress (WIP) on capital projects.

The provision for bank bailout costs seems low because some contingent liabilities could crystalize e.g., GAT sovereign guarantees, reimbursing depositors, payment of employee benefits, underwriting the cost of restructuring the insurance sector.

The Review is unusually silent on the cost Free Senior High School (FSHS) even as the 2019 marks the admission of all three (3) batches of students under the free banner.

The second serious point besides the dwindling arrears is treating the outstanding (top-up) energy sector arrears of Ghc5.2 billion in the Supplementary Budget and Appropriation as “amortization”—and leaving the provision for arrears unchanged at Ghc858 million.

Description of energy sector debt in 2019 Mid-Year Review

The Glossary of the Government Finance Statistics (GFS) of the International Monetary Fund (IMF) defines amortization as “reimbursement of the principal of a debt … distinguished from interest, which is a charge for the use of borrowed money”. It explains further that “amortization and interest are recorded in the Balance of Payments at the time they are due”. Table 5 shows the treatment as amortization in the Mid-Year Review.

Table 5: Arrears as Amortization in 2019 Appropriation

Amortization of arrears in the 2019 Mid-Year Review

The following observations are based on Review quotes supporting Table 5—

Interest, expenses, and borrowing: “Upward adjustments to interest payment…as well as higher net domestic borrowing to meet some emergency security and energy expenses in the first half of the year” (p. 29 par 136). These appear to suggest

– accrued pre-July (Q1&Q2) expenditure that MOF should have increased arrears; or

– borrowing to pay arrears—approved by Parliament retroactively since MOF did not adjust the provision for arrears of Ghc730 million; and

– neutralizing arrears or exceptional expenditure—which will be consistent with, and entrenching, the practice of “offsetting” or omitting fiscal items since 2017.

– Crystalized contingent liability as amortization: “Mr. Speaker, the crystallization of energy contingent liability in respect of take-or-pay contract obligations with Independent Power Producers (IPPs) estimated at Ghc5.1 billion for 2019 is being amortized, thus increasing the requirement for external amortization above the amount originally provisioned for in the 2019 Budget” (p.29, par 139):

– it is common to borrow to clear (huge) arrears, crystalized contingent liabilities must increase arrears or exceptional expenditures and financing—prior to the loan and repayment or amortization phase, often not immediate.

– Increase in Energy Sector Levy Act (ESLA) levies: “Government proposes to increase Energy Sector Levies by GHp20/litre for petrol and diesel, and GHp8/kg for LPG. This will increase inflows and enable Government issue additional bonds to pay down our energy sector debt obligations” (p. 33 par. 153)—Table 1 and 2 items.

Revision of arrears in Supplementary Budget and Appropriation

Tables 6A and 6B treat the energy sector arrears as expenditure, payable from the increase in ESLA levy or ESLA Bond, after accrual in Q1, Q2 or prior years).

Table 6(a): 2019 Mid-Year Review (Supplementary Budget & Appropriation)

Table 6(a) increases provision for arrears and overall fiscal balance significantly to Ghc6.1 billion and Ghc21.8 billion, respectively—

– assuming Central Government takes over the SOE crystallized contingent liabilities; and

– in principle, expenditure increases if paid from revenues (levies) or prior borrowing—and the levies used to amortize and pay interest.

Alternatively, the crystalized energy liabilities will increase “exceptional expenses” but not a Appendix Memoranda item (the current treatment of financial sector bailout costs)—given its one-time nature and huge amount involved (Ghc5 million).

Exceptional expenditure reverts to zero (0)

A Memoranda items in the 2019 Mid-Year Review, compared to the 2019 Budget, shows that the former slashes the financial sector bailout costs to zero (0).

Table 6(b): 2019 Mid-Year Review (Supplementary Budget & Appropriation)

Table 6(c) or MTEF Table 4 shows that the 2019 Budget had a provision for financial sector costs of Gh3.1 billion.

Table 6(c): Memorandum items showing exceptional expenditures

Revised Fiscal Balance and Appropriation

Table 7(a) restores the provision for exceptional financial costs from zero (0) to Ghc3.1 billion—but leaves the energy sector arrears unchanged in Table 6(a).

Table 7(a): Revised 2019 Mid-Year Review (Supplementary Budget & Appropriation)

The following are some of the outcomes from not treating arrears as amortization to improve fiscal performance—not through the practice of offsets:

– the fiscal balance including arrears but not bank bailout costs increases to 6.3 percent while the all-inclusive (arrears and exceptional costs) rises to 7.2 percent; and

– financing rises by the same margin after adding the arrears and exceptional costs.

Finally, Table 7(b) uses the revisions made to bailout costs, arrears, and exceptional items to show a revised Supplementary Budget and Appropriation to inform a Revised 2019 Budget. They do not address the adequacy of the provisions made.

Table 7(b): Revised 2019 Mid-Year Review (Supplementary Budget & Appropriation)

Fiscal accounting—possibility of off-budget processing

The Public Financial Management (PFM) reforms build on modules in the Ghana Integrated Financial Management Information System (GIFMIS). The key elements in achieving sound macro-fiscal outcomes are electronic data entry, processing, and reporting in budget and financial accounting modules and Classification systems and Chart of Accounts.

An effective GIFMIS process means that all MDAs and MMDAs must process their data to conform with the rules that underlie the Public Accounts and Fiscal Tables. The distortions in these articles suggest that MPF is yet to develop the Accounts Payable module sufficiently to capture arrears and exceptional items and reduce discrepancies to the minimum. Hence, it is important to investigate the likely existence of the parallel off-Budget systems and processes.


The amortization approach appears to perpetuate the explicit and subtle “offsets” of arrears in another form. It should be noted that the overall balances (commitment and cash) and financing remain constant despite increases in revenue, expenditure and arrears that informs the Supplementary Budget and Appropriation, inappropriately in several instances.

The methods in the Mid-Year Review (Appendices 11 & 12) do not follow conventional fiscal accounting rules. They are inconsistent with the commitment or semi-accrual accounting rules under the International Public Sector Accounting Standards (IPSAS) that Ghana adopted in 2015, under the auspices of the Institute of Chartered Accountants, Ghana (ICAG). ICAG is the legal authority on national accounting standards in Ghana and its enhanced rules will encourage best practice for the Ghana Integrated Financial Management Information System (GIFMIS).

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