IEA outlines expectations for 2025 Budget and Economic Policy

The Finance Minister is expected to present the 2025 Budget in Parliament on Tuesday, March 11. The Minister engaged traders and businessmen in Accra over the weekend and assured that government will remain mindful of their needs at all times.

Ahead of the budget presentation, the Institute of Economic Affairs (IEA) has outlined its expectation of the 2025 Budget and Economic Policy proffering some adjustment to the revenue management, expenditure management, debt management and other sectors of the economy.

The IEA has suggested a reduction in the betting from 10% to 5% and called for the abolishment of the E-Levy, Covid-Levy and Emissions tax.

Read full statement from the IEA below.

Expectations of the 2025 Budget and Economic Policy

 The Minister of Finance is expected to present the 2025 Budget and Economic Policy, the first of the new NDC Government, on March 11, 2025. The budget is being prepared against the backdrop of a severe economic crisis characterised by heightened inflation, currency instability, high cost of living, high indebtedness, subdued growth and high unemployment, among others.

The budget is also being presented amidst an IMF-supported Extended Credit Facility (ECF) programme, spanning 2023-26, which the NDC Government inherited from the previous NPP administration. The budget is expected to conform generally with the ECF.

In particular, the budget is expected to have a strong fiscal consolidation bias, which is necessary to restore macroeconomic stability and debt sustainability. At the same time, we expect the budget to indicate a path to economic recovery anchored by a strong revenue mobilisation drive and rationalised and efficient expenditure strategy.

The IEA presents its expectations of the budget in this note in the areas of: i. Revenue management; ii. Expenditure management; iii. Debt management; iii. Energy policy; iv. Cocoa sector policy; and v. Monetary and financial sector policy to inform and engender public discourse.

Revenue Mobilisation

 Ghana has a large tax revenue-to-GDP ratio deficit. Hovering around 13-14%, Ghana’s tax revenue-to-GDP ratio compares unfavourably with the average of 20-25% for the country’s middle-income peers. Ghana’s low tax effort is due to the narrow tax base, numerous loopholes, administrative inefficiencies, high spate of evasion and corrupt practices.

The NDC Government has promised to abolish a number of taxes, including the E-Levy, Covid Levy, Emissions Tax and Betting Tax. We agree with the abolition of the first three because they are either nuisance and/or obsolete taxes.

However, in our view, the Betting Tax is useful for both revenue and deterrence purposes and should be retained, although it could be reduced from 10% to 5%. Further, the Growth and Sustainability Tax, formerly the Fiscal Stability Tax, that was imposed on selected companies as far back as 2001 to raise revenue to help stabilise the economy, is obsolete and should be abolished as well.

The revenue loss expected from abolition of the taxes could be offset through other compensatory measures, including: i. Plugging the numerous tax loopholes (including trade mis-invoicing, tax exemptions, transfer pricing, under-collected property taxes, and tax evasion); ii. Broadening the tax base by using digitisation to increase formalisation of the economy; and iii. Improving efficiency of tax administration, including through the use of modern technology.

The tax system must be rid of complexity and multiplicity through simplification and reduction of rates, where necessary. High, multiple and complex taxes risk raking in less revenue, due to evasion, than a simpler and less complex system. New tax innovations should be explored especially within the vast digital space. E-commerce tax, for example, provides a huge potential and should be fully exploited.

Additionally, consideration should be given to taxing excess profits of extractives companies, telcos and banks. Super-profit or wind-fall tax, as it is called, is common and has been adopted by several countries such as: Australia, United Kingdom, India, Italy, Hungary, United States and several other EU member states. Ghana should not be scared that imposing such a tax will drive away the companies.

Many other countries are doing the same, so the companies have nowhere else to go. In any case, the super profit or windfall tax does not have to be in place forever. It can be reviewed from time to time, as necessary, especially to correct possible loss of competitiveness and economic distortions.

The hard fact is that even with Ghana’s best effort, where the country is able to raise the tax revenue/GDP ratio to, say, 20%, the small size of Ghana’s GDP (currently about GHS1 trillion, equivalent to USD 66 billion) implies that the total tax revenue would amount to about USD13 billion.

Clearly, this is still grossly inadequate to fund the country’s huge development needs. Obviously, Ghana cannot continue to rely solely on its traditional revenue sources to propel its growth and development. The country needs to find extra resources for this purpose.

Fortunately, Ghana does not have to look far to find these extra resources. The country does not have to seek the extra resources from outside, as it has traditionally done. God has generously endowed the country with a wide range of natural resources, which can be tapped to support the country’s development.

What the country needs to do differently is to negotiate for favourable natural resource fiscal regimes that deliver maximum benefits to Ghana, departing from the colonial unjust regimes. Local value-addition to natural resource products should also be part of the new paradigm for exploiting our natural resources for development, thereby positioning Ghana beyond aid and indebtedness.

Expenditure Rationalisation

Expenditure rationalisation should be part of the fiscal consolidation process. There is always room for cutting wasteful expenditure, especially on goods and services, including relating to administration, travel, medical services, utilities and entertainment.

However, beyond these, there is a limit to the extent to which expenditure can be cut without hurting essential sectors like health, education, infrastructure, etc. Already, the capital expenditure (CAPEX) budget has been cut to the bone, being only 3-4% of GDP, with growing recurrent expenditure.

This situation is inimical to the long-term growth of the economy. It is our expectation that the 2025 budget will mark the beginning of turning around budgetary allocations to capital expenditure (CAPEX). CAPEX should be progressively increased to at least 10% of GDP over the mediumterm towards accelerating growth, fostering job creation and improving living standards.

As evidenced by the Auditor General’s reports, substantial amounts of Government revenue get lost yearly through diversions, inflated costs and inefficiencies. It is, therefore, welcoming to hear President Mahama speak about establishing an Independent Value-for-Money Department (IVMD) to address these pitfalls.

The IVMD is said to be capable of saving revenue of as much as 3-4% of GDP, equivalent to the current entire CAPEX budget. Checking public corruption and inefficiencies could significantly increase the fiscal space needed to fund essential development projects and programmes.

Lower debt service costs, resulting from the restructured public debt and the suspended external debt service, have created some fiscal space. It is important that this is not wasted but leveraged to reduce the budget deficit and build reserves or buffers for future debt repayments.

The reserves can be used to replenish the Sinking Fund, which President Mahama, welcomely, has promised to make fully functional.  

 Debt Management

 Ghana successfully completed a Domestic Debt Exchange Programme (DDEP) that saw the restructuring of over 80% of the domestic debt involving coupon discounts and extension of principal maturities. Ghana also reached similar restructuring agreements with its external bilateral creditors, which included some debt relief, and its external bond holders.

The country expects to conclude restructuring agreements with its commercial debt holders as well based on the principle of equality of treatment. The debt restructuring, geared towards achieving a sustainable debt of about 58% of GDP by 2028, is a requirement under the ECF programme.

The debt restructuring has reduced the debt/GDP from over 100% in 2022 to about 72% as of November 2024 and the debt service significantly. However, because Ghana lost access to international capital markets since 2020, domestic borrowing has increased steadily.

It will require the maintenance of a strong fiscal consolidation effort to keep the public debt on the envisaged sustainable path. This in turn would require a strong revenue mobilisation effort along with expenditure rationalisation.

 Energy Sector Policy

Ghana’s energy sector represents a huge financial yoke around the country’s neck due to the huge legacy debts in the sector. The budget should specify a comprehensive plan for addressing the debt, while returning the sector to financial sustainability. As a matter of priority, the legacy debt should be ring-fenced and addressed separately, while minimising further debt accumulation in the sector. The ring-fenced debt could be progressively liquidated through allocations from the Energy Sector Legislative Act (ESLA) fund or from enhanced revenue streams from natural resources.

The Electricity Company of Ghana (ECG) seems to be the most inefficient institution in the energy value chain. The company’s distribution losses are way above industry standards due to obsolete equipment and operational inefficiencies. Inefficient billing practices and widespread power thievery also represent considerable losses. Obviously, ECG needs major reforms to restore it to financial viability. However, we do not believe that privatizing the entire company is the answer.

We have been advocating for increased Ghanaian ownership of the economy and we believe that ECG is one of the major “cash-cows” that should remain under state ownership. Some of ECG’s operations, such as billing, could be allocated to a private company to manage if they can do it more efficiently.

In any case, whatever form ECG becomes, management should be assigned closely-monitored and strict Key Performance Indicators (KPIs). The reform of ECG should go hand in hand with rationalisation of tariffs. In particular, tariff structures should ensure that they are appropriately matched with costs as well as affordability.

The power generation mix will have to be structured in a manner as to enhance efficiency, while minimising generation costs and the effects on tariffs and consumers. Exploitation of renewable sources of energy, including hydro, solar, wind, nuclear and biomass, should be given utmost attention to guarantee sustainable power supply and at affordable cost.

Power generation capacity may have to be boosted to provide the needs of a fast-growing technology fuelled economy. It is said that Artificial Intelligence (AI), for instance, consumes vast amounts of energy and we cannot compete in that space without installing adequate energy generation capacity.

In this regard, future PPAs should ensure a high degree of transparency, accountability and oversight, including by Parliament, drawing on best practices, in order to reduce costs and increase efficiency. There should also be a plan to ensure stable and lesscostly power to boost the competitiveness of the economy.

Cocoa Sector Policy

Ghana’s cocoa sector, for a long time the bedrock of the economy, supporting millions of farmers and being the leading export earner for the country, has been reduced to a pale shadow of itself. Cocoa production declined consistently from about 1,050 thousand tonnes in 2020/21 to just 580 thousand tonnes in 2023/24. Ironically, the small-size crop being produced cannot be fully purchased due to lack of funds.

The sorry state of the cocoa sector is the result of excessive bureaucracy and political interference in the operations of Cocobod, which have led to a ballooning of its operational costs and indebtedness. The budget is expected to propose a revival strategy for the cocoa sector as envisaged in the ECF programme.

As a priority, Cocobod needs to be restructured to reduce its huge costs. The restructuring should involve streamlining of its operations and staff. In particular, Cocobod must be relieved of its funding for “cocoa roads,” a function that should be taken over by the Ministry of Roads.

Staff must be right-sized to ensure that their productivity matches their remuneration.  Second, funding for cocoa purchases must be streamlined so as to ensure that cocoa produced by farmers is fully purchased and on a timely basis. Restoring the cocoa sector to viability should make it possible for Cocobod to secure funding locally through the issue of cocoa bills to banks with Bank of Ghana guarantee, as prevailed before the move to external syndicated financing.

This would help alleviate the financial plight of cocoa farmers, while reducing the incidence of smuggling. It is also important to ensure a reasonable and competitive producer price for cocoa to spur production, while stemming smuggling.

Concerted efforts would be needed to reduce “galamsey” in cocoa producing areas so as to reduce its threat to production as well as the quality of the crop. Local facilities for processing cocoa must be expanded to add value to the product before export so as to increase foreign exchange earnings for the country.

 Monetary and Financial Sector Policy

Inflation stayed in the low twenties throughout 2024. The latest figure is 23.1% for February 2025.

These rates far exceed the Bank of Ghana’s target of (8+/-2)% and are excessive by international standards. Recent inflation has been fuelled to a large extent by food prices, energy prices and the exchange rate.

Although monetary policy has remained fairly tight, with the Policy Rate being reduced only marginally from 30% to 27% over the past two years, it has failed to rein in inflation because of the strong supply and cost undercurrents.

To rein in inflation on a lasting basis, the Bank of Ghana will have to supplement its Policy Rate with measures directly targeted to food, energy and the exchange rate. This, the Bank will have to do in collaboration with Government and its relevant agencies. We expect the budget to make explicit statements to this end.

The exchange rate has witnessed marked depreciation in recent years. In 2023 the cedi deprecated by 28% against the dollar followed by a further deprecation of nearly 20% in 2024.

Stemming the chronic cedi depreciation would require a combination of measures, including; i. Export expansion, diversification and value addition; ii. Import-substitution strategy; iii. Increased Ghanaian ownership of the economy; iv. Strong foreign exchange support for the cedi; and v. Enforcement of foreign exchange market regulations. The budget is expected to indicate a phased implementation of these measures, among others.

After a brief recovery of the financial sector from the 2018-19 reforms, the sector has witnessed declining capital adequacy ratios (CARs) and rising non-performing loans (NPLs) as a result of macroeconomic instability and subdued economic growth.

In 2022, the financial sector was further affected by losses on government bonds held by the sector as a result of the Domestic Debt Exchange Programme (DDEP). Other problems associated with the financial sector include low intermediation, prohibitively-high cost of credit, and low Ghanaian ownership brought about by the 2018-19 reforms that saw exclusive closure or mergers of local banks.

The financial sector will require further reforms to restore its soundness, enhance financial intermediation and restore majority Ghanaian ownership. Another round of recapitalisations may be required to strengthen the banks. This should be done over a period during which the banks may be allowed to enjoy some regulatory forbearance in the form of relaxed prudential provisions.

The Financial Sector Support Facility (FSSF) proposed by the IMF to assist banks cope with the effects of the DDEP, should be fully funded and made operational to serve its intended purpose. The closed or merged local banks should be returned to viability through Government- and Bank of Ghana-sponsored recapitalisations and time-bound takeover by Bank of Ghana to strengthen their management and governance structures.

Steps should be taken to enhance financial intermediation, including by strengthening safety nets, such as functioning Credit Reference Bureau and Deposit Insurance Scheme, to protect both banks and customers.

The Bank of Ghana, operating in a developing country, needs to perform an active role in the development of the economy. Even central banks in developed countries actively promote growth and/or employment as their secondary objectives in addition to the primary objective of price stability.

First and foremost, the Bank of Ghana should strive to maintain a regime of low interest rates to engender investment and economic growth. The Bank must also invest in the development banks—Agricultural Development Bank, National Investment Bank, and the Development Bank of Ghana—to enable them provide cheap credit to Ghanaian enterprises, especially SMEs, to support them to grow.