World Bank warns against premature return to international capital markets

By Ebenezer Chike Adjei NJOKU

Returning to international capital markets prematurely could send the wrong signal to investors, resulting in unsustainable borrowing costs and derailing recent fiscal gains, the World Bank has warned.

Speaking at the Bank’s launch of the Ghana Public Finance Review, Robert R. Taliercio, World Bank Country Director for Ghana, Liberia, and Sierra Leone, warned against complacency as he urged authorities to sustain fiscal consolidation efforts.

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“A premature return to international capital markets could send the wrong signal to markets and bring a reversal to unsustainable borrowing costs… The risk now is falling into complacency with these achievements and returning to a business-as-usual mindset – a recurring error in the past,” Mr. Taliercio explained.

His comments come against the backdrop of recent unsustainable debt levels which resulted in the nation’s credit ratings plummeting, making it impossible to borrow from the international market.

This proved to be a new episode in the nation’s story of persistent fiscal instability, as evidenced by its frequent visits to the International Monetary Fund (IMF) – 17 times since independence, which translates into 40 of its 68 years under active IMF programmes.

Government has consequently pivoted to short-term instruments, particularly Treasury bills to finance its business – raising rates and squeezing out the private sector.

While these measures have eased short-term pressures, the World Bank cautions that any missteps could undermine fiscal stability. To break this pattern, it stressed the need for fiscal discipline, structural reforms and completion of the current adjustment programme, which aims to reduce the debt-to-GDP ratio to acceptable levels in the medium-term.

“Not fully completing the adjustment programme – reducing debt to GDP to 55 percent by 2028 – could jeopardise the credibility of policy reforms and the fundamentals for long-term growth,” Mr. Taliercio noted.

Review

The report, titled ‘Building the Foundations for a Resilient and Equitable Fiscal Policy’, aims to inform Ghana’s fiscal consolidation efforts as the country strives to rebound from the 2022 macroeconomic crisis, the World Bank said.

It highlighted lack of fiscal discipline as a key driver of its economic crisis in 2022, citing weak budgetary institutions, rising fiscal liabilities and declining revenue collection.

While the country has made progress toward stabilisation, the report warned that more needs to be done to create sustainable fiscal space.

The findings indicate that weak expenditure controls and an overreliance on external commercial debt led to unsustainable debt accumulation, exacerbated by a decline in tax revenue.

Collected revenues as a share of GDP fell from 15.7 percent in 2017 to 13 percent in 2021, with income tax and VAT revenue dropping despite contrasting trends in peer countries.

The costly financial sector clean-up and persistent losses in the energy sector further strained public finances.

The report identifies tax administration inefficiencies and widespread exemptions as critical revenue gaps. Tax exemptions, particularly on value-added tax (VAT), personal income tax and import duties, accounted for an estimated 3.9 percent of GDP in lost revenue. The VAT exemption on land and dwellings alone represented 33 percent of this shortfall.

Public financial management weaknesses also undermine fiscal policy effectiveness, with budget credibility persistently low. In 2022, arrears accumulation reached 5.8 percent of GDP due to inadequate commitment controls and cash management.

“A lack of budget discipline since 2010 has resulted in booming public spending marked by volatility, high interest payments and mounting rigidities,” the report pointed out.

“From 2010 to 2023, 79 percent of total expenditure (15.8 percent of GDP on average, nearly 100 percent of revenue) was dedicated to three spending items: public sector wages, interest payments and earmarked transfers to statutory funds,” it continued.

While  fiscal reforms – including the PFM Act and PFM Strategy 2022-2026 – have had some impact, the report calls for stronger domestic revenue mobilisation and stricter expenditure controls to prevent a recurrence of fiscal distress.

It highlighted inconsistent budget preparation schedules, insufficient discipline in procurement and fragmentation of key systems including the Ghana Electronic Procurement System and Ghana Integrated Financial Management Information System (GIFMIS).

The review also identifies liabilities from state-owned enterprises (SOEs), especially in the energy and cocoa sectors, as a major fiscal risk. Government has been urged to take decisive steps to manage these liabilities, which continue to exert pressure on public finances.

The World Bank’s report presents a set of high-level priorities aimed at ensuring fiscal sustainability and economic resilience. These include strengthening fiscal discipline through expenditure controls, debt rules and public financial management reforms.

Additionally, it proposed enhancing domestic revenue mobilisation by broadening the tax base, improving compliance and addressing tax expenditures.

The World Bank further proposed managing fiscal risks by ensuring that financing costs are aligned with investment returns as well as prioritising pro-growth and pro-poor investments in human capital, agriculture, economic transformation and climate resilience.

“Ghana needs to stay the course on ongoing reforms and deepen some of them to maintain debt sustainability and support long-term growth,” it stressed.

Commitments

In response, Finance Minister Dr. Casiel Ato Forson reiterated government’s commitment to implementing revenue reforms aimed at creating an equitable and efficient tax system.

“Our fiscal policy will be anchored on a 24-hour economy strategy aimed at enhancing productivity, maximising production, creating sustainable jobs and transforming Ghana into an import-substitution and export-led economy,” he stated.

As part of efforts to strengthen fiscal discipline, government will focus on “enhancing revenue mobilisation, reducing government expenditure and waste, lowering public debt to sustainable levels, shifting from consumption-related expenditure to capital investments and progressively reducing the fiscal deficit in line with the Fiscal Responsibility Act”.

Dr. Forson highlighted the need for tax reforms – including measures to broaden the tax base, review the extractive sector regime and reform the tax exemption system to promote transparency and economic growth.

He also noted that tax administration would be enhanced by restructuring the Ghana Revenue Authority, operationalising the Independent Tax Appeals Board and enacting a Natural Resources Revenue Management Act.

On expenditure rationalisation, he underscored the importance of prioritising investments in productive sectors, digitalising and harmonising fiscal management systems, and enforcing compliance with the Public Procurement Law.

He affirmed government’s commitment to fiscal decentralisation with the goal of  ensuring that its spending is “efficient, transparent and aligned with our development goals”.

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