By Dr. Felix Larry Essilfie
At the beginning of 2025, Ghana initiated what could turn out to be one of the most significant periods of budget tightening since its recovery from a crisis. This effort was steered by Finance Minister Dr. Cassiel Ato Forson through his three-pronged strategy focusing on streamlining expenditures, improving tax adherence, and digitizing income management systems.
Based on the guidelines set by the IMF’s Extended Credit Facility, the policy package aimed to achieve multiple objectives at once: restoring fiscal stability, enhancing public financial management systems, and rebuilding trust in the markets.
From the outset, the framework exhibited a high degree of internal coherence: by targeting revenues and grants at GH₵ 223.8 billion (17.2 percent of GDP) against overall expenditures of GH₵ 269.1 billion (20.7 percent of GDP), the design implied a domestic financing gap of GH₵ 36.9 billion that would need to be covered through a disciplined combination of revenue uplift—representing approximately 0.8 percent of GDP—and nominal expenditure cuts equivalent to roughly 1.0 percent of GDP. Such parameters align closely with the predictions of a well-specified fiscal reaction function, in which the primary balance responds positively to rising debt burdens.
Given that Ghana’s debt is projected to reach around 80% of GDP by 2025, a sustained primary surplus of at least 1.5% of GDP over the long term would be necessary for stabilizing the economy. The Forson framework was adjusted to surpass this threshold.
The macroeconomic trade-offs of this approach were both anticipated and empirically quantifiable. In the near term, subsidy rationalization and wage restraint were projected to impose a drag of between 0.3 and 0.5 percentage points on real GDP growth; yet this contractionary impulse was expected to reverse by the medium term, yielding a 0.5 percentage-point gain through diminished macroeconomic uncertainty and private-sector crowding-in.
Concurrently, fiscal tightening was modelled to reduce aggregate demand sufficiently to ease headline inflation by up to 3–4 percentage points over twelve months—assuming the central bank maintained a neutral monetary stance—and thereby facilitate a return to the Bank of Ghana’s 8 ± 2 percent target band. Under an illustrative debt sustainability analysis, the narrowing of the fiscal deficit from 6.5 percent of GDP in 2024 to approximately 3.5 percent in 2025, combined with a 2 percent real growth rate, was estimated to lower the debt-to-GDP ratio by some four percentage points, stabilizing it near 78 percent by 2026 instead of rising toward 85 percent in the absence of reforms.
Moreover, by reducing treasury-bill issuance to close the financing gap, the policy implicitly sought to moderate exchange-rate depreciation—from around 12 percent in 2024 to near 6 percent in 2025—thus alleviating imported inflation pressures and strengthening external stability.
These predictions were based on a solid theoretical framework. According to standard small-open-economy IS-LM analysis, fiscal consolidation causes the IS curve to shift inward, leading to reduced economic output and—in the case of a flexible exchange rate—to either an appreciation of the currency or a deceleration in its depreciation.
At the same time, debt dynamics relationships taking the form
Δ(D/Y)
≈ (r − g) · ((D/Y)_t) − PB
(where
r
denotes the real interest rate,
g
indicates the actual expansion of Gross Domestic Product.
PB
Indicates the main balance). This shows that even small primary surpluses—at around 1.5% of GDP—can have a significant stabilizing impact on debt trends when r surpasses g, which is presently true for Ghana. By directly connecting each reform area to these models, the strategy achieved a degree of analytical precision not often observed in previous fiscal consolidation initiatives.
However, transitioning from a broad framework to practical fiscal discipline is often complex. Ghana’s public financial management system continues to face persistent issues. Weak cash flow management—including delays in budget approvals and slow fund transfers to local administrations—has traditionally resulted in year-end shortages, which manifest as unpaid expenditures.
Exactly these arrears, estimated at GH₵ 56.9 billion, pose a threat to the fiscal discipline enforced by the consolidated budget unless the Treasury Single Account (TSA) broadens its coverage and strengthens its oversight.
Similarly concerning are extra-budgetary funds and hidden debts, particularly the assurances provided to government-run businesses, often overlooked by the public and skewing the actual funding shortfall. Lack of clear disclosure about these commitments might lead to unexpected capital injections that would erase the intended financial gains.
Ultimately, the recurring observations by the Auditor-General regarding unapproved departures from budget limits highlight auditing gaps that undermine both financial reliability and the effectiveness of remedial measures.
The three key areas for reforms come with substantial risks when put into practice. Efforts to streamline spending, particularly cuts to subsidies, have traditionally faced societal opposition; the attempt to adjust power sector subsidies in 2018 resulted in savings of just 0.2% of GDP instead of the targeted 0.6%, due to public demonstrations leading to some reversals.
In order to prevent repetition, the present structure suggests specific protective measures—especially protections for the most susceptible household groups—but the exact implementation details of these support systems continue to be less defined. Regarding revenues, digital adherence programs anticipate significant improvements; Ghana aims to generate an extra GH₵ 5 billion via better enforcement of VAT and income taxes, similar to Kenya’s achievement where their system iTax increased compliance by about 4% of GDP within three years.
Nevertheless, Kenya’s experience highlights the critical importance of thorough stakeholder training and significant system enhancements; inadequate investment in these preliminary measures might postpone the anticipated increase in revenues, thereby weakening the drive for fiscal consolidation.
An early indicator of policy reliability can be seen in the Q1 2025 figures, showing expenditures actually running 0.5 percentage points lower than what was planned in the budget.
This divergence serves as a favorable indicator for foreign lenders, according to a typical method used for extracting signals: initial estimates indicate a decrease in government bond spreads by around 50 basis points, which could reduce yearly repayment expenses by roughly GH₵ 1.2 billion.
Such confidence effects may prove self-reinforcing, as lower debt-service requirements create fiscal space for further reforms and soften the social impact of continued austerity.
Structurally, the consolidation plan requires supportive reforms to ensure lasting benefits. Implementing a stringent deficit cap—perhaps limited to around 3% of GDP—and codifying this into law alongside automatic correction mechanisms might prevent future deviations. Enhancing TSA oversight by requiring all financial inflows and outflows to pass through one centralized account could eliminate opportunities for extrabudgetary activities.
Similarly, strengthening the Budget Committee of Parliament with advanced technical capabilities would allow for continuous monitoring of mid-year budget revisions and additional expenditures, thereby avoiding arbitrary reallocating that undermines fiscal goals.
The article outlines an effective strategy divided into three phases. Initially, swift implementation of TSA should be completed by Q3 2025 because this phase provides instant enhancements in financial management and openness. Next, the second stage involves testing subsidy reform specifically within the electricity industry, alongside introducing supportive basic rates aimed at protecting disadvantaged families from potential negative societal reactions.
Thirdly, improvements to the digital tax platforms should be implemented gradually, starting with larger taxpayers to establish operational reliability before extending coverage to small and medium-sized businesses. This approach allows for incremental problem-solving and minimizes the risks associated with launching new systems.
In addition to these main components, Ghana’s wider reform plan should include modifications to tax policies—like widening the Value Added Tax (VAT) base by reducing exemptions, potentially increasing revenues by another 0.4% of GDP—and establishing performance-driven budgeting systems.
Connecting budget funds to quantifiable outcomes and mandating quarterly progress updates could promote financial restraint as well as boost responsibility among government departments. Additionally, establishing an official fiscal-monetary coordination board, which includes representatives from both the Ministry of Finance and the Bank of Ghana, would guarantee that monetary activities and fiscal goals complement each other instead of conflicting. This ensures maintaining a fine equilibrium between managing inflation rates and fostering economic expansion.
To summarize, Ghana’s fiscal consolidation strategy for Q1 2025, led by Finance Minister Dr. Cassiel Ato Forson, stands out as an exceptional example of combining analytical thoroughness, macro-fiscal consistency, and ambitious institutions—a combination rarely seen in fiscal frameworks following a crisis.
The policy design is anchored in technically sound fiscal reaction models and debt dynamics equations, which quantify the necessary primary surplus to stabilize Ghana’s debt trajectory, while maintaining consistency with inflation targets and medium-term growth prospects.
The consolidation approach adeptly balances spending reduction with increased domestic revenue collection, guaranteeing that fiscal changes bolster, instead of destabilize, overall economic steadiness.
Furthermore, the merging of fiscal and monetary goals—especially via decreased budget deficits that alleviate exchange rate stresses and facilitate disinflation—shows a significant degree of macroeconomic collaboration.
The framework stands out due to its deep-seated institutional elements: the drive towards enforceable fiscal regulations, expedited implementation of the Treasury Single Account (TSA), enhanced parliamentary scrutiny, and the digital transformation of tax collection highlight an ambitious plan focused on both stabilizing current conditions and fundamentally reshaping Ghana’s system of public finance management.
This confluence of technical design, policy coherence, and institutional reform reflects an uncommon policy maturity and offers a compelling model for other emerging economies navigating fiscal recovery under IMF-supported programs.
Nevertheless, the effective execution of this framework comes with several hurdles. Ongoing deficiencies within public financial management systems, the complex political issues related to adjusting subsidies, along with the limitations in expanding digital enforcement efforts, pose substantial threats.
These weaknesses highlight that effective policy formulation needs to be coupled with robust implementation skills and consistent political dedication.
Hence, the reliability and sustainability of the consolidation process will hinge on the government’s capability to prudently schedule reforms, establish institutional protections, and maintain financial openness.
When these criteria are fulfilled, Ghana’s consolidation framework has the capability not just to halt unhealthy debt buildup but also to spur a shift towards a more robust financial system.
The individual serves as the Executive Director of IDERAN.
Provided by SyndiGate Media Inc.
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