OREANDA-NEWS. Ghana's 2016 budget and fiscal data for 9M15 show continued commitment to fiscal consolidation, Fitch Ratings says. But greater reliance on revenue than expenditure measures may make consolidation more challenging next year if growth disappoints or oil production at the TEN field is delayed, and elections make spending control harder.

The budget announced on Friday aims to narrow the deficit to 5.3% of GDP (cash basis) in 2016, in line with the IMF programme. The government expects revenue to rise by 1.4% of GDP from 22.6% in 2015 (excluding the impact of import exemptions, which are now included as a memo item). A simplified income tax regime is forecast to boost revenue by 0.3% of GDP due to improved compliance. The start of production at the TEN field is set to increase oil revenue.

The government expects expenditure, stripping out the cost of import exemptions, to fall by 0.4% of GDP as wage cuts, lower interest payments, and reduced capex offset election-related spending included in goods and services, and additional spending on transfers and subsidies.

Fitch thinks the deficit will narrow more slowly, to 6.2% in 2016, due to our lower revenue assumptions and the challenges of consolidating expenditure ahead of elections.

Financing the deficit is likely to be challenging and expensive. The authorities assume an additional USD750m Eurobond in 2016. Ghana paid 10.75% to issue a 15-year USD1bn Eurobond in October, despite the World Bank's partial guarantee. Planned domestic issuance at 3.4% of GDP, unchanged from 2015, suggests borrowing costs will remain high (short-dated treasury bills currently yield around 25%). The IMF programme prohibits recourse to central bank financing from 2016.

Consolidation is on track in 2015. Data for 9M15 shows a deficit of 5.1% of GDP, below the target of 5.7%. This was partly due to underpayment of social contributions and grants to government units, which helped offset higher capital spending. Domestic borrowing - including central bank financing - was higher than expected, but within the limit set by the IMF. We forecast the 2015 deficit to narrow to 7.8% of GDP from 10.2% last year, slightly higher than the authorities' figure of 7.3%.

But government debt has risen above 70% of GDP, from 39.1% in 2011. Ghana's debt structure has also deteriorated, reflecting increased non-concessional external financing and short-dated domestic securities. High domestic yields and a sharply weaker exchange rate have pushed up borrowing costs, with interest payments accounting for more than a third of government revenue - the highest level among Fitch-rated sub-Saharan African sovereigns.

High fiscal and external risks are reflected in the Negative Outlook on Ghana's 'B' rating. Addressing underlying fiscal imbalances could make a lasting improvement in Ghana's external position and bring debt back to more sustainable levels.