New leaders say Ghana "broke" after spending spree

ACCRA, Jan 18 (Reuters) - Overspending by Ghana's former government in the run-up to elections it narrowly lost last month has left the West African state "broke", the administration of new President, John Atta Mills, said.

Mills's transition team said the former government had exceeded its forecast budget deficit for 2008 by nearly seven times, bringing it to 13.4 percent of gross domestic product, the highest in 10 years and well above a 10 percent forecast.

"In a word, the government of Ghana is broke," Hanna Tetteh, spokeswoman for the transition team in charge until Mills names a government, said in a statement at the weekend.

In the first nine months of 2008 some ministries over-spent their annual budgets for salaries and benefits by between 76 percent and nearly 270 percent, Tetteh said.

Government overspending was compounded by a ballooning trade deficit driven by high world market prices for food and fuel imports, adding to the challenges facing the new administration amid high public expectations for its four-year term, she said.

Mills was sworn in on Jan. 7, replacing John Kufuor, who had served the maximum two 4-year terms allowed by the constitution of the former British colony, the world's No. 2 cocoa grower, Africa's second biggest gold miner and a future oil producer.

A tense month-long election process which capped a lavish electoral campaign saw Mills beat Nana Akufo Addo, of Kufuor's New Patriotic Party (NNP), in a presidential run-off by a margin of less than 0.5 percent. The peaceful polls won wide praise.

On his last day in office, Kufuor announced public sector salary increases of 16-34 percent for workers, provoking a barrage of criticism even from labour unions, who lean towards Mills's centre-left National Democratic Congress (NDC).

Those salary increases would be "very difficult to implement" given the financial situation, Tetteh said.

RISING DEBT

Ghana's public debt reached $7.7 billion, or 53.5 percent of GDP, by the end of September, up from 51.4 percent nine months earlier, central bank figures show. Debts have steadily risen since Ghana received billions of dollars in debt relief in 2005.

Credit ratings agency Fitch downgraded its positive outlook on Ghana's B+ rating last February due to rising debt and a widening current account deficit, and any further deterioration could erode confidence in its sovereign eurobond <374422AA1=RRPS>, issued as the first in West Africa in 2007.

"While we see a limited risk of default on Ghana's sovereign bond at present, it is increasingly clear that macroeconomic fundamentals have deteriorated," investment bank Renaissance Capital said in a note to investors last week.

Annual inflation, which had fallen back from a June 2008 peak of 18.4 percent, rose sharply to 18.1 percent in December.

After expensive measures to protect the poor from rising fuel and food prices in mid-2008, Ghana was hit by the global slowdown, including falling prices for key commodities exports and fears of a reduction in remittances from Ghanaians abroad, who send home around $3 billion a year, almost a fifth of GDP.

Taking power in the midst of a global economic slowdown and financial crisis, Mills faces some of the same problems as U.S. President-elect Barack Obama, who will be sworn in on Tuesday. But Mills has had less time to prepare than his U.S. counterpart.

The foreign-trade tax law expert and university professor, who served as vice-president in the late 1990s, took power just four days after Ghana's final election result was announced.

He is expected to name a government by the end of January, and will probably need to use cabinet nominations to heal some of the divisions exposed by the bruising electoral campaign.

Mills's NDC overturned an NNP majority in parliament, but failed to win an outright majority itself, meaning it will require backing from minor parties and may have more trouble enacting austerity measures than Kufuor's administration.