The cost of the Single Spine Salary Policy, energy subsidies and the free-fall of the cedi took their toll on the economy last year, with the government borrowing an extra GHc 4 billion to meet its obligations, the Bank of Ghana (BoG) has disclosed.

The situation was not helped by less-than-expected revenues and grants, causing the government's budget deficit to rocket to GHc8.7billion - or 12.1 percent of GDP - against a target of GHc 6.7 billion (or 6.7 percent of GDP), the BoG said.

Analysts had forecast last year's deficit to be bigger than projected because of a tendency by incumbent governments to open the spending-taps in an election year. But the size of the gap appears to have surpassed the most pessimistic forecasts.

"It's worse than I expected," said Dr. Joe Abbey, Executive Director of the Centre for Policy Analysis (CEPA), who had told the B&FT November that "it would be a miracle if the deficit ends the year lower than 9 percent of GDP".

According to the BoG, the escalation of the deficit was due to factors including excess spending on wages and energy subsidies, high interest rates and a shortfall in revenues - mainly corporate tax receipts.

Spending on wages exceeded the target by GHc 1.9 billion, rising to GHc 7.5billion, while excess spending on fuel and utility subsidies added GHc 339 million to the deficit, the BoG said. The shortfall in corporate taxes cost the budget GHc 708.2 million, and the cost of debt-service rose by an additional GHC245million due to higher interest rates.

Acting Governor of the BoG Dr. Henry Kofi Wampah called for fiscal consolidation last week as he announced the Bank's decision to hold its key lending rate for the third straight monetary-policy committee meeting at 15 percent.

"The provisional end-year fiscal numbers present the economy with a major challenge going forward. The budget outturn clearly shows there will be a need for fiscal consolidation in 2013," he said.

"To achieve this, it will be necessary to address the pressures related to wages and salary settlements, utility and fuel subsidies, and outstanding payments and commitments."

The Bank's appeal echoes recent calls for the removal of petroleum, power and water subsidies, which have been rising with soaring demand and cost of production of the commodities.

The National Petroleum Authority (NPA), which regulates fuel markets, says fuel subsidies cost more than GHc 1 billion in 2012 and led to smuggling and shortages. It says retaining the subsidies will cost the government GHc 2.4billion in 2013, with a disproportionate share of the benefits flowing to high-income earners.

On the external front, the sharp depreciation of the cedi coupled with slow export growth widened the trade deficit from US$3.1billion in 2011 to US$4.2billion last year, the BoG revealed, warning that the worsening external balance poses a risk to the economy's outlook.

In 2012 the cedi lost 17.5 percent against the dollar, triggering a sharp increase in import costs and a reduction in the Central Bank's reserve buffers as it tried to defend the currency through increased sales of foreign exchange.