Government must get a grip on the Single Spine Salary Structure Policy and the growing size of the public sector if it is to rein in the fiscal deficit, which widened to 12.1 per cent of GDP in 2012, Databank research has said.

Spending on the public sector wages and salaries has surged by 200 per cent in nominal terms since 2009 – compared to a growth of 134 per cent in government revenues (excluding grants) in the same period – due to implementation of the single spine salary structure policy, which has been partly blamed for the hefty deficit recorded last year.

Amid fears that the increase in government borrowing will crowd-out the private sector, Databank said curbing the deficit is essential to reduce interest rates to acceptable levels.

“Ghana’s fiscal account presents the most challenges for microeconomic stability in 2013. Overall, we anticipate that government will strongly push for reforms on that front-especially in streaming utility and petroleum subsidies,” said Sampson Akligoh, analyst and head of research.

“But any effective consolidation must address the weakness of the Single Spine Salary Structure and also aim to reduce the size of the government to be effective.

“A successful fiscal consolidation will lead to lower interest rates and private sector job-creation over the medium term,” he added.

Last week the Bank of Ghana (BoG) held its policy lending rate at 15 per cent for the next two months, a decision that is likely to keep average lending rates above 20 per cent during the first half of the year, Akligoh said.

Commercial banks’ average lending rate was 25.7 per cent per annum in 2012.

“The steady rate decision has sent a mixed signal to the market on concern about fiscal imbalances and the possible impact of the removal of subsidies on domestic petroleum prices over the next three months.”

On Sunday the government cut subsidies on fuel products, causing prices to soar by 20 per cent for petrol and diesel, and 50 per cent for Liquefied Petroleum Gas (LPG), which has been in short supply for the most part of the last two years.

The move signaled that the 2013 budget will be relatively austere compared to 2012, when spending on petroleum subsidies surged by 167 per cent to more than GHC 1billion. Had the subsidies not been removed, the cost would have ballooned to GHC 2.4 billion this year, the National Petroleum Authority (NPA) said.

Finance Minister, Seth Terkper, has said the budget that he will present in the coming weeks will be targeting a learner deficit because “some of the elements that caused it to rise in 2012 will not be present this year”.

Among the elements was the jump in debt-service expenditure due to high interest rates engineered by the Central Bank to compensate for the rapid depreciation of the cedi.

Fitch Ratings, which lowered Ghana’s credit-rating outlook from stable to low after seeing the deficit numbers, has projected a gap of 8 per cent of GDP in 2013 and 5 per cent of GDP in 2014, “reflecting a combination of real expenditure restraints, particularly on current expenditure, as well as continuing robust revenue growth.”

According to the BoG, the worse-than-expected deficit outturn triggered a 40 per cent increase in the stock of public debt, which went up from GHC 24 billion (42.6 percent of GDP) in 2011 to GHC 33.5 billion (46.7 percent GDP) in 2012.

“The current trend for public-sector debt accumulation is not sustainable, and has the potential to derail earlier macroeconomic gains,” Akligoh said.