One year of IMF’s prescription: The bumps and bruises

A year ago, Ghana began a programme, a three-year Extended Credit Facility of US$918 million, with the International Monetary Fund. 

The programme’s key aims were to restore macroeconomic stability, debt sustainability and ensure economic growth, while protecting social spending.

A year on, while some, including senior officials of the IMF, think the country can point to some positives, others also believe that not much can be shown for all the bitter austere measures.

One of the criticisms is that the inability to slow down inflation and the government’s borrowing costs, as previous IMF programmes did in a relatively short time, is a particular weakness of this programme and appears to be derailing its objectives.

Indeed, since the start of the IMF programme, inflation has risen from 16.6 per cent to a current rate of 19.2 per cent, defying forecasts of a reduction under tight monetary conditions.

The high yields on the 2015 Eurobond and other medium-term domestic bond issues by the government are also examples of persistently high financing costs, which make debt management more difficult.

The current programme is also not too strong on the approach to the country’s debt management, according to the Institute for Fiscal Studies (IFS) think-tank. The programme only requires the government to limit its borrowing plans to loans with a minimum grant element of 35 per cent, with possible exceptions in line with the debt limits set. Despite this, the fund approved for the government to issue a US$1.5 billion Eurobond in 2015.

One critic, Dr Mahamudu Bawumia, an economist and vice-presidential candidate for the opposition New Patriotic Party (NPP) in this year’s elections, has also said that the programme requires an explicit debt target, rather than mere projections, to give better assurance about its debt sustainability objective. Ghana’s public debt currently sits at 73 per cent of GDP, a level that has not been seen since 2005.

Another sore point is the insufficient attention paid to economic growth, as is typical of IMF programmes that has also increased the hardships resulting from the adjustment. The strategy of tackling inflation through higher and higher interest rates, which affect economic growth, is a case in point.

Economic growth

Since 2013, Ghana’s rate of economic growth has fallen from above seven per cent to an estimated 4.1 per cent in 2015. It is expected to pick up to 5.4 per cent this year as new oil fields begin production.

The IMF however thinks differently from the critics. Last Friday at a news conference in Washington D.C. during the Spring Meetings, the Head of Africa Department of the Fund, Madam Antoinette Sayeh, said: “On Ghana, let me say that we have been quite satisfied and encouraged with the implementation of the programme.”

“We are encouraged by the fact that the government has made quite an effort to stick with the targets under the programme and the fiscal is on track.

“And of course, as you say, one of the objectives of the programme in Ghana is to help the government contain and reduce debt through performance in increasing the primary fiscal balance, and in doing that, limit the need for financing through debt,  be it domestic or foreign external debt, and Ghana is making progress in that regard.”

IMF position

The Deputy Managing Director of the Fund, Mr Min Zhu, in an interview with Graphic Business during a visit to Ghana in February this year, said: “The huge risk is in whether the authorities can implement the fiscal consolidation plan, stick to the fiscal discipline, and ensure that they stick to the two per cent primary budget surplus and continue doing the structural reforms.”

Needless to say, strict adherence to the programme targets in 2016 will be difficult.

First of all, an increase in revenues is expected to play a bigger role than expenditure management in reducing borrowing (relative to GDP) in 2016, but the further steep decline in the price of oil, which has been below the budget’s benchmark price of US$53 since the year began, is a direct threat to this plan.

Second, early indications suggest that the government’s capacity to resist politically motivated spending may have been overstated by the programme. For instance, unbudgeted subsidies have already been incurred after the government gave in to workers’ demands for a cushion against sharp utility tariff increases.

Containing government borrowing within the set limit would be difficult in these circumstances. This makes the forecast reduction in the debt-to-GDP ratio somewhat optimistic.

In actual fact, how to readjust the 2016 budget to manage these problems will exercise the minds of the IMF staff team and the government during their upcoming third review of the programme.

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