Ghana entered into a three year Extended Credit Facility (ECF) arrangement with the International Monetary Fund in 2015. The deal guaranteed Ghana a credit facility worth $918 million while the country pursued policy initiatives that would promote fiscal stability. In 2017, however, the Akufo-Addo government decided to extend the deal to April 2019. Why did the government decide to extend it when it had made suggestions to the contrary? More importantly, what were the economic problems the country faced that necessitated the initial deal to begin with?
The country faced both internal and external challenges due to cedi depreciation, power outages, and unsustainable debt levels. Growth levels had slumped to 4.2% in 2014 following a 9% level in 2011. These factors led to rising input costs and subsequent shrinking of the industrial sector. Despite hikes in policy rates, inflation levels in Ghana reached 17%, which was way beyond the target of +/- 8%.
In addition, a slump in oil prices in the middle of 2014 caused a revenue shortfall of close to 2% of GDP, the IMF survey reports. The government was, thus, reeling from unsustainable debt levels. The budget deficit was 7.5% of GDP in 2015, which amounted to about GHS 10 billion. This deficit was financed by the Bank of Ghana, which had further negative monetary implications for the country. There was also a cash deficit of about 9.5% of GDP. Faced with such difficulties, the government had to resort to a billion dollar bond which attracted significantly higher interest rates.
The public sector wage bill stood at 49.5% of the total government tax revenue in 2014. At the end of September that year, the debt-to-GDP rate stood at a whopping 60.8%. This translated to over $21 billion in debt and would increase by another $4 billion within a year. Add to this very low international reserves and a rapidly depreciating currency, and you had low imports and serious challenges in the current account figures. To ensure the country didn’t slip further beyond the 60% debt-to-GDP mark, the government of Ghana, under the erstwhile John D. Mahama, entered into a deal with the International Monetary Fund.
In 2015, the Mahama government entered into an Extended Credit Facility with the IMF to help achieve macroeconomic stability. The Ghana government would receive a sum of $918 million over the three year duration of the deal. For her part, though, Ghana had to take important steps in addressing its rising debt and poor revenue mobilization
Among the objectives of the IMF deal was the need for a fiscal adjustment in order to maintain debt sustainability. Bonds and securities came with steep interest rates, making it difficult for the country to raise funds on the international market. The IMF deal was to help Ghana steer clear of the heady waters.
As part of the deal, the Ghana government was to cut down its wage spending by limiting net hiring into the public sector. The IMF website summarizes the deal as follows:
In sum, the government was to strengthen public finances through fiscal discipline and budgetary transparency.
In August 2017, at the end of the fourth review of the Extended Credit Facility, the International Monetary Fund confirmed a one year extension of the deal. The new date of exit from the IMF deal was set to April 2019. Towards this end, the IMF would extend a further $116 million to the government in addition to the $464.6 million it had received already. But why did the government agree to the extension, especially given their incessant claims to stay to the contrary?
Deputy Minister of Finance, Kwaku Kwarteng, in an interview, said the country had under-performed during the period under review and was on course to miss all its objectives. This meant the whole deal would have been considered a failure in the eyes of the international community. To forestall any such negative effects, the IMF decided to end the programme abruptly, rather than wait for its logical end.
The government also agreed to the extension to save its reputation within the investor market. “…we did not want to come out of the programme as though there is a new government and government had abandoned the programme, it will send a wrong signal to the market and it will hurt our image as a credible country so we said we were not going to do that,” the deputy Minister said.
Why did Ghana sign up to the Extended Credit Facility with the IMF? The real question is why does any government sign up to any IMF deal at all?
The government of Ghana entered into the ECF deal to help restore policy credibility, create economic stability, and maintain fiscal discipline. By restoring confidence in a country that seemed to be ailing in the short run, the international investor community would see a country taking plans to secure its long term.
Many developing nations rely on foreign investor funds to pursue their industrialization goals. Faced with the paucity of data, these investors rely on judgement passed by the international credit rating agencies. Countries that are seen to be ‘guided’ by the IMF exude confidence. The same is expected from the international capital markets. Where a single percentage increase in debt could mean higher interest rates, a clear path towards debt sustainability through an IMF deal throws positive light on the country’s future and could shave off a few percentage points.
President Mahama, speaking at the US-Africa Leaders’ Summit in Washington DC, spoke to this need for confidence from investors. “So we are going to discuss with the IMF how we can turn the deficit around quickly and create the kind of confidence even in the short-term narrative,” he said.
Also, governments benefit from the IMF’s rich history and experience with developing countries. The Bretton Woods institution has been in existence since the end of WW2. Emerging markets, like Ghana, face crossroads: in the face of massive deficits and urban poverty, how does the government find a middle ground? How does one reduce subsidies without affecting the livelihoods of majority of the people? How does government raise taxes, widen it, and at the same time keep the economy moving forward? The president at the time indicated these intentions when he said, “We are taking subsidies off fuel and the utilities, streamlining the spiraling public sector wages, we are working to improve revenue collection and efficiency in collecting taxes and also reforming the public financial management system.”
To do this, developing countries feel they need the guiding hand of the International Monetary Fund. More than the credit facility the country was getting to support its export-import sector, the presence of the fund provided credibility even domestically. Citizens could see things were being done under the guardianship of the IMF. It meant even if things were hard now, there was obviously a clear path towards achieving safety.
Ghana looks set to exit the Extended Credit Facility with the IMF after a final review in April 2019. After seven reviews, the country would come out of the programme all the better for it. For example, the budget deficit has fallen from 9.3% of GDP in 2016 to 5.5% in 2018. After the rebasing of Ghana’s GDP, the debt ratios paint a better picture for the country. The problematic debt-to-GDP ratio has fallen to 57.2% in 2018; excluding the money spent in bailing out distressed banks, this value falls to 53.9%. This is an improvement on the 73.1% of 2016. Also, the interest burden due to debt financing has declined from 45% to 43.9%. Given these figures, it would seem the country has enormous room to manoeuvre. But the country’s economics chiefs aren’t leaving anything to chance; they intend to keep certain checks the IMF introduced in place.
Minister Ken Ofori-Atta said the country would maintain the Policy Support Instrument programme with the International Monetary Fund. Under the programme, Ghana would maintain close policy dialogues with the Fund and also subject itself to half-yearly economic and financial assessments.
One of the major problems the government faced was unsustainable budget deficits. To consolidate the gains made in that regard, the government is introducing legislation to cap the fiscal deficit at 5% of GDP. The move, coupled with the establishment of a Fiscal Council, would ensure the country did not suffer a relapse in its budgetary policy.
The Ghana government has the opportunity to consolidate the gains accrued from the Extended Credit Facility with the IMF. The biggest challenge for the Nana Addo government is that after such tight budget cuts in public spending, would it throw caution to the wind and pursue an expansionary policy? What’s going to happen to the country’s flagship programmes, especially the National Builders Corps and the One District One Factory policy? It remains to be seen how the government will navigate these new heights so that Ghana will not go back to the IMF again.