Rapid Credit Facility vrs Extended Credit Facility: Restoring the economy after COVID-19 pandemic

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Emmanuel Amoah-Darkwah

The International Monetary Fund (IMF) Executive Board on 13th April 2020 approved the disbursement of US$1billion to be drawn under the Rapid Credit Facility (RCF). The disbursement will help address the urgent fiscal and balance of payment needs Ghana is facing, improve confidence and catalyse support from other development partners. The RCF is available to low-income countries and carries a zero-interest rate. RCF has a grace period of 5½ years and a final maturity of 10 years. Countries like Mozambique, Liberia, and Guinea accessed this facility in the wake of Cyclone Idai and Ebola. The table below shows some macroeconomic indicators.

Economic Indicators

Indicator 2018 (Est) 2019 (Prel) 2020 (Proj)
GDP at Constant Prices (%) 6.8 6.1 1.5
GDP per Capita (US$) 2,217 2,229 2,085
Inflation (CPI)-Annual Average (%) 9.8 7.2 9.7
Fiscal Deficit (excluding financial and energy sector related cost) -3.7 -4.7 -6.4
Primary Balance (%) -1.4 -1.8 -4.1
Public Debt 59.0 63.2 68.7
Net Int. Reserves (Import Cover) 1.9 2.7 2.1

Source: IMF Press Release No. 20/153

Aftermath of Extended Credit Facility Programme

On 3rd April 2015, the Executive Board of the IMF approved a three-year arrangement under the Extended Credit Facility (ECF) for Ghana in an amount equivalent to SDR 664.20 million (180 percent of quota or about US$918million) in support of the authorities’ medium-term economic reform programme. The programme was extended for another year because of missed targets in the initial years of implementation. The main pillars of the programme were:

  • To achieve sizeable and frontloaded fiscal adjustment, to restore debt sustainability, to contain expenditures through wage restraint and limited net hiring, as well as on measures to mobilise additional revenues.
  • To embark on structural reforms to strengthen public finances and fiscal discipline by improving budget transparency, cleaning-up and controlling the payroll, right-sizing the civil service and improving revenue collection.
  • To restore effectiveness of the inflation targeting framework to help bring inflation back into single-digit territory and preserve financial sector stability.
  • To safeguard social and other priority spending under the programme, including expanding the targetted social safety nets—such as the Livelihood Empowerment Against Poverty (LEAP) programme.

Successful implementation of the ECF programme resulted in improved macroeconomic indicators. GDP growth picked up from 3.4% in 2016 to 8.1 percent in 2017 and declined to 6.1% in 2019. Inflation declined from 15.4% to 9.0% in January 2019 and further declined to 7.9% by the end of 2019. Fiscal deficit also declined from 7.3% of GDP in 2016 to 3.8% in 2018 and 4.7% (excluding financial and energy sector-related costs) in 2019. The primary balance turned positive at the end of 2017; the first time in almost a decade.

Significant pieces of legislations were enacted during and after the Fund programme. These include passage of the Special Deposit Taking Act 2016 (Act 930) and amendment of the Bank of Ghana Act 2016 (Act 918) to ensure financial sector stability in Ghana’s economy.  A key clause of the Bank of Ghana Amendment Act was BoG financing of central government. The Fund proposed zero financing of central government by the BoG, but Parliament rejected that provision and instead pegged it at five percent of the previous year’s revenue.

Furthermore, Parliament in August 2016 passed the Public Financial Management (PFM) Act 2016, Act 921, which repealed the Financial Administration Act of 2003, its amendment and the Loans Act of 1970. The PFM seeks to regulate financial management of the public sector within a macroeconomic and fiscal framework, as well as define the responsibilities of persons entrusted with the management and control of public funds, assets, liabilities and other resources.

It also seeks to ensure that public funds are sustainable and consistent with the level of public debt, and also makes provision for accounting and audit of public funds. The fiscal and monetary stability councils were also established. The Fiscal Responsibility Act, 2018 (982) establishes two numerical fiscal rules, limiting the overall fiscal deficit on a cash basis to 5% of GDP and mandating a positive primary balance.

The 2015 ECF programme had conditionalities attached to its implementation which include austerity measures such as tax hikes, reduced spending and a net hiring freeze. Ghana also went through eight (8) reviews before completion of the programme, and disbursements of the US$918million was done in tranches subject to performance reviews. On the other hand, the RCF has limited conditionalities.

The IMF’s support under RCF is provided without ex post programme-based conditionality or reviews. Economic policies supported under RCF aim at addressing the underlying balance of payments difficulties, and supporting the country’s poverty reduction and growth objectives. Repeat use of the RCF may facilitate eventual transition to an ECF arrangement. It is premature to call for a repeated use of RCF which could result in an ECF programme. The government’s position on ECF is known; it offers a tight fiscal space that is parallel to the expansionary policies formulated.

A Reversal of Gains?

On 30th March 2020, the Finance Minister presented an Economic Impact of the COVID-19 Pandemic on the Economy of Ghana study to Parliament. As part of measures under the Coronavirus Alleviation Programme, the minister proposed:

  • Amendment of the Bank of Ghana Act to allow for government borrowing from BoG beyond the stipulated threshold in the Act in the event of tight domestic financing market conditions.
  • Amend the Petroleum Revenue Management Act (PRMA) to allow a withdrawal from the Ghana Heritage Fund to undertake urgent expenditures in relation to the coronavirus pandemic. There is an estimated US$591.1million in the Ghana Heritage Fund.

These are early days to compare the current state of Ghana’s economy to that of 2014, 2015; but there are some economic indicators that are not performing well, which include depreciating exchange rate, ballooning public debt and severe commodity price shocks – partly as a result of the COVID-19 pandemic. This year is an election year and the data points to fiscal slippages which characterise such years. It is safe to assume that 2020 will not be an exception, partly because of this pandemic. But managers of the economy should have medium-term macroeconomic stability in mind when making short-term decisions as aforementioned.

Budget deficits and associated public debt are not necessarily bad, but depend on investment options (recurrent and capital expenditure). There should be utmost transparency and accountability in management of public funds during this crisis, so as to prevent adverse macroeconomic instability in the medium- to long-term. These are not normal times, and hence government should rationalise expenditure as much as possible to limit the pandemic’s impact on the economy.

The writer is an Economic Analyst 

[email protected]

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