Can Government Maintain Fiscal Discipline Post IMF Exit

Ghana – IMF Relationship

After independence in 1957, Ghana has returned to the International Monetary Fund (IMF) sixteen times (see Figure 1.0). In May 1996, government agreed a standby arrangement of SDRs36,400,000.00 (~ US$50 million) with the IMF out of which SDRs31,400,000.00 (~ US$433 million) was drawn. Standby arrangements continued until 1987 when a Structural Adjustment Facility Commitment, a financial assistance program given to poor countries, of which SDRs129,858,000.00 was accessed by government. From then, government after government have continued to access Extended Credit Facilities (ECF) from the IMF.

Figure 1- History of IMF’s Lending Arrangements with Ghana

The 16th Return

The 2015 fiscal year saw the nation’s return to the IMF for a 3-year ECF worth US$918 million (SDRs664,200,000) aimed at restoring debt sustainability and fiscal stability. Prior to our return to the IMF in 2015, the nation had experienced strong and broadly inclusive growth for a decade at an average rate of 7.2% (see figure 2) and its medium-term prospects have been supported by rising hydrocarbon production. However, the emergence of large fiscal and external imbalances amid power outages in 2014 placed the economic outlook under extreme pessimism. The government was facing increasing financing difficulties whiles inflationary pressures rose on the back of large depreciation of the currency and monetary financing of the fiscal deficit. The external position weakened through mid-2014, with net international reserves reaching low levels in the third quarter and the exchange rate depreciating sharply. As confidence in the economy reached its low, government turned to the IMF in 2015 for its extended credit facility.

Figure 2 – Broad and exclusive GDP growth

Macroeconomic Gains Recorded under the IMF’s Watch

With government’s implementation of IMF’s supported financial and economic program, the country experienced some appreciable amount of growth through prudent economic policies and fiscal discipline. Production in the economy accelerated with real GDP growth increasing to 6.8% in 2018 from a 3.7% recorded in 2016. The fiscal deficit improved from the 7.3% of rebased GDP in 2016 to a provisional 3.8% of GDP at the end of 2018 (see Figure 3.0). The debt-to-GDP ratio declined from the 56.6% of GDP in 2016 to 54.8% at the end of 2018. Inflation dropped from 15.4%, at the end of 2016, to 9.5% as of April 2019. The country have recorded trade surplus since 2017 reaching an all-time high of 504.46 USD Million in April of 2019.

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Post the Bailout

Post the IMF bailout program which ended in April 2019, government is faced with the test to maintain economic gains and fiscal discipline achieved under the supervision of the IMF. Many economist and analyst have questioned government’s ability to maintain this discipline.

Fiscal discipline requires better management of public finances, devoid from fiscal slippages to excessive government expenditure, curbing domestic debt levels and narrowing budget deficits. This warrants an interest in fiscal rules to reinforce fiscal discipline and sustainability in the long-term. Such rules help tackle a country’s predisposition to budget deficits by pre-empting possible spending overruns and thereby help to address the political and institutional tendencies to raise expenditure during economic booms. Fiscal rules however need to be complemented with expenditure targets to achieve better fiscal consolidation. More so, there is a need for strong commitment to fiscal discipline and the presence of strong institutions to ensure that fiscal processes are followed through.

The Journey So far

Government has demonstrated its commitment to journey the path of fiscal discipline without the IMF. Over the years, large fiscal volatility have sprung up around election cycles. With the 2020 general elections at hand, the test for fiscal discipline comes to bear. Will the persistence of election cycles defile the government’s pledge to walk the path of fiscal discipline needed for the country’s fiscal consolidation? In order to manage fiscal slippages and avoid the recurrent buildup of fiscal pressures, government has committed to a number of measures:

  1. Fiscal Responsibility Law (FRL)

The establishment of a Fiscal Responsibility Law, Act 982 gives room for the establishment of a Financial Stability Council and a Fiscal Council. Government passed the FRL in December 2018. It caps the budget deficit not to exceed 5% for a fiscal year and also provide that, debt to GDP ratio of not more than 65% of GDP is to be maintained with a positive primary balance. This is expected to maintain some sustainable level of fiscal balance.

  1. Financial Stability Council

The Financial Stability Council is constituted by the Governor of the BoG (Chairman), Deputy Governor, Deputy Minister of Finance, CEO of the NIC, Director General of the SEC, CEO of the NPRA and CEO of the Ghana Deposit Protection Corporation. This council will strengthen and reinforce the stability of the financial sector, acting as an inter-institutional consultative coordination body. Recently, we have witnessed the Bank of Ghana carry out a cleanup exercise by initially increasing the minimum capital requirement for the banking institutions. This led to the revocation of eleven banking licenses. Both the insurance and securities sector also seeks to clean up their sector as well. The establishment of this council will ensure that, financial stability measure are carried out in a more fashioned way.

  1. Fiscal Council
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Unlike the Financial Stability Council, the fiscal council is made up non-institutional members. It is chaired by Dr. Paul Acquah, former Governor of the Bank of Ghana and Deputy Director of the Africa Department of the IMF. Their primary role in this journey is to advise the President on relevant, additional measures needed to maintain fiscal discipline. This will be a local version of what most international fiscal responsibility advisories do.

Frontline is of the opinion that, the fiscal consolidation process will require government to generate more revenue to meet its expenditure. In the first half of the year, revenue collected amounted to GHC 22.8 billion recording a total deviation of 15.5 percentage points from a target of GHC 27 billion. If innovative measures are not developed to expand the tax net, the budget deficit will continue to widen and therefore the need for government to result to internal funding to bridge that gap. Without this, government will have to curb expenditure in order to ease the fiscal pressure. Government needs to also drive further its industrialization agenda through the One District One Factory initiative to boost economic growth. Complementing the local boost to economic growth will require the implementation of responsible policies necessary to attract foreign Direct Investment. This will expedite the path to debt sustainability and increase fiscal space for further government capital and social spending.

As to whether government can maintain fiscal discipline without the IMF, we believe just as the good old adage goes, “the taste of the pudding is in the eating”.

By: Clement Adjei-Bisa Adjieteh

Financial Analyst

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