IMF projects economy won’t contract amid pandemic

Director, African Department, IMF, Abebe Aemro Selassie
  • Fiscal deficit to hit -16.4% of GDP

It is true that the coronavirus pandemic has decimated the nation’s productive sectors, even resulting in a contraction in the second quarter, however, the International Monetary Fund (IMF) says it expects the economy to still see some growth at the end of the year, albeit smaller; essentially meaning there will be no contraction as previously feared.

In its Regional Economic Outlook (October 2020) report, the Fund projected Ghana’s economy to grow at 0.9 percent in 2020, same as government revised target stated in the mid-year budget. Despite the projection presuming that the economy will not experience the dreaded contraction, especially after it did that by 3.2 percent the second quarter of the year, it will still be the slowest growth ever recorded in 37 years.

The IMF’s projection comes on the back of an earlier forecast by the Bank of Ghana’s Composite Index of Economic Activity (CIEA) which has tipped GDP to grow between 2 to 2.5 percent at the end of the year, given the rebound of activities in many sectors of the economy, including the hospitality sector which saw a contraction of 79.4 percent in the second quarter.

The Fund, however, expressed concerns over the worsening fiscal situation and ballooning public debt of the country which has been further exacerbated by the pandemic. It projects fiscal deficit to hit -16.4 percent of GDP at the end of the year, indicating the country will have to borrow more than the GH¢44 billion (which is 11.4 percent of GDP) it earlier stated will be needed to close the fiscal gap for the year. Total public debt has also recently hit more than 62 percent of GDP – a figure the World Bank says put the country at high risk of debt distress.

Responding to a question on the debt situation during a virtual launch of the report, Director, African Department, IMF, Abebe Aemro Selassie, said it requires swift policy response from government to keep the debt level in check.

“This year, the policy response has been very supportive, as needs to be the case, but, you know, going forward, it’s will be very, very important to make sure that policies revert back to making sure that there is much more focus on keeping debt stable and bringing it down gradually.  So, I think much will depend on how quickly this policy recalibration takes place, and, given how high debt levels are in Ghana, I think the quicker that is done, the better,” he said.

On the continental front, the Fund cautioned that policymakers will have to brace up for difficult times ahead as they would have to rekindle their economies with the fewer resources at their disposal.

“Indeed, without significant additional assistance, many will struggle to simply maintain macroeconomic stability while meeting the basic needs of their populations. Fiscal policy, for example, will have to balance the immediate need to boost the economy against the need for debt sustainability.

Monetary policy will need to balance the need to support growth against the need for external stability and longer-term credibility. Financial regulation and supervision must help offset the immediate demands of crisis-affected banks and firms, without compromising the financial system’s ability to support longer-term growth. These efforts must be also weighed against the need to maintain social stability while also preparing the ground for sustained and inclusive growth over the long term,” the report recommend.

On African Continental Free Trade Area (AfCFTA) agreement, the IMF said member sates should put in the necessary resources to implement the deal as soon as possible as it will make the continent globally competitive and provide a window of opportunity, given the disruptions in the global value chain caused by the pandemic.

“The COVID-19 crisis may prompt a significant reorganisation of global value chains, underscoring the potential of the African Continental Free Trade Area as an engine for the development of regional trade. An effective framework would not only reduce Africa’s vulnerability to global disruptions, but would boost regional competition and productivity, and promote food security.

Trade under the arrangement was originally scheduled to start in July 2020 but has been delayed because of the pandemic. As the region moves into the recovery phase, authorities should resume their efforts to ensure implementation as soon as possible,” the IMF recommended.

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