Menu of measures to build policy credibility and avoid going to the IMF

The Ghanaian economy is facing a serious crisis brought on to a large extent by Covid-19 and recent geopolitical developments. A domestic policy credibility deficit, arising in part from the budget stalemate in Parliament over the e-levy and a rising debt level, has compounded the crisis.

The crisis has led to the downgrading of Ghana by credit rating agencies, which has restricted access to international bond markets, increased borrowing costs and fuelled disinvestments from the money and capital markets, causing a sharp depreciation in the cedi. Rising commodity prices across the world have also fuelled domestic inflation.

Given the fast-deteriorating economic conditions, calls have been made to Government to approach the IMF to obtain policy credibility and restore investor confidence. To me, however, Government need not go to the IMF if it can adopt some of the key measures that the IMF is known to prescribe for members seeking its assistance.

I suggest below measures that I believe Government and Bank of Ghana can take help build the needed policy credibility, restore the economy to some level of sanity and make going to the IMF unnecessary.

1. Government

I suggest the following measures for the consideration of Government:

1. Work to resolve the current budget stalemate in Parliament over the e-levy as a matter of urgency. To that end, we suggest splitting the proposed rate of 1.75 percent between telcos (1 percent) and consumers (0.75 percent). We believe this is a compromise that both the majority and minority can accept.

2. Take additional measures to scale up revenue, which is below par. These should include the following:

• Pass the Tax Exemptions Bill to reduce the scope and scale of exemptions
• Enforce tax compliance, especially by professionals
• Introduce segregated corporate tax ranging from the current level of 25 percent for indigenous companies to 35 percent for foreign companies
• Introduce a temporary ‘windfall tax’ of 10 percent on ‘excess profits’ of mining companies, oil companies, telcos and banks
• Abolish the current import benchmark discount of 30 percent for general goods and 10 percent for vehicles

3. Take urgent measures to reduce expenditure, whose level and composition remain problematic. The measures should include the following:

• Restructure ministries and reduce the number from 30 to 20; reduce the number of Ministers from 86 to 56 (including 16 Regional Ministers)[1]
• Slash executive pay by 20 percent
• Enforce the announced 20 percent reduction of MDA’s budgets
• Introduce government-parent cost-sharing arrangement for the Free Senior High School Policy. Abolish the purchase of past examination questions for students
• Scrap NABCO
• Freeze allowances for nursing and teacher trainees
• Impose a temporary freeze on recruitment into the public service

4. Reduce the 2022 fiscal deficit from 7.4 percent to 6.0 percent to boost credibility of the budget and reduce concerns regarding both fiscal and debt sustainability.

2. Bank of Ghana

I suggest the following for the consideration of Bank of Ghana:

1. Increase the Policy Rate by 200 basis points from 14.5 percent to 16.5 percent to stem inflation, while also increasing the attractiveness of cedi-denominated assets to stem disinvestments from the money and capital markets and the negative effect on the cedi.

2. Increase the Primary Reserve Requirement from 8 percent to 10 percent to help curb liquidity creation by banks, which could fuel both inflation and exchange rate depreciation.

3. Change the current foreign currency-cedi primary reserve requirement to foreign currency-foreign currency requirement to help boost foreign currency reserves at the Bank of Ghana. This will also meet a long-standing demand by banks.

4. Enforce foreign exchange laws more strictly, including relating to:

• Documentation requirements for external transfers
• Limits on carry-on foreign currency by travellers
• Documentation requirements for foreign currency purchases from forex bureaux
• Activities of unlicensed foreign currency dealers
• Pricing of goods and services in cedis and not in foreign currency
• Payment for services provided by Ghanaians in cedis and not foreign currency
• Money laundering through banks and forex bureaux

It is important that Government and Bank of Ghana collectively take these measures to restore investor confidence and gain needed policy credibility.

Failure to act accordingly will only worsen the economic crisis, with widening of spreads on Ghana’s bonds, decreasing access to international bond markets, growing disinvestments from local financial markets and growing pressure on the cedi.

Should the crisis continue, the Government could be forced to seek the needed policy credibility from the IMF, which is expected to recommend the very measures that Government might fail to initiate by itself.

The writer is Director of Research, IEA 

[1] The new ministries and number of Ministers (M) and Deputy Ministers (DM) should be: 1. Finance (1M 1DM) 2. Foreign Affairs (1M 1DM) 3. Justice (1M 1DM) 4. Agriculture (1M 1DM) 5. Trade & Industry (1M 1DM) 6. Interior (1M 1DM) 7. Defence (1M 1DM) 8. National Security (1M 1DM) 9. Energy (1M 1DM) 10. Lands & Mineral Resources (1M 1DM) 11. Education, Science & Tech (1M 1DM) 12. Health (incl Sanitation & Environment) (1M 1DM) 13. Local Govt & Rural Development (1M 1DM) 14. Roads & Transport (1M 1DM) 15. Sports & Youth (1M 1DM) 16. Tourism & Culture (incl. Chieftaincy) (1M 1DM) 17. Employment, Gender & Soc. Protection (1M 1DM) 18. Works & Water (1M 1DM) 19. Communications (1M 1DM) 20. Parliamentary Affairs & Information (1M 1DM).