Ghana on 1st July 2022 officially announced the commencement of an engagement with the International Monetary Fund (IMF) to address, primarily, the current Balance of Payment (BoP) challenges. This was followed by an IMF staff team visit to Accra from 6th – 13th July led by Carlo Sdralevich, mission chief for Ghana, to begin initial discussions with Ghanaian authorities for a possible IMF-supported programme. Government has reiterated its commitment to negotiating a good deal as the country faces two exogenous shocks (the COVID-19 pandemic and Russia-Ukraine war), which have exacerbated structural domestic economic bottlenecks.
In a press statement after a Cabinet retreat in March 2022, Ghana lost GH¢13.1billion of revenue and had to increase expenditure by GH¢14.2billion with combined fiscal impact of GH¢26billion (6.8% of GDP). The public debt to GDP ratio has increased considerably from 54.2% in 2017 to 61.2% in 2019 to 74.4% in 2020 and further to 76.6% at the end of 2021. Provisional data from the Bank of Ghana indicate that public debt stock reached GH¢387.9billion (77.2% of GDP) at the end of April 2022.
The overall balance of payment deficit worsened to US$934.5million in first-quarter 2022, compared with US$429.9million in the same period last year. Inflation hit an 18-year high at 27.6% in May 2022, while the Monetary Policy Rate (MPR) was increased by 200 basis point to 19% in May 2022 to tame inflationary pressures. To address these challenges, government announced a raft of measures in March 2022 to contain the ballooning expenditure while ensuring tax compliance.
This latest request comes on the back of the IMF’s approval of disbursing US$1billion drawn under the Rapid Credit Facility (RCF) in April 2020. The disbursement was to aid Ghana address fiscal and balance of payment challenges, improve confidence and catalyse support from other development partners. The RCF is available to low-income countries and carries a zero-interest rate. It has a grace period of 5½ years and a final maturity of 10 years.
The IMF’s Article IV consultations with Ghana in July 2021 posited that ongoing recovery from the pandemic is threatened by possible new waves and rising debt vulnerabilities, including large financing needs which leave government exposed to rollover and solvency risks. This has been heightened by the crisis in Ukraine, which has led to supply chain disruptions, skyrocketing food prices and limited access to the international capital market.
Comparative Analysis
It is important to highlight how the Fund has used Special Drawing Rights (SDR) to address balance of payment challenges in member-states. SDRs are international reserve assets created by the IMF to supplement the official reserves of its member countries – currently 190. They are potential claims on the freely usable currencies of IMF members. As such, SDRs can provide a country with liquidity. What is Ghana’s current Special Drawing Rights (SDR) position at the Fund?
According to the IMF, Ghana’s SDR as at 7th July 2022 stood at US$671.34million with a quota of US$738million. As Ghana commences negotiations with the Fund, what could the value of financial assistance from the IMF possibly be? Government has hinted of its expectation to get between US$2-US$3billion in BoP support. These are early days of the negotiations as Ghana is at the data-sharing stage with the Fund for a possible stabilisation programme. How has the IMF resolved other countries’ BoP challenges in recent times?
On 2nd April 2021, the IMF Board approved SDR 1.655 billion (about US$2.34billion) Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements for Kenya. The three-year financing package will support the next phase of the authorities’ COVID-19 response and their plan to reduce debt vulnerabilities while safeguarding resources to protect vulnerable groups. Kenya currently has SDR of 489.08 million with a quota of 542.8 million.
Similar to the aforementioned, on 12th December 2016, the IMF Executive Board approved a three-year ECF/EFF arrangement with a total access of SDR 650.4 million (about US$896.7million) which was extended by one year on December 6, 2019 for Cote d’Ivoire. It was augmented by about US$278.2million. Cote d’Ivoire currently has SDR of 1634.95 million with a quota of 650.4 million.
Moreover, on 7th June 2021, the IMF Board approved a SDR 453 million (about US$650million or CFAF350billion) Stand-by arrangement under the Standby Credit Facility for Senegal and completed the third review under the Policy Coordination Instrument. The 18-month arrangement together with the Policy Coordination Instrument will provide a policy anchor for the next phase of the authorities’ COVID-19 response and support a strong and job-rich recovery. At present, Senegal has SDR of 884.89 million with a quota of 323.6 million.
It is safe to predict that Ghana could secure an ECF or EFF programme from the Fund because of the current broad macroeconomic challenges and, more importantly, debt vulnerabilities. The ECF is a lending arrangement that provides sustained programme engagement over the medium- to long-term in case of protracted balance of payment problems. On the other hand, the EFF was established to provide assistance to countries: (i) experiencing serious payments imbalances because of structural impediments; or (ii) are characterised by slow growth and an inherently weak balance of payments position.
Ghana’s ECF programme in 2015
On 3rd April 2015, the Executive Board of the International Monetary Fund (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) to support the authorities’ medium-term economic reform programme. The programme aimed to restore macroeconomic stability, debt sustainability; and to foster a return to high growth and job creation while protecting social spending. 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 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 the inflation-targetting framework’s effectiveness to help bring inflation back into single-digit territory; and to 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. A similar programme could be agreed on with the IMF after the ongoing negotiations.
Ghana’s Bargaining Chip
The government of Ghana has indicated that it will present its Enhanced Domestic Programme (EDP) to serve as an anchor-programme at the negotiation table. The EDP is a 3-year fast-tracked macroeconomic stabilisation programme that seeks to restore investor confidence and achieve fiscal and debt sustainability. The programme is heavily driven by a mix of robust structural reforms and revenue, expenditure and financing policies. This will further enhance the recovery and transformation efforts by Ggvernment under the Ghana CARES ‘Obaatan pa’ programme. The main pillars are:
- Strengthen government’s effort to restore investor confidence in the economy; thereby regaining market access, boosting Development Partner (DP) disbursements and unlocking other financing sources.
- Restore debt sustainability and macroeconomic stability to support green growth, economic transformation and job creation while protecting social spending.
- Strengthen the central bank’s Monetary Policy Regime.
- Build buffers to strengthen resilience to economic shocks.
- Further enhance the recovery and transformation efforts by government under the Ghana CARES ‘Obaatan pa’ programme.
Broader consultations with sections of the populace by government before commencement of negotiations with the IMF could have solidified Ghana’s position at the negotiation table. History is the best teacher. The IMF’s Structural Adjustment Programme (SAP) in 1983 spurred economic growth but at a social cost; and the net freeze on employment and cuts in other social expenditure between 2015 and 2019 during implementation of the ECF programme are good examples to inform government’s position as it engages the Fund.
To Review or Scratch?
As Ghana negotiates for a stabilisation programme, domestic pressures heighten. Agitations from the labour front are rife. The Civil and Local Government Staff Association of Ghana (CLOSAG) in April 2022 embarked on a strike to demand a so-called ‘neutrality allowance’. On 4th July 2022, the Ghana National Association of Teachers (GNAT), National Association of Graduate Teachers (NAGRAT), Teachers and Educational Workers’ Union (TEWU) and Coalition of Concerned Teachers (CCT) declared a strike to demand a 20% Cost-of-Living Allowance (COLA).
A meeting between the Ministry of Employment and the striking unions ended inconclusively on 6th June 2022. Other labour unions have hinted at similar industrial actions. In the 2022 Budget, government earmarked GH¢35.4 billion for compensation of government employees. This is followed closely with interest payment allocations of GH¢37.4billion. The tight fiscal space makes is difficult for government to fully accommodate the demands of labour.
On the other hand, flagship programmes of government – which include Free Senior High School Education, Planting for Food and Jobs, 1D1F etc. – have come up for discussion. Typical IMF stabilisation programmes come with austerity measures, hence some sections of Ghanaians fear these programmes might be reviewed or scratched despite government assurances.
In conclusion, as Ghana engages the IMF for an 18th stabilisation programme, Ghanaian authorities should negotiate in the best interests of Ghanaians with emphasis on social protection. The medium-term prospects of the country are bright, hence an IMF programme should be anchored on securing prior micro and macroeconomic gains while dealing with the risk of fiscal slippages, ballooning debt and its accompanying interest payments.
The writer is an Economist/ Partner at C-KADD GLOBAL
Email: [email protected]
