Analysis of Proposed Structural Conditionality under the Extended Credit Facility-2023-24(1)QWE

Prior Action 1. Enact any legislation and/or executive order necessary to achieve the 2023 fiscal objective — an adjustment of the non-oil primary balance (measured on a commitment basis) of at least 2 percent of GDP, with revenue measures that will permanently improve the non-oil revenue-to-GDP ratio by at least 1 percent of GDP.

Overview

Ghana’s fiscal and debt vulnerabilities have been significantly aggravated by a pattern of excessive borrowing in recent years, leading to a range of adverse consequences. These consequences include the loss of access to international markets, limited domestic financing options, and a growing reliance on monetary financing by the government. To address these pressing issues and qualify for a $3 billion bailout from the International Monetary Fund (IMF), specific diagnostic measures have been imposed on Ghana.

One of the key actions required by the IMF is the enactment of legislation and/or executive orders to achieve the fiscal objective for 2023. This objective entails making adjustments to the non-oil primary balance, measured on a commitment basis, by a minimum of 2 percent of GDP. In addition, Ghana needs to implement revenue measures that will result in a permanent improvement of at least 1 percent of GDP in the non-oil revenue-to-GDP ratio.

The imposition of these measures indicates that Ghana’s fiscal policies have been inadequate and unsustainable, resulting in a deteriorating fiscal situation and heightened debt vulnerabilities. The excessive borrowing and lack of fiscal discipline have significantly impeded Ghana’s ability to access funds from external sources, constraining the country’s capacity to finance its budget deficit and meet its financial obligations.

The risks of not achieving the policy objectives set by the IMF are substantial. Failure to implement the necessary fiscal adjustments could prolong the state of fiscal and debt unsustainability. In the absence of credible fiscal reforms, Ghana may face further deterioration in key economic indicators. The declining international reserves, depreciation of the Ghanaian Cedi, rising inflation, and eroding domestic investor confidence mentioned earlier highlight the severity of the crisis confronting Ghana.

If the policy objectives are not met, Ghana may experience further loss of access to international markets, higher borrowing costs, and increased difficulty in securing external financing. These factors would exacerbate the burden of debt and hinder economic growth. It is imperative for Ghana to address its fiscal challenges comprehensively, restore fiscal and debt sustainability, and rebuild the confidence of international investors to stabilize the economy and foster sustainable long-term growth.

Policy Impact Analysis:

1. Austerity Measures and Reduction in Public Spending: To achieve the fiscal objectives set by the IMF, Ghana will likely implement austerity measures and reduce public spending. This can have a negative impact on citizens as it may lead to cuts in social welfare programs, public infrastructure development, and public sector employment. Reduced access to essential services and job losses can worsen living conditions and increase poverty levels among the population.
2. Increased Taxes and Cost of Living: Ghana may implement revenue measures, such as tax increases, to improve the non-oil revenue-to-GDP ratio. Higher taxes can burden citizens, especially the middle and lower-income groups, who may struggle to meet their basic needs. The increased cost of living can reduce disposable income and limit individuals’ ability to save or invest, further impacting economic growth at the household level.
3. Inflation and Currency Depreciation: The deteriorating fiscal situation and excessive borrowing can lead to inflation and currency depreciation. Rising inflation erodes the purchasing power of citizens, making goods and services more expensive. Currency depreciation can increase the cost of imported goods and essential commodities, further straining the budgets of households and businesses.
4. Limited Access to Credit and Investment: Ghana’s loss of access to international markets and increased borrowing costs can limit the availability of credit for businesses and individuals. This can hinder investment, entrepreneurship, and job creation opportunities. Reduced access to credit can also impede economic growth and prevent businesses from expanding or innovating.
5. Unemployment and Economic Instability: The economic crisis and fiscal challenges faced by Ghana can lead to increased unemployment rates as businesses struggle to sustain operations. A lack of job opportunities can exacerbate poverty, inequality, and social unrest. Economic instability can also create uncertainty and deter both domestic and foreign investment, negatively impacting long-term economic prospects.
6. Reduced Public Services and Infrastructure: The fiscal constraints faced by the government may result in reduced investment in public services and infrastructure development. Citizens may experience deteriorating healthcare, education, and transportation systems, leading to a decline in the overall quality of life. Limited access to quality public services can disproportionately affect vulnerable populations, further widening social disparities.
7. Erosion of Investor Confidence and Economic Growth: Ghana’s unsustainable fiscal policies and excessive borrowing can erode investor confidence in the economy. This can lead to a decrease in foreign direct investment and hinder the growth of key sectors such as manufacturing, agriculture, and services. Reduced economic growth rates can limit job creation and opportunities for citizens, exacerbating poverty and inequality.

Overall, the negative impacts of Ghana’s fiscal and debt vulnerabilities, as well as the imposed policy measures, can include reduced public services, increased taxes and cost of living, inflation, currency depreciation, limited access to credit and investment, unemployment, and economic instability. Addressing these challenges comprehensively and implementing sustainable fiscal reforms are crucial for restoring stability, improving living standards, and fostering long-term economic growth in Ghana.

Overview

As part of the specific conditionality imposed by the IMF, Ghana was required to implement an upfront weighted-average electricity tariff adjustment of at least 29 percent. This condition was set with the aim of addressing the challenges faced by Ghana’s power sector, specifically related to cost recovery and financial sustainability.

The existing electricity tariffs in Ghana were likely insufficient to cover the actual costs associated with generating and distributing electricity. As a result, there was a significant shortfall in the power sector, where the revenue generated from tariffs was not enough to meet the operational and maintenance expenses. This situation created various difficulties, including limited investment in infrastructure, maintenance issues, and challenges in providing reliable and affordable electricity to consumers.

By implementing the upfront tariff adjustment, Ghana aimed to raise the electricity tariffs to a level that would more accurately reflect the true costs of producing and delivering electricity. This adjustment was crucial to improving cost recovery in the power sector, ensuring that the revenues generated from tariffs were adequate to cover the expenses incurred.

Failing to achieve the objective of bringing electricity tariffs closer to cost recovery and reducing the power sector shortfall could have significant implications. It could perpetuate the financial challenges in the power sector, impacting the sustainability of electricity supply and hindering investments in necessary infrastructure. This, in turn, could result in power outages, unreliable service, and adverse effects on economic activities.

Additionally, if the electricity tariffs were not adjusted to cover costs adequately, it could place an ongoing financial burden on the government. This would further exacerbate fiscal vulnerabilities and contribute to the overall debt burden, straining the country’s fiscal position.

Therefore, the implementation of the tariff adjustment was crucial for Ghana to improve the financial sustainability of the power sector, ensure proper cost recovery, and address the power sector shortfall. By meeting this specific conditionality, Ghana aimed to mitigate the challenges in the power sector, foster a reliable electricity supply, and strengthen the government’s fiscal position.

Policy Impact Analysis:

1. Increased Cost of Electricity: The upfront tariff adjustment of at least 29 percent would result in a significant increase in electricity tariffs for consumers. This would directly impact citizens, particularly households and businesses, as they would face higher electricity bills. The increased cost of electricity can strain household budgets, reduce disposable income, and limit the ability of businesses to invest and expand, potentially leading to job losses and reduced economic activity.
2. Affordability Challenges for Low-Income Households: Higher electricity tariffs can disproportionately affect low-income households who already struggle to meet their basic needs. For vulnerable populations, the increase in electricity costs can further exacerbate financial hardships, potentially forcing them to cut back on other essential expenses, such as food, healthcare, or education. This can contribute to increased poverty levels and worsen inequality within society.
3. Impact on Productivity and Competitiveness: Businesses, particularly those in energy-intensive sectors, may face increased operating costs due to higher electricity tariffs. This can reduce their competitiveness in both domestic and international markets. Higher energy costs can also discourage investment in energy-intensive industries, limiting job creation and hindering economic growth in these sectors.
4. Reliability of Electricity Supply: The power sector shortfall and financial challenges in the industry have contributed to issues with the reliability and stability of electricity supply in Ghana. Inadequate cost recovery has limited the funds available for infrastructure maintenance and investment, leading to frequent power outages and service disruptions. The upfront tariff adjustment aims to address these challenges, but if not implemented successfully, it could perpetuate the existing problems, negatively impacting citizens who rely on a consistent and reliable electricity supply for their daily lives and businesses.
5. Potential Social Unrest: If the increased electricity tariffs impose a significant financial burden on citizens, especially for low-income households, it can lead to public dissatisfaction and potential social unrest. The affordability of basic utilities like electricity is essential for maintaining social stability, and any sharp increases in costs without corresponding improvements in service quality can strain the social fabric of the country.
6. Indirect Economic Impact: The increase in electricity tariffs can have indirect consequences on various sectors of the economy. Higher energy costs can result in increased production costs for businesses, leading to potential price inflation for goods and services. This can impact consumers’ purchasing power and contribute to a higher cost of living, further straining household budgets.
7. Implications for Government Finances: Failing to achieve adequate cost recovery in the power sector can place a continued financial burden on the government. Subsidizing electricity tariffs to keep them artificially low would require the government to allocate significant funds from the national budget. This can lead to fiscal vulnerabilities, including increased public debt, reduced resources for essential public services, and potential austerity measures in other areas.

Overall, the upfront tariff adjustment imposed by the IMF, while necessary to address the challenges in Ghana’s power sector, can have negative impacts on citizens. The increased cost of electricity, particularly for low-income households, affordability challenges, potential social unrest, and indirect economic effects are all important considerations. Careful implementation and targeted mitigation measures should be put in place to alleviate the burden on vulnerable populations and ensure that the benefits of improved financial sustainability in the power sector are realized by all citizens.

Overview

The IMF has imposed a prior action on Ghana, requiring the reporting of provisional spending budgets in Hyperion at a disaggregated level for the GETFund, Road Fund, and District Assemblies Common Fund. This condition aims to leverage the functionalities of the Ghana Integrated Financial Management Information System (GIFMIS) to enhance budget execution, commitment control, and reporting.

This prior action signifies that Ghana was facing challenges in its budget execution processes and commitment control mechanisms. The existing systems might have been inadequate in ensuring transparent and effective utilization of funds allocated to specific sectors, such as the GETFund, Road Fund, and District Assemblies Common Fund.

By implementing the reporting of provisional spending budgets in Hyperion at a disaggregated level, Ghana seeks to strengthen the functionality of GIFMIS. GIFMIS is an integrated financial management system designed to manage budgetary resources, monitor commitments, and ensure financial transparency and accountability.

The objective of this action is to address issues related to inefficient fund utilization, weak commitment controls, and insufficient reporting mechanisms. By doing so, Ghana aims to enhance transparency, efficiency, and accountability in the management of public funds.

Failure to achieve the objective of strengthening budget execution, commitment control, and reporting could have adverse consequences. It may lead to mismanagement of funds, lack of transparency, challenges in tracking expenditures, and inadequate reporting on budget execution. These issues can erode public trust, hinder effective financial management, and result in inefficiencies in resource allocation.

Implementing the prior action would enable Ghana to enhance the functionality of GIFMIS and improve budget execution, commitment control, and reporting. This, in turn, would contribute to better financial management practices, increased transparency in fund utilization, and improved accountability. Ultimately, strengthening budget execution, commitment control, and reporting is vital for ensuring effective financial governance, fostering public trust, and optimizing the allocation of resources in Ghana.

Policy Impact Analysis:

1. Potential Delays in Public Service Delivery: The implementation of the prior action may require significant adjustments and upgrades to the existing financial management systems. This could result in temporary disruptions or delays in the provision of public services, as government agencies and departments adapt to the new reporting requirements. Citizens may experience difficulties in accessing necessary services or encounter delays in critical infrastructure projects.
2. Increased Administrative Burden on Government Agencies: The reporting of provisional spending budgets at a disaggregated level can increase the administrative burden on government agencies responsible for budget execution and reporting. This additional workload may divert resources and attention away from frontline service delivery and essential public programs. The strain on government agencies can potentially impact the quality and efficiency of public services.
3. Limited Financial Flexibility for Local Governments: The prior action specifically targets the reporting requirements for the District Assemblies Common Fund, which supports local government operations and development projects at the district level. The increased reporting standards may place additional financial and administrative burdens on local governments, potentially limiting their flexibility in utilizing funds to address local needs and priorities.
4. Temporary Disruptions in Financial Management Processes: As Ghana adjusts its financial management systems to meet the IMF’s prior action requirements, there may be temporary disruptions in budget execution, commitment control, and reporting processes. These disruptions could affect financial planning, decision-making, and coordination within government agencies, potentially leading to inefficiencies and delays in resource allocation.
5. Limited Citizen Engagement and Participation: While the prior action aims to enhance financial transparency and accountability, the complex technical requirements and focus on internal reporting may limit citizen engagement and participation in budgetary processes. Citizens may face challenges in accessing and understanding the disaggregated spending information, reducing their ability to hold the government accountable for resource allocation and spending decisions.
6. Potential Misallocation of Resources: If the implementation of the prior action is not effectively managed, there is a risk of misallocating resources or failing to address systemic issues related to budget execution and commitment control. Inefficient fund utilization, weak commitment controls, and insufficient reporting mechanisms can persist, leading to suboptimal resource allocation and ineffective public spending.
7. Limited Immediate Benefits for Citizens: While strengthening budget execution, commitment control, and reporting is crucial for overall financial management, citizens may not experience immediate direct benefits from these improvements. The impact on citizens’ lives and well-being may be indirect, as enhanced financial transparency and accountability can contribute to better resource allocation, improved public service delivery, and long-term economic development.

It is essential for the Ghanaian government to effectively manage the implementation of the prior action to minimize potential negative impacts on citizens. Measures should be put in place to mitigate disruptions, provide necessary support to government agencies, and ensure that the enhanced financial management systems translate into improved public service delivery and citizen-centric outcomes.

Overview

The IMF has imposed a prior action on Ghana, requiring the signing of a Memorandum of Understanding (MoU) between the Ministry of Finance and the Bank of Ghana. This condition aims to eliminate the practice of monetary financing of the Central Government.

The information suggests that Ghana was facing a situation where the Central Government relied on direct borrowing from the central bank, known as monetary financing. This practice can have negative consequences for the economy, such as inflationary pressures and weakened central bank independence.

By signing the MoU, Ghana seeks to address the issue of fiscal dominance, where fiscal policy decisions exert undue influence on monetary policy. This undermines the independence of the central bank and hampers its ability to effectively implement monetary policy to achieve macroeconomic stability.

The objective of eliminating monetary financing of the Central Government indicates that Ghana needed to reduce its reliance on central bank financing and establish a more sustainable framework for government borrowing. This involves seeking alternative sources of financing, such as domestic and international markets, rather than relying on direct borrowing from the central bank.

Failure to achieve the objective of eliminating monetary financing could lead to several risks and implications. Firstly, it could contribute to inflationary pressures as the increased money supply resulting from direct central bank financing can lead to excessive money creation. This, in turn, can erode the value of the currency and negatively impact price stability.

Moreover, continued fiscal dominance and reliance on monetary financing could undermine the independence of the central bank. This could limit the central bank’s ability to set interest rates and implement effective monetary policy to manage inflation and promote economic stability.

By signing the MoU and eliminating monetary financing, Ghana aims to mitigate these risks, strengthen central bank independence, and enhance the transmission of monetary policy. This would create a more favorable environment for macroeconomic stability, sustainable economic growth, and investor confidence.

Overall, the prior action focuses on reducing fiscal dominance, reinforcing central bank independence, and improving the effectiveness of monetary policy transmission. Achieving these objectives would enable Ghana to establish a more sustainable and stable economic framework, which is crucial for long-term economic development.

Policy Impact Analysis:

1. Potential Impact on Inflation: The elimination of monetary financing aims to address the inflationary pressures associated with excessive money creation. However, the adjustment process may initially disrupt the balance between fiscal and monetary policy, potentially affecting the overall price levels in the economy. Citizens may experience higher inflation rates, which can erode their purchasing power and reduce the affordability of goods and services.
2. Economic Uncertainty: The transition away from monetary financing and the establishment of alternative sources of financing for the government can introduce uncertainties in the financial and economic landscape. Changes in borrowing practices may impact interest rates, credit availability, and overall economic conditions. These uncertainties can create challenges for businesses, investment decisions, and overall economic growth, potentially affecting job opportunities and income levels for citizens.
3. Potential Impact on Government Spending: Eliminating monetary financing requires Ghana to seek alternative sources of financing, such as domestic and international markets. Depending on the availability and conditions of these sources, there may be implications for government spending priorities and allocations. Citizens may experience changes in public expenditure patterns, potentially affecting the provision of essential services and infrastructure development.
4. Short-Term Adjustment Challenges: The shift away from monetary financing may require the government to make short-term adjustments to its fiscal and monetary policies. These adjustments can have immediate impacts on citizens, including changes in interest rates, exchange rates, and access to credit. Such changes can affect borrowing costs, investment decisions, and overall financial stability, potentially impacting individuals and businesses.
5. Potential Impact on Central Bank Independence: The prior action aims to reinforce the independence of the central bank by reducing fiscal dominance. However, the process of aligning fiscal and monetary policies may involve challenges and potential conflicts of interest. If central bank independence is compromised, it can affect the ability of the central bank to effectively manage monetary policy, which can have consequences for overall economic stability and citizens’ confidence in the financial system.
6. Adjustments in Government Financing: Shifting away from monetary financing may require the government to rely more on external borrowing or domestic debt markets. Depending on the terms and conditions of these financing sources, there may be implications for the country’s debt burden and debt service obligations. Higher debt levels can constrain government resources and potentially limit fiscal space for social programs and investments that directly benefit citizens.
7. Potential Impact on Investor Confidence: The successful implementation of the prior action to eliminate monetary financing can contribute to increased investor confidence in Ghana’s economic management. However, any challenges or uncertainties during the transition process may negatively impact investor sentiment and foreign direct investment. This can have indirect consequences for citizens, such as reduced job opportunities, limited economic growth, and potential capital outflows.

It is crucial for Ghana to carefully manage the transition away from monetary financing, mitigate short-term disruptions, and ensure effective coordination between fiscal and monetary policies. Implementing measures to maintain price stability, enhance investor confidence, and safeguard the provision of essential services will be vital to minimize the potential negative impacts on citizens and promote sustainable economic development.

Overview

The IMF has imposed a prior action on Ghana, requiring the publication of the Auditor General report on the audit of COVID-19 spending undertaken between March 2020 and June 2022. This condition aims to ensure transparency and accountability in the utilization of funds allocated for COVID-19 emergency response measures.

The information suggests that Ghana allocated significant funds for addressing the COVID-19 pandemic during the specified period. However, concerns arose regarding the transparency and accountability of the spending, indicating a potential lack of clear reporting and oversight mechanisms.

By publishing the Auditor General report on the audit of COVID-19 spending, Ghana aims to enhance transparency in the utilization of funds allocated for the pandemic response. The Auditor General, as an independent authority, is responsible for examining and reporting on the financial affairs of the government.

The objective of ensuring transparency and accountability of COVID-19 emergency spending highlights the need to address potential issues related to mismanagement, fraud, or inadequate reporting and monitoring of the funds allocated for pandemic response measures. It aims to instill public trust and confidence by providing a comprehensive assessment of how the resources were utilized and whether they were used in accordance with established guidelines and regulations.

Failure to achieve the objective of ensuring transparency and accountability of COVID-19 emergency spending could have various implications. It may lead to public mistrust, skepticism, and concerns about the handling of public funds during a critical time of crisis. Additionally, the lack of transparency and accountability can result in inefficient allocation of resources, potential misappropriation of funds, and missed opportunities to effectively combat the pandemic.

By publishing the Auditor General report, Ghana intends to address these risks and demonstrate its commitment to transparency, accountability, and good governance. The report will provide insights into how the COVID-19 funds were spent, identify any irregularities or deficiencies, and enable appropriate corrective measures to be taken if needed.

Overall, the prior action focuses on enhancing transparency and accountability in the utilization of COVID-19 emergency funds. Achieving this objective would contribute to maintaining public trust, ensuring effective resource allocation, and enabling the efficient management of the pandemic response, ultimately leading to better outcomes in combating the crisis.

Policy Impact Analysis:

1. Trust and Confidence: Failure to publish the Auditor General report on the audit of COVID-19 spending could erode public trust and confidence in the government’s ability to manage public funds during a crisis. Citizens may become skeptical about the allocation and utilization of funds, leading to decreased trust in the government’s response to the pandemic and future crisis situations.
2. Potential Misappropriation: The lack of transparency and accountability in COVID-19 spending could raise concerns about potential misappropriation of funds. This can lead to citizens perceiving the government’s actions as self-serving and prioritize personal gains over public welfare. Such perceptions can contribute to disillusionment and frustration among the population.
3. Inefficient Resource Allocation: Without proper reporting and oversight mechanisms, there is a risk of inefficient allocation of resources in the COVID-19 response. Mismanagement and lack of accountability can result in funds being misdirected or misused, leading to suboptimal outcomes in terms of healthcare services, economic support, and overall pandemic management. Citizens may not receive the necessary support and assistance, worsening the impact of the crisis on their lives and livelihoods.
4. Missed Opportunities: Inadequate reporting and monitoring of COVID-19 funds can hinder the identification of areas where additional resources are needed or where existing resources are not effectively utilized. This can result in missed opportunities to enhance testing, healthcare infrastructure, vaccination campaigns, and other critical aspects of the pandemic response. Citizens may face difficulties accessing essential services and resources, prolonging the effects of the crisis on their well-being.
5. Weakened Public Health Response: Insufficient transparency and accountability in COVID-19 spending can undermine the government’s ability to effectively respond to the public health aspects of the pandemic. The lack of clear reporting and oversight can impede the implementation of evidence-based strategies, hinder coordination between different stakeholders, and reduce the overall effectiveness of containment measures. Citizens may experience prolonged health risks and disruptions to their daily lives.
6. Socioeconomic Impact: Mismanagement and misappropriation of COVID-19 funds can have broader socioeconomic consequences for citizens. Insufficient support for affected individuals and businesses, inadequate investment in social protection measures, and lack of targeted assistance can deepen inequalities, exacerbate poverty, and prolong economic recovery. Citizens may face challenges in accessing essential services, employment opportunities, and financial stability.

By meeting the prior action and publishing the Auditor General report, Ghana aims to address these negative impacts by fostering transparency, accountability, and good governance in the utilization of COVID-19 funds. This would help restore public trust, ensure effective resource allocation, and enable the government to implement targeted measures that effectively mitigate the health and socioeconomic effects of the pandemic.

The writer is an Economic Policy & Financial Analyst