In July 2022, government took the decision to request support from the IMF to implement the Post-COVID-19 Programme of Economic Growth (PC-PEG). The country was trapped in a period of economic uncertainties and despondency. Parliament passed the revenue and expenditure measures, and several other macro-critical economic policies presented in the 2023 Budget as the first critical step toward fulfilling the PC-PEG objective.
In line with the above, it was necessary for government to create additional fiscal space by negotiating an International Monetary Fund (IMF) Programme; concluding the debt operations programme; and attracting significant investments (especially green investments) for a vibrant growth strategy.
Government was diligent and resolute in implementation of the foregoing measures and successfully negotiated the US$3billion, 3-year IMF-ECF Programme to support the implementation of PC-PEG; concluded the initial part of the Debt Operations (Domestic Debt Exchange Programme (DDEP); developed the framework for the V20 Climate Prosperity Plan to attract climate investments from the private sector; and initiated the Mutual Prosperity Dialogue to crowd-in domestic and external private investment to underpin the national growth strategy.
Progress was made during the first six months to exceed non-oil revenue targets for the year. There were improvements in non-oil tax revenue collection despite some noticeable shortfalls in VAT. However, oil revenues fell short of expectations due to changes in global prices.
Therefore, government had to undertake a downward review of the oil-related revenue as well as the corresponding expenditures to align with the underperformance of some revenue handles. Specifically, this would impact the Annual Budget Funding Amount (ABFA).
Based on the reasons outlined above, and lower domestic interest payment and amortisation owing to partial completion of the DDEP and reduction in the foreign-financed CAPEX, the Appropriation was revised from GHȼ227.7billion as presented and approved in November 2022 at GHȼ206billion (during the Mid-Year Budget presentation). This was in line with Regulations 24 sub-regulation (3) of Public Financial Management Act Regulations 2019 (L.I. 2378).
Based on the foregoing factors, no Supplementary Budget was required during presentation of the Mid-Year Budget.
However, government is committed to pursuing a robust growth strategy within the limited fiscal space and within its fiscal consolidation programme. This would be executed by attracting domestic and foreign private sector investments and expanding production, which would be encouraged and stimulated by government policies and agencies.
Government’s Mutual Prosperity Dialogue with the private sector would seek to facilitate the ease of doing business in order to crowd-in private domestic and foreign investments. Security continues to be a priority of government.
The United Nations recently reported that over 1,800 terrorist attacks, resulting in nearly 4,600 deaths, were recorded in the West African sub-region in the first six months of 2023. Due to this instability, among others, increasing numbers of West African nationals are seeking refuge in the country. This has required review of the security expenditures within a limited fiscal space.
End-December 2022 macroeconomic data
- Overall Real GDP growth was 3.1 percent compared to the revised target of 3.7percent.
- Non-Oil Real GDP growth was 3.8 percent compared to the revised target of 4.3percent.
- End-December inflation rate was 54.1 percent compared to the projected 28.5percent.
- Total Revenue and Grants for the period amounted to GH¢96.7billion (15.8 percent of GDP) compared with the revised target of GH¢96.84billion (16.4 percent of GDP).
- Total Expenditure on commitment basis amounted to GH¢165.1billion (27 percent of GDP) against the revised target of GH¢133.8billion (22.6 percent of GDP).
- Overall Budget deficit on commitment basis was 11.8 percent of GDP against the revised target deficit of 6.3 percent of GDP.
- Primary Balance on commitment basis was a deficit of 4.3 percent of GDP against the revised target deficit of 0.7 percent of GDP.
- On cash basis, the Overall Budget deficit was 10.7 percent of GDP against the revised target deficit at 6.6 percent of GDP.
- The corresponding Primary Balance on cash basis was a deficit of 3.2 percent of GDP against revised target of surplus at 0.4 percent of GDP.
- Gross International Reserves were equivalent to 2.7 months of import cover.
- As at end-December 2022, Ghana’s central government debt and guaranteed debt in nominal terms stood provisionally at GH¢435,306.45million, up from GH¢351,787million at end-December 2021, representing an increase of 23.7 percent.
- Using the revised GDP released by the Ghana Statistical Service in April 2023, the debt-to-GDP ratio as at end-December 2022 stood at 71.3 percent.
Revisions to key macroeconomic targets for 2023
- Overall Real GDP Growth rate of 1.5 percent, down from 2.8 percent.
- Non-Oil Real GDP Growth rate of 1.5 percent, down from 3 percent.
- End-period headline inflation of 31.3 percent, from 18.9 percent.
- Primary Balance on Commitment basis of deficit of 0.5 percent of GDP compared to surplus of 0.7 percent of GDP, aligning with IMF-supported PC-PEG target for Primary Balance.
- Gross International Reserves (programme definition) sufficient to cover at least 0.8 months of imports of goods and services in 2023.
Government engaged the IMF to support the implementation of PC-PEG to address the 2022 macro-fiscal challenges, including macroeconomic stability and debt sustainability; extensive reforms to strengthen resilience; and lay the foundation for stronger and more inclusive growth. Executive Board of the IMF approved a 36-month Extended Credit Facility (ECF) in an amount equivalent to SDR 2.242 billion (approximately US$3billion). The programme is anchored on government’s PC-PEG.
Key priority interventions to address economic issues
- Large and frontloaded fiscal consolidation to bring public finances back on a sustainable path.
- Protection for the vulnerable through enhancement of existing social protection programmes, including the Livelihood Empowerment Against Poverty (LEAP); National Health Insurance Scheme (NHIS); Capitation Grant; and School Feeding Programme.
- Strong and ambitious structural reforms in tax policy; revenue administration; public financial management; financial sector; and strong measures to enhance revenue mobilisation and address weaknesses in the energy and cocoa sectors – both remain critical to efforts intended to bring public finances back on sustainable path while creating fiscal space for critical development spending.
- Bring inflation under control through prudent monetary policy including appropriate monetary policy tightening; and elimination of monetary financing of the budget.
- Rebuild international reserves buffer to 3 months of imports by end of the PC-PEG Programme.
- Restore debt sustainability and preserve financial stability following the Domestic Debt Exchange Programme to support private investment and growth.
- Pursue reforms to encourage private investment, strengthen growth and create more jobs.
Some significant milestones in the IMF Programme
- Secured US$3billion IMF financing equivalent to three times Ghana’s quota.
- Government in discussions with the World Bank for US$900million Development Policy Operation.
- The United States, through the International Development Finance Corporation (IDFC), announced a programme to invest US$300million toward the construction of a Data Centre under the G7 Partnership for Global Infrastructure and Investment (PGII) in the country.
Government sought to embark on a debt restructuring programme to alleviate fiscal pressures by reducing debt servicing costs; improving debt sustainability; and ensuring macroeconomic stability and economic growth. The (debt) restructuring remains critical toward implementation of the IMF supported PC-PEG Programme to ensure a return to the path of debt sustainability.
The perimeter for the restructuring includes both domestic (central government debt and some parastatals) and external. The main aim of the operation is to reduce debt servicing costs and restore national debt sustainability.
Debt Operations Target by 2028
- The present value of overall debt and external debt to GDP is expected to fall below 55 percent and 40 percent thresholds, respectively.
- External debt service-to-revenues-and-exports expected to decrease below the 18 percent and 15 percent thresholds, respectively.
Domestic Debt Exchange Programme (DDEP)
- Total bonds outstanding at the settlement date amounted to GH¢126,978.5million, of which GH¢29,286.2million was held by Pension Funds – bringing the total eligible bonds to GH¢97,749.6million.
- The ministry received final participation of GH¢82,994.5million, representing 84.9 percent of total eligible bonds.
- DDEP has provided government with increased fiscal flexibility and addressed cash and other liquidity constraints.
- Government intended to pursue further discussions around the following domestic debt instruments which were excluded from the DDEP perimeter: energy sector Independent Power Producers (IPPs); Cocoa bills; Local US dollar-denominated bonds; and Bank of Ghana non-tradable debt.
- Government launched debt operations for the Cocoa bills and local US dollar-denominated bonds on July 14, 2023. The settlement date was July 31, 2023.
- Although Pension Funds were exempted from the main DDEP, government continues to engage them.
- Government was engaging with the IPPs on debt relief and financing arrangements to achieve both debt sustainability for the country and financial sustainability for the energy sector.
- As part of the restructuring process for external debt, government requested treatment of the bilateral debt under the G20 Common Framework beyond the Debt Service Suspension Initiative. Government also held a series of engagements with its bilateral creditors via the Paris Club to provide financing assurances in support of Ghana’s IMF-ECF request.
- The Official Creditor Committee for bilateral creditors was established and co-chaired by China and France. The Committee provided financing assurances to support the IMF Board’s approval of Ghana’s IMF-ECF request.
- Government has begun a negotiation process with its commercial creditors (Eurobond investors). Two bondholder groups have been formed, comprising domestic and regional bondholders as well as international bondholders. Government has already shared a set of data and scenarios to commence discussions.
- On Eurobonds restructuring, government expects to receive counter-offers from bondholders in the short-term; and envisages an agreement by year-end 2023.
Impact of DDEP on Banks and Other Financial Sector Institutions
- The Financial Sector, comprising Commercial Banks, Specialised Deposit-Taking Institutions, Insurance Companies and Fund Managers participated significantly in the DDEP.
- Effects of the debt operations on the financial sector include increased liquidity and solvency risks from impairment losses.
- Regulators, including the Bank of Ghana, provided temporary regulatory forbearance to mitigate the liquidity impact of DDEP.
- Government is working with key partners to establish a Ghana Financial Stability Fund to provide liquidity and solvency support to the financial institutions.
- The eligibility criteria agreed with regulators and international partners will be published soon by MoF.
- These macro-prudential interventions and operations were also to address impacts of the large external shocks within a wider global economic context.
- In addition to financial institutions, government is mindful of impacts from the debt exchange programme on individuals; and is thus working assiduously to stabilise the economy and toward faster economic recovery to ameliorate impacts on the welfare of individuals.
Overview of Global Macroeconomic Development
- The global economy continues to struggle through a patchy recovery phase following the shocks, including those from the COVID-19 pandemic and Russia-Ukraine war.
- The IMF (2023) projected global output growth would decline significantly to 2.8 percent in 2023, from 3.4 percent in 2022, before rising slightly to 3 percent in 2024.
- The projected slowdown reflects synchronous policy tightening around the globe, especially in the United States, Euro area, United Kingdom and China to contain the surge in inflation and worsening financial conditions.
- Despite signs of modest growth in early 2023, persistent high inflation and the global financial market turmoil have proven too strong and dampened hopes of robust recovery.
Domestic macroeconomic development – 2022
- Overall, real GDP growth declined from 5.1 percent during 2021 to 3.1 percent in 2022. This was lower than the 3.5 percent projected for the year.
- Non-oil GDP growth declined over the period, recording growth of 3.8 percent compared to the 6.6 percent recorded in 2021.
- Headline inflation accelerated consecutively from 13.9 percent in January to 29.8 percent in June 2022 to a peak at 54.1 percent in December 2022, following the sharp currency depreciation and surge in commodity prices.
- Interest rates broadly trended upward across the spectrum of the yield curve, consistent with the tightening policy stance. The 91-day and 182-day Treasury bill rates increased to 35.48 percent and 36.23 percent respectively in December 2022 from the respective 12.49 percent and 13.19 percent during the same period of 2021.
- Cumulatively, the Ghana cedi depreciated by 30 percent, 21.2 percent and 25.3 percent against the US dollar, pound sterling and euro respectively. This compared with appreciation of 3.5 percent against the euro and respective depreciations of 4.1 percent and 3.1 percent against the US dollar and pound sterling in 2021.
- Gross International Reserves declined by US$3,457.03million to US$6,238.19million, equivalent to 2.7 months of import cover.
- Government sought to, among others, strengthen its fiscal consolidation programme which commenced in 2021. The objective was to gradually return to the Fiscal Responsibility Act thresholds of a fiscal deficit at no more than 5 percent of GDP and annual positive Primary Balance at the close of 2024.
- The strategy included pursuing strong revenue-led consolidation to complement expenditure rationalisation measures. However, owing to several factors, government’s fiscal policy suffered major setbacks from both external and domestic shocks.
- The fiscal anchor in the context of IMF-supported PC-PEG is the Primary Balance on commitment basis. To align with this requirement, government indicated in the 2023 Budget Statement that the fiscal accounts will henceforth be reported on commitment basis; thereby taking into account outstanding unpaid commitments of government.
- The assessment on commitment basis promotes transparency, enables real-time monitoring of government’s fiscal performance and provides a real-time view on the payables; thus helping to prevent while reducing the accumulation of arrears. This information was considered essential for the public to get a comprehensive view of the bold fiscal policies to restore fiscal and debt sustainability in Ghana.
Domestic macroeconomic developments update – 2023
- Overall, first quarter growth for 2023 was 4.2 percent – up from 3 percent recorded for the same period in 2022. This growth largely reflected an increase in the Services Sector which recorded growth of 10.1 percent.
- Headline inflation eased in the first half of 2023. From the peak at 54.1 percent in December 2022, headline inflation gradually trended downward from 53.6 percent in January 2023 to 42.5 percent in June 2023. The moderation in inflation was largely supported by monetary policy tightening; relative stability in the exchange rate; and lower and stable ex-pump petroleum prices.
- Cumulatively, the Ghana cedi depreciated by 22.1 percent against the US dollar from beginning of the year to July 17, 2023, compared to 21.1percent in the same period of 2022. The Ghana cedi, excluding the January 2023 depreciation of 20 percent, depreciated by an impressive 1.84 percent between February and July 17, 2023.
- Total export receipts fell by 7.9 percent to US$8,178.56million on the back of lower crude oil export receipts. Crude oil exports declined by 41.3 percent year-on-year due to a 21.4 percent decline in volumes and 25.3 percent fall in prices.
- Current account recorded provisional surplus of US$849.16million (1.1 percent of GDP) compared with deficit of US$1,111.87million (1.5 percent of GDP) for the same period in 2022.
- Gross International Reserves dropped from US$6.2billion at the end of December 2022 to US$5.3billion (2.5 months of import cover) in June 2023, reflecting the BoG’s objective of reducing its foreign liabilities in line with the IMF programme. Net International Reserves received a boost from gold reserves and improved to US$2,353.95million, equivalent to 1.1 months of import cover compared with US$1,440million (0.6 months of import cover) recorded at the end of December 2022.
Banking industry developments and outlook
- The banking industry posted an unexpected and relatively strong performance during the first-half of the year, despite lingering effects of the domestic debt exchange programme.
- Banks reported increased deposits and investments, higher profitability and return on equity of over 35 percent. The DDEP’s impact, such as the increase in non-performing loans (NPLs), was partly moderated by the timely introduction of temporary regulatory reliefs.
- In the outlook, operationalisation of the US$750million Ghana Financial Stability Fund and planned recapitalisation of banks will ensure stability as well as strengthen financial intermediation to support the private sector.
- To equip participants with entrepreneurial skills, investment readiness tools as well as coaching and mentoring services under the YouStart initiative, 26,626 persons across the country have received business advisory support services since its launch last year.
- Government will continue to work with Participating Financial Institutions (PFIs); the National Entrepreneurship and Innovation Programme (NEIP); and Ghana Enterprises Agency (GEA) to provide soft loans and managerial skills for setting up youth-led enterprises.
Export promotion and AfCFTA
- As part of efforts to take full advantage of AfCFTA, government has established an Export Trade House in Nairobi, Kenya, to promote made-in-Ghana products and services.
- Government has also undertaken a marketing expansion expedition to Kenya with 63 Ghanaian companies to introduce them to the East African market.
- Government has facilitated the issuance of AfCFTA Certificates of Origin to 51 Ghanaian companies and businesses covering 300 product lines, indicating eligibility to be traded under AfCFTA.
Private sector interventions
Financial intermediation for entrepreneurship
- Government remains committed to promoting access to competitive financing for the private sector. Over the course of the past five years, government has established and recapitalised critical institutions that are able to provide financial intermediation to the private sector.
- These institutions include the Ghana Incentive-based and Risk-Sharing Scheme for Agricultural Lending (GIRSAL); Development Bank, Ghana (DBG); Consolidated Bank, Ghana (CBG); Ghana Commodity Exchange (GCX); Ghana Infrastructure Investment Fund (GIIF); and Venture Capital Trust-Fund (VCTF).
- As the economy recovers, government needs to support these critical institutions to deepen their interaction with the private sector to spur growth and create more jobs.
- Government will place emphasis on:
- Supporting DBG capital raising to the US$1billion mark in the medium-term; and disbursing about GHȼ1billion in loans from the current GHȼ450million by the end of 2023.
- Ensuring DBG and GIRSAL are providing Partial Credit Guarantees that will reduce risk and attract more private sector actors to expand agricultural operations.
- Operationalising an equity fund in partnership with other private sector investors to augment existing capital for SMEs.
- Supporting GIIF to execute commercially sustainable infrastructure construction solutions, including the Agenda 111 Hospitals; Accra-Tema Expressway project; and affordable university hostel accommodation.
Climate change and financing
- The World Bank estimated climate change could cost Ghana approximately 1.7 percent of GDP annually by 2030 if left unaddressed.
- Government is working to secure carbon financing to support its Nationally Determined Contributions (NDCs) and meet its commitments under the Paris Agreement. This will drive foreign direct green investment to benefit local businesses.
- As part of efforts to address loss and damage from climate change, Ghana as one of the first pathfinder countries launched the in-country process for participation in the Global Shield against Climate Risk and the Global Risk Modelling Alliance. These initiatives will enable the country to assess quantitatively its climate risk; design solutions informed by the data; and facilitate access to resources from the Global Shield.
- Government in partnership with the Green Climate Fund has established the Ghana Shea Landscape Emission Reduction Project (GSLERP) at an estimated cost of US$54.5million. The GSLERP will focus on the Shea landscape and address the country’s efforts to reduce emissions from deforestation and forest degradation (REDD+).
- Government is implementing the Ghana Cocoa Forest REDD+ Programme (GCFRP), which covers 5.9 million ha (79 percent off-reserve, 21 percent on reserve) in seven regions. The programme will benefit 12 million urban and rural residents.
- Ghana became the second African country after Mozambique to receive FCPF REDD+ payments in January 2023.
Funding the national growth agenda
- Financing from domestic and external private sector investments, and rationalisation of ongoing programmes.
- The approach is to prioritise existing programmes that are critical to growth and can be implemented to deliver quick results without huge demands on the available budgetary resources.
Implications for the banking industry
- Banks that meet the determined eligibility criteria will benefit from the Financial Stability Fund.
- Effective operationalisation of the Financial Stability Fund is needed to ensure liquidity buffers toward sustained operations in the immediate and medium-term.
- Shareholder investment is eminent in restoring capital buffers over the long-term.
- Banks need increased interactions (education and campaign) with businesses in the private sector on various banking products, services and financing opportunities.
- Increased lending to small- and medium-sized enterprises (SMEs) will revive real-sector businesses and ensure economic stimulation and growth acceleration.
- Opportunities to restore public confidence in the banking industry and broader financial system must be utilised.
The role of banks in ensuring resilience and robustness of the economic fundamentals cannot be overemphasised.
This is a Ghana Association of Banks (GAB) Research