IMF strikes deal to help Ghana rebuild economy

Fitch Ratings said the agreement should ease short-term government and external financing pressures, but sticking to the programme, which includes ambitious fiscal consolidation targets, will be challenging ahead of elections in 2016. The three-year programme is expected to be worth $940m. According to Fitch, it will provide an impetus for donors to re-engage with Ghana, providing much-needed foreign currency. The programme will focus on three areas: “Restraining and prioritising public expenditure, increasing tax collection and strengthening the effectiveness of the central bank’s monetary policy.” This policy agenda identifies Ghana’s key sovereign credit weaknesses—successful implementation would improve fiscal discipline, help to restore macroeconomic stability and support the currency. Demonstrable commitment to implementing the programme over its life could therefore be positive for Ghana’s sovereign rating.hideJoel Toujas-Bernaté, who headed the IMF delegation visiting Ghana last year, said: “Ghana experienced three difficult years characterised by declining economic growth, increasing inflation rates, rising debt levels and financial vulnerabilities. In 2014, economic growth reached its lowest level in many years, with non-oil GDP growing at 4.1%, in the context of high interest rates, a fast depreciating currency, low aggregate demand and a deepening energy crisis. “Inflation reached 17%, well above the central bank’s inflation target. Large fiscal deficits caused by a ballooning wage bill, poorly-targeted energy subsidies and commodity price shocks pushed government debt and financing costs to very high levels, and made the economy more vulnerable to rollover risks, despite the implementation of corrective measures in the past couple of years. These domestic imbalances resulted in a weakened external position and pressures on the exchange rate. “In the context of the programme, total GDP growth is expected to decline further in 2015 to 3.5% on the back of a severe energy crisis and fiscal consolidation. Growth is expected to rebound over the medium term on account of an improved macroeconomic environment and cost-effective solutions to address the energy crisis. “Inflation should decelerate substantially, while the stronger fiscal consolidation will stabilise the debt ratio to GDP. The external current account deficit is projected to decline to 7% of GDP in 2015, which, together with increased donor support, should contribute to start rebuilding reserves.” Mr Toujas-Bernaté added: “The 2015 budget adopted by parliament included a strong set of measures. Swift implementation of these measures, in particular the elimination of distortive and inefficient energy subsidies, the new tax on petroleum products, and stronger containment of the wage bill, should contribute to a significant reduction in the fiscal deficit in the medium term, with the fiscal deficit projected to decline from 9.5% of GDP in 2014 to 7.5% in 2015 and about 3.5% in 2017, including the repayments of all arrears outstanding at end-2014.” Key elements of the government reforms include improving transparency in the budget process to prioritise spending, enhancing revenue mobilisation and strengthening fiscal institutions, including through the review of possible fiscal rules. “To strengthen its control on the wage bill and address payroll irregularities, the government started implementing a detailed and time-bound action plan to detect and remove ghost workers, to secure and unify payroll databases and to sanction those responsible for fraud. In addition, strict control on new hiring and a reduction in the number of subvented agencies will further help contain the wage bill, ” said Mr Toujas-Bernaté. However, Fitch has some concerns about the numbers cited. For example, Fitch forecasts a deficit of 8% of GDP in 2015. It said: “The fund then projects that the deficit will narrow to 3.5% of GDP by 2017. We think this is too optimistic given the deepening electricity crisis, which could drag growth lower and the likely pressure that the upcoming elections will exert on spending. “The announcement follows renewed pressure on the Ghanaian cedi, with the currency falling by 8% since the beginning of January, partly reflecting seasonal pressures, and reserves falling by $600m to $4.9bn in the same period. Treasury bill yields have remained above 26%, meaning Ghana faces the highest funding cost among Fitch-rated sovereigns in Sub Saharan Africa.” Fitch continued: “An IMF programme should reduce external vulnerability and support reserve accumulation, helped by a narrowing of the current account deficit due to import compression. “Donors who withheld around $200m in grants in 2014 will likely re-engage and the presence of the IMF will unlock access to cheaper concessional financing. This should reduce finance costs and bring in dollars. A recent three-year bond auction saw 70% foreign participation and may herald renewed foreign interest in Ghanaian debt. “The Negative Outlook on Ghana’s B sovereign rating reflects the risks to external financing capacity and the challenge and cost of financing the deficit. Easing pressure on external finances and reserves following the IMF announcement would contain near-term downward pressure on the rating. However, signs of fiscal slippage ahead of the election or increased external financing pressures would put further downward pressure on the rating.”

IMF strikes deal to help Ghana rebuild economy

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