IMF expresses concern over Ghana’s short-term vulnerabilities

Compile by Fred Yaw Sarpong

After reviewing Ghana’s economic performance, the executive board of the International Monetary Fund (IMF) has expressed concern over the emergence of significant short-term vulnerabilities stemming from high fiscal and external current account deficits.

According to the directors, these imbalances make the country vulnerable to a deterioration of external conditions and are creating pressure on interest rates and the exchange rate. ‘If unaddressed, they risk weakening economic growth and public debt sustainability,’ said the director, emphasizing that macroeconomic stability will need to be restored to preserve a positive medium-term outlook.

They commended Ghana’s authorities’ policy efforts and supported the fiscal measures in the 2014 budget. They noted however that achieving the 2014 fiscal deficit target will be challenging, in light of high interest rates, a depreciating currency, and a possible growth slowdown. They therefore urged the authorities to take additional short-term measures to reduce the fiscal and external imbalances.

The directors welcomed the government’s recent policy documents outlining its homegrown medium-term reform and consolidation measures. They supported the government’s intention to rationalize public spending, lower the wage bill, restructure the statutory funds, and enhance revenue mobilization and tax administration. They encouraged the authorities to translate their policy commitments quickly into specific and time-bound action plans to achieve significant and durable consolidation.

In light of current imbalances, IMF board of directors recommended a more ambitious medium-term consolidation path to stabilize public debt and debt service at sustainable levels. While the risk of debt distress remains moderate, the directors expressed concerns about the high debt service-to-revenue ratio.

‘A stronger medium-term adjustment could set off a virtuous cycle of lower fiscal deficits and falling interest rates, creating space for social and infrastructure spending and crowding-in of private sector activity,’ according to the IMF directors.

After welcoming the recent monetary policy tightening by the Bank of Ghana, the IMF suggested that further tightening may be needed, in combination with fiscal consolidation, to steer inflation back into the target range. They stressed that the central bank of Ghana should limit its net credit to the government, strengthen liquidity management and the inflation forecasting framework, and continue to allow the exchange rate to adjust to prevent further erosion of the reserve buffer.

The directors emphasized that the new foreign exchange regulations will not be effective unless the underlying macroeconomic imbalances are resolved. In particular, they were concerned that the measures could have unintended adverse effects. They therefore welcomed the Bank of Ghana’s decision to review the measures with the objective of mitigating any adverse implications and removing the associated exchange restrictions. They also commended the Bank of Ghana for its steps toward adopting a unified, market-based exchange rate.

The directors welcomed that the financial system is currently sound, adequately capitalized, and liquid. The IMF bosses stressed the need to monitor exposures closely, noting that a weaker macroeconomic outlook, rising interest rates, and currency depreciation expose the financial sector to credit and currency risks. Accordingly, they encouraged the authorities to strengthen their crisis prevention and management capabilities and welcomed recent actions to improve the bank supervision framework.

Ghana has experienced strong and broadly inclusive growth over the past two decades, and its medium-term prospects are supported by rising energy production. The country has outperformed regional peers in reducing poverty, with robust democratic credentials and a highly-rated business climate attracting significant foreign direct investment (FDI) and supporting economic growth. Expanding energy production over the medium term has the potential to generate new opportunities to channel resources into productive investment.

The emergence of large fiscal and external imbalances since 2012, however, has created significant challenges. A swift return to macroeconomic stability in 2013 was thwarted by weaker external and domestic conditions. Reflecting lower gold and cocoa exports, the current account deficit exceeded 12 percent of GDP. While recently revised estimates point to an only moderate slowdown in growth to about 7 percent, the fiscal deficit target of 9 percent of GDP was missed by about 1 percentage point, despite significant policy efforts. Inflation also overshot the 9 +/- 2 percent target range, prompting a further tightening of monetary policy in early 2014.

Ghana’ short-term economic outlook is subject to significant risks. Growth is projected to slow to 4¾ percent in 2014, as high interest rates and a weaker currency are compressing domestic demand. At the same time, the economy’s continued large twin deficits, and high financing needs, leave it vulnerable to a deterioration of external conditions.