{"id":231521,"date":"2022-07-17T14:26:44","date_gmt":"2022-07-17T12:26:44","guid":{"rendered":"https:\/\/www.myza.co.za\/ghanas-return-to-the-imf-within-three-years-underscores-its-deeper-economic-problems\/"},"modified":"2022-07-17T14:26:44","modified_gmt":"2022-07-17T12:26:44","slug":"ghanas-return-to-the-imf-within-three-years-underscores-its-deeper-economic-problems","status":"publish","type":"post","link":"https:\/\/www.myza.co.za\/press\/ghanas-return-to-the-imf-within-three-years-underscores-its-deeper-economic-problems\/","title":{"rendered":"Ghana\u2019s return to the IMF within three years underscores its deeper economic problems"},"content":{"rendered":"
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Ghana is again seeking assistance<\/a> from the International Monetary Fund (IMF) to enable the country to meet its payments<\/a> to the rest of the world and restore the health of government finances. It is the second time in the past three years<\/a> and 17th since independence<\/a> in 1957 that Ghana has turned to the IMF for help.<\/p>\n

The latest foray reverses the current administration\u2019s earlier stance that it would avoid approaching the multilateral body because of the conditions<\/a> that come with its assistance. Ghana\u2019s finance minister Ken Ofori-Atta said in May 2022<\/a> that government was \u201cconfident in its homegrown solutions such as the e-levy in getting the economy to recover \u2026 seeking a bailout from the IMF is not an option\u201d.<\/p>\n

Ghana\u2019s approaches to the IMF, which have averaged every four years over the past 65 years, tell a story of recurrent failure of government to properly build the economy to withstand internal and external shocks. Ghana\u2019s lack of fiscal discipline, and its recent history of dependence on foreign financing \u2013 with as much as 48% of the total public debt<\/a> being held by external investors \u2013 leaves the country vulnerable to swings in investor sentiment, and accompanying portfolio investment selloffs. <\/p>\n

The request to IMF also underscores the fact that Ghana has much deeper structural economic problems. These require a multi-stakeholder approach to resolve. Unfortunately, the pervasive and deeply entrenched nature of the country\u2019s Fourth Republican clientelist politics<\/a> which manifests in a \u2018winner take all<\/a>\u2019 approach to governance<\/a> has often distorted a much-needed national debate on what needs to be done and how it must be done. Ghana must fix the structural problems \u2013 such as its over-reliance on primary commodity exports \u2013 and live within its means. As we argue in an upcoming research project<\/a>, there is a greater political leaning towards shorter-term goals of maintaining regime stability or forcing a change in the regime.<\/p>\n

Ghana came out of the last IMF programme in 2019<\/a> with some significant<\/a> macroeconomic gains. <\/p>\n

It had been forced to tap IMF assistance to deal with global and local economic shocks – the same as now. These included the spillovers of the slowdown<\/a> in China, the 2014-2017 commodities price slump<\/a>, reckless spending<\/a> in the lead up to often highly contested elections especially in 2012 and 2016, and a prolonged domestic electricity crisis<\/a> known locally as ‘dumsor\u2019<\/em>.<\/p>\n

Ghana\u2019s current external shocks are related to the COVID-19 pandemic<\/a> and Russia\u2019s ongoing war<\/a> against Ukraine. Internally, the government has also recklessly managed its finances with excessive borrowing, resulting in a looming debt crisis. The country now spends<\/a> about a third (27%) of its expenditures in just servicing debt alone, not including principal repayments. This is often more than the compensation of workers<\/a> on the government payroll, estimated at 26% of total expenditure in 2022.<\/p>\n

The depth of Ghana\u2019s mess<\/h2>\n

A review of recent economic data shows why it was inevitable that Ghana would seek IMF assistance. <\/p>\n

Real GDP<\/a> growth slowed from an average of 6.9% from 2017-2019 to 0.4% in 2020 during the pandemic but picked up to 4.7% in 2021. The November 2021<\/a> forecast of 5.6% real growth in GDP in 2022 is likely to be lower because of rising price pressures. This is mainly driven by food and refined petroleum products due to the Russia-Ukraine war<\/a> and global supply chain bottlenecks. Ghana\u2019s inflation, as measured by a basket of goods and services, hit 29.8% in June 2022<\/a> – the highest level in 20 years.<\/p>\n

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Read more: Ukraine war: how Ghana is vulnerable, and what can be done<\/a> <\/strong> <\/em>\n<\/p>\n

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Rising prices have forced<\/a> the Bank of Ghana to raise its policy rate by 4.5 percentage points to 19% by May 2022 in an attempt to tame inflation. Commercial banks have in turn raised the rate at which they lend to businesses and individuals. The policy rate last<\/a> hit 20% in January 2018 and drastically reduced to 13.5% until the recent hikes started in November 2021. The unintended consequence of stemming inflation is a potential stifling of economic activity through crowding out of the private sector by the government and high cost of capital. <\/p>\n

In addition, the local currency \u2013 the cedi \u2013 had depreciated by almost 20% against the US dollar as of June 2022<\/a>, making imports more expensive, forcing prices of goods and services upwards.<\/p>\n

Ghana\u2019s economic challenges have been made worse by the country\u2019s reliance on portfolio flows. This is the foreign money that moves in and out of countries in search of the best investment returns. Unlike money that builds factories, these flows are more sensitive to a country\u2019s short-term economic and financial developments. Given Ghana\u2019s significant borrowings from commercial rather than multilateral development financiers, the country has become more vulnerable to the rising cost of debt. Multilateral development institutions lend for longer at more reasonable rates. <\/p>\n

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Read more: Ghana’s debt: the pros and cons of borrowing abroad versus at home<\/a> <\/strong> <\/em>\n<\/p>\n

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Of Ghana\u2019s total public debt<\/a> of US$55.1 billion (78% of GDP) as of March 2022, 40.2% (US$28.3 billion) was owed to external parties. And of the external debt, about 57% was owed to commercial creditors, predominantly in Eurobonds<\/a>.<\/p>\n

To add salt to Ghana\u2019s economic wounds, rating agencies downgraded<\/a> the country\u2019s sovereign risk scores earlier this year. This significantly limited the governmet\u2019s ability to borrow on the international capital markets to finance the budget. <\/p>\n

Ghana\u2019s fiscal policymaking has shown a bias<\/a> towards overspending during good times, with little being saved to help when there are downturns or external shocks. <\/p>\n

This is largely driven by commodity price cycles – oil, cocoa and gold – and fiscal excesses during election periods. Ruling parties often overspend ahead of elections to buy votes and then tighten the purse strings afterwards. <\/p>\n

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Read more: Why Ghana is likely to go on needing the IMF — however difficult the relationship<\/a> <\/strong> <\/em>\n<\/p>\n

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So, what should Ghana differently this time round?<\/p>\n

Way forward<\/h2>\n

The following could be a guide to ensure that Ghana benefits from its new deal with the IMF: <\/p>\n