Ghana contemplates ending IMF credit agreement as scheduled amid improving fiscal balance

Lower inflation figures and higher growth forecasts in Ghana are raising the prospects for a stronger economic recovery over the coming year, prompting the government to reiterate its commitment to deficit reduction targets – although much work remains to be done.

Following a macroeconomic slowdown and a weakened balance sheet, a number of the country’s key indicators are showing signs of improvement. The most recent inflation data from the Ghana Statistics Service show the consumer price index eased in March to 12.8%, the lowest since the end of 2013.

Tamer inflation is supported by improved performance of the cedi, which has recently stabilised, coming off record lows of GHS4.7:$1 in March to trade at GHS4.2:$1 in mid-April. A stronger currency could help reduce import costs and put downward pressure on prices of foreign goods and services, potentially fuelling private sector consumption.

Another positive came from the IMF, which – in its latest World Economic Outlook, released last month – forecast that GDP would rebound further, from 4% last year to 5.8% this year and 9.2% next, on the back of increased oil production and despite government belt-tightening. The 4% growth figure for 2016 represented an upward revision from 3.6%, which already had surpassed the IMF’s earlier forecast of 3.3%.

Curbing the deficit

The more robust outlook has a beneficial impact on the state balance sheet, which has suffered in recent years to the point where the country has sought assistance from the IMF. An increase in revenue from the improving economy, along with fiscal reforms, could allow Ghana to end its credit agreement with the IMF as scheduled in the second quarter of next year.

In mid-April Ken Ofori-Atta, minister of finance, said Ghana might not seek an extension to its $918m extended credit facility with the IMF, a three-year package agreed in April 2015 under the previous government.

“We are committed to ending it when it should have ended,” he told press during a review of the IMF’s programme. “The government is working assiduously to increase revenue by 34% and will achieve that by sealing revenue leakages.”

Through tax reform and spending cuts, he said, Ghana could achieve the targets set under the IMF deal to tame its budget deficit to 6.5% this year and 3-4% next, down from 8.7% in 2016.

Closing the book on the IMF credit facility would likely boost investor sentiment, signalling the government’s confidence in its ability to improve state finances, implement reforms and support growth without further assistance from the fund.

However, there are still plenty of external pressures – including low oil prices – that Ghana must navigate, and which prompted the head of the IMF mission, Annalisa Fedelino, to note that an extension would be “quite normal” and that “the road to economic reform is bumpy”. Ofori-Atta similarly hinted at challenges, adding that terminating the deal would “lead to some very tough decisions” in the next budget. An extension could ease fiscal pressure from high levels of state debt and weak commodity prices.

Public sector overhaul

A cornerstone of the government’s plan to meet IMF targets is to curb corruption and reduce unnecessary spending, the finance minister said.

The administration is, among other things, focusing on increasing transparency in state procurement and ending the practice of payroll “padding”, whereby government salaries were given to people not employed by the state. In recent years, reforms have also included merging public sector wage rolls into a single pay schedule and centralising financial management systems.

“The measures we are taking are necessary,” he said, “We feel the economy will respond strongly to them, and therefore maybe against all the odds, we will be able to meet the targets.”

In a mid-April statement, the IMF praised government efforts to rein in the deficit and increase budget inflows, including measures to control tax evasion, limit exemptions and improve fiscal discipline. However, Fedelino also warned that government revenue projections were “optimistic”.

“The sizable fiscal slippage in 2016 (a budget deficit of 8.7% of GDP, more than 3% of GDP above target) has further undermined debt sustainability and increased Ghana’s reliance on foreign investors to fund its large gross financing needs, with possible pressures on the exchange rate if financing conditions deteriorate,” the fund said in a recent update on Ghana.

In response to these pressures, it said the immediate priority was to anchor confidence and mitigate risk by entrenching fiscal discipline throughout the public sector.