Ghana under pressure: IMF loan feared

20 June 2014

Ghana has long been held up as an economic success story relative to its neighbours, but the prospect of its government turning to the IMF for a lending programme has caused controversy.

DespiteGhana’s ‘success story’ status, a May blog post by staff of the Fund’s African department noted that a quarter of the population still lives below the poverty line, while most firms lack access to affordable credit and reliable power supplies, estimating that at least 6 million jobs (over half the current labour force) need to be created in the next two decades simply to keep pace.

In March, finance minister Seth Terkper, a former IMF staffer, said “if it becomes necessary, we’ll fall on the Fund”. In April, Ghanaian parliamentary finance committee chair, James Avedzi, admitted that the country may need a bailout in the “short-term” but that it should seek to hold out on a formal programme until 2015. However, he pointed out that Fund programmes “come with a lot of conditionalities”, adding that “we are already implementing” most of them, citing the removal of subsidies on utilities and a planned freeze on public sector wage increases this year.

In early April the government announced public sector cuts, amidst a tightening of monetary policy by the Bank of Ghana. The government also announced an increase in the valued-added tax rate and reduced exemptions. In 2013 it had also eliminated a number of fuel subsidies and raised electricity and water tariffs.

The IMF said in its annual Article IV surveillance report, released end May, that Ghana’s “transformation agenda” is at risk. The  report advocated that the government go further, with more “front-loaded fiscal adjustment”, while endorsing the Bank of Ghana’s hawkish stance.

In mid-May Tekper admitted that Ghana was undergoing “ key processes for a bailout from the International Monetary Fund”, further adding that “we have already discussed with IMF what we want to do”. This admission came days after it emerged that the government had moved to implement a large public sector worker redundancy programme beginning next year.

Days later president John Mahama denied any immediate intention of turning to the Fund. The secretary general of the Trades Union Congress in Ghana, Kofi Asamoah, responded that “IMF policies and guidance have never worked  … they will come with the kind of conditionalities, which will eventually worsen the situation”. In late May Ghana announced that it had hired a group of banks to advise it on the issuance of a $1 billion bond to offset its fiscal difficulties, which suggests that there is no immediate desire to turn to the Fund. Avoiding the Fund may come at a high cost, according to Carmen Altenkirch, an analyst at global ratings agency Fitch, who suggested in June that the financing of the government deficit in the first quarter of 2014 was achieved by “printing money … [which] will aggravate already high inflation”. She added “Attracting dollars to fund the current account and budget deficits looks increasingly challenging.”

Rising risks to Sub-Saharan Africa

IMF managing director Christine Lagarde, speaking to African finance ministers at the Africa Rising conference in Mozambique in late May, cautioned that governments should be more “attentive” and not risk “overloading the countries with too much debt”, as it represented “additional vulnerability”. Sub-Saharan African (SSA) countries public debt is now estimated by the IMF to be worth 35 per cent of the region’s GDP. Sovereign bond issuance in SSA raised $11 billion in 2013, compared to $6 billion the year before. The IMF’s April regional outlook warned that SSA countries face risks from large fiscal deficits despite accelerating growth which the Fund expects to average 5.4 per cent in 2014. This is in part due to continued large private flows of investment into the region, with the African Development Bank forecasting in early June record foreign direct investment in 2014 of over $80 billion.

Tirivangani Mutazu of Zimbabwe-based NGO network Afrodad said: “IMF conditionalities threaten the political and social stability of Ghana. With high poverty levels, unemployment and sluggish industrial growth levels, the government while going through its domestic challenges should seriously weigh its policy options against an IMF bailout. A successful debt issuance, will enable the country to mobilize long term resources on the international market and reduce its dependency on IMF. While it is now relatively easier for African countries to raise money on the international market, emerging challenges in the global market pose significant debt risks.