Why Ghana has returned to the IMF

It was a decision that many analysts had long considered inevitable, despite repeated promises from Finance Minister Ken Ofori-Atta never to ask for IMF support again. Why has the country changed course and what could the IMF demand in return?

WHY NOW?

Inflation reached its highest level in 18 years in May at 27.6%, ending a year of rising prices. Growth fell to 3.3% in the first quarter and the value of the cedi currency has fallen 23.5% against the dollar since the beginning of the year.[L1N2YG1CH]

In a statement outlining its plan to approach the fund, the government blamed its suffering on a combination of recent external forces, including COVID-19, the Ukraine crisis and the US and Chinese economic crisis.

Finance Minister Ken Ofori-Atta last month told lawmakers that pandemic-related spending was 18.19 billion cedis ($ 2.26 billion) in May 2022. The country has received $ 1.23 billion in COVID-19 aids from the IMF and World Bank during that period, he said.

Prices of imported goods rose more than domestically produced goods for the second month in a row in May, with cereals – of which Ghana imports 20% from Russia – repeatedly being among the biggest price increases. Oil prices have almost doubled year by year.

Two weeks ago, authorities were reluctant to ask for support from the IMF, but found their hands tied after lawmakers withheld a $ 1 billion loan and underperformed an unpopular tax on electronic payments designed to generate revenue, Amaka Anku said. , Head of Eurasia Group Africa, in a note.

DEBT AND DEFICIT

Authorities hope an IMF program will shorten Ghana’s nearly $ 1 billion balance of payments deficit, which central bank governor Ernest Addison said in May is the result of global capital flight.

But experts say the root of Ghana’s problem is likely to be fiscal, as the country uses increasingly large loans to close its double-digit budget deficit.

“Our biggest problem is that about 60% of our spending constantly goes to paying public sector employees or interest payments,” said William Duncan, founder of Ghana-based Spear Capital & Advisory. “It’s been a cycle through the last three governments.”

Ghana’s debt has more than doubled since 2015, rising steadily from 54.2% of GDP that year to 76.6% by the end of 2021, according to government data.

The Ministry of Finance’s plan to repay this debt rests solely with the IMF, which will help the country regain access to international capital markets and roll over existing debt following recent downgrades in creditworthiness, which will cool lenders’ interest.

Many have questioned the sustainability of this strategy. Interest payments have been the government’s largest annual expenditure since 2019 and before that it was the second largest expenditure for five consecutive years, figures from the Ministry of Finance show.

Although Ghana’s Eurobonds have been rising following news that the government would ask the IMF for help, interest rates for all but the bond, which expire this year, remain above 10%, the level that a country from issuing new debt because it will be too expensive .

PROGRAM PROPOSAL

When Ghana last asked for help from the IMF in 2015, it received $ 918 million through an expanded credit facility, equivalent to 180% of the country’s quota.

This time, Ghana has proposed to the IMF its own “Enhanced Domestic Program”, which will run for a minimum of three years.

It insists there will be no cuts to key government programs, such as its campaign promises to build hospitals and factories in each of the country’s 216 districts and a free high school program.

And while debt service will cost nearly 48% of government revenue in 2021, the Treasury Department’s proposal does not call for debt restructuring.

Experts believe that such conditions can prove to be complicated.

“A program will support creditors’ confidence and curb the rise in government borrowing costs, but will also introduce fiscal consolidation conditions that may prove difficult to meet,” said Moody’s Aiste Makareviciute.

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