[ 2015-04-15 ]

Ghana Must Implement Strict Measures For Bailout - IMF
The Managing Director of the International
Monetary Fund (IMF), Ms Christine Lagarde, has
stated that what Ghana needs now to restore its
economic health is strict implementation of
measures agreed on under the new IMF programme.

She said the country must also implement those
measures intended to diversify the economy to
reduce vulnerabilities.

Ms Lagarde said this when she responded to
questions posted to her by the Daily Graphic
through the email yesterday in which she bluntly
stated why the country was facing the current
economic challenges and what should be done to
address them.

What went wrong

According to her, “Ghana made tremendous strides
over the past 15 years and ranked among the
fast-growing countries in Africa that have made
significant progress in poverty reduction, but the
discovery of oil might have given the illusion
that the public finance imbalances would get
resolved easily.

“This may have weakened the sense of fiscal
discipline. But, in reality, oil revenues flowing
to the budget have been relatively limited,
compared with other oil producers (less than three
per cent of Gross Domestic Product (GDP) or about
$35 per capita in 2014). As a consequence, public
debt has more than doubled since Ghana received
debt relief in 2005,” she added.

The outspoken IMF chief said unfortunately,
Ghana’s large borrowing was not generally used
for investments but rather to finance large
recurrent spending, pointing out that the debt
service, which was now very high, further
constrained spending in priority sectors such as
social protection and key infrastructure.

“The key to success lies in Ghana’s commitment
to put in place measures that address the
underlying causes of the huge budget deficits we
have seen in the recent past.

“On that score, I am encouraged by the
commitment to the current measures on the part of
senior officials in the government, including the
President. As in the past, the IMF will support
the implementation of the government’s
programme, both financially and through technical
and policy advice,” Ms Lagarde said.

Decision to seek bailout

In August 2014, the government turned to the IMF
for financial support and technical advice as it
battled to overcome serious macroeconomic
instability caused by a hefty budget deficit of
11.6 per cent of GDP recorded in 2012, followed by
another double-digit deficit of 10.4 per cent of
GDP in 2013.

Before the call on the IMF, the government had
been implementing its own home-grown stabilisation
measures which involved a mixture of tax hikes and
expenditure retrenchment that brought pain to
Ghanaians even as President John Mahama insisted
they were necessary to ride the economic storm.

The implementation of the home-grown measures
faced several hiccups, including a sustained fall
in the value of the cedi, a power crisis which
dented growth and a general lack of confidence
among public and private investors in the
government’s commitment to its own reform
agenda.

The IMF support was, therefore, required to gain
policy credibility and the confidence of
investors.

After many rounds of negotiations, the IMF
Executive Board approved an extended credit
facility (ECF) programme for Ghana on April 3,
2015.

Three pillars

Discussing the details of the package, Ms Lagarde
said: “Ghana will receive $920 million during
the three years covered by the programme. The
programme rests on three main pillars.”

The first tranche was expected to hit the Bank of
Ghana’s foreign accounts by the close of day
yesterday.

“First, a strong fiscal adjustment to restore
debt sustainability, as public debt is now 67.5
per cent of GDP and without corrective measures it
is projected to increase and could become
unsustainable. This will be done by taking
measures to collect more revenue and restrain the
wage bill, which more than doubled in real terms
in the last five years.

“Second, structural reforms to strengthen public
finances and fiscal discipline by improving budget
transparency, cleaning up and controlling the
payroll and restructuring the civil service.

“Third, strengthening the monetary policy
framework to help reduce the high inflation which,
as always, hurts the poor more, and preserving
financial sector stability,” she added.

She explained further that to alleviate the
potential adverse impact of the fiscal adjustment
on the most vulnerable in society, the government
was committed to safeguarding priority spending
under the programme, including expanding the
targeted social safety net.

“For example, the Ghana Shared Growth and
Development Agenda outlines several social
protection and safety net interventions, including
increased funding of the Livelihood Empowerment
Against Poverty (LEAP) programme, which is
expected to expand to cover 150,000 households in
2015,” Ms Lagarde said.

Projections

The projections in the IMF programme envisage a
sharp contraction of economic growth from 4.1 per
cent in 2014 to 3.5 per cent in 2015, before
growth recovers to 6.4 per cent in 2016 and 9.2
per cent in 2017.

Over this period, the budget deficit is expected
to be brought down from 9.4 per cent in 2014 to
3.7 per cent in 2017, while the debt-to-GDP ratio
will stabilise at just above 60 per cent of GDP.

Ms Lagarde expressed support for the
government’s transformation agenda, noting that
it rightly focused on leveraging the country’s
natural and human resource endowments and
agricultural potential to diversify the economy
through export-led growth and industrial
development.

“In this regard, it is crucial for the
government to create fiscal space for
infrastructure investment and prioritise
investment in energy generation and distribution,
which has become one of the most significant
constraints to growth.

“We think that the package of reforms supported
under the Millennium Challenge Account is
important to improve governance and accelerate
private investment in the energy sector. What is
needed now is strong implementation of these steps
that can help diversify the economy over time,”
she added.

Source - Daily Graphic

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