Breaking the 17: Alternatives to IMF conditionalities (1)
Over the past 65 years, Ghana has faced periods of large fiscal and external imbalances that have led to high inflation, declining reserves, depreciation of the cedi and high interest rates.
During such episodes, the country has had to turn to the International Monetary Fund (IMF) for a financial bailout. Ghana’s latest approach to the IMF is the 17th since the country gained its independence in 1957. (ACET; 2022)
Since the start of the Fourth Republic in 1993, the country has had to grapple with large fiscal deficits, frequent sharp debt build-ups, recurring large debt service costs and low public investment.
Managing the onerous debt service burden has become one of the biggest fiscal policy challenges facing the current government culminating in painful domestic debt restructuring, one of the prior conditions for the latest IMF programme which process was initiated in July 2022 and was approved as if by design on May 17, 2023.
For the politically savvy among us, Ghana’s task is not so much breaking the eight as it is breaking the 17.
Recent IMF programmes
The country’s most recent programmes were in 2003, 2009 and 2015 and like those before them, they failed to transform the post-colonial economy into a dynamic and resilient one that is able to withstand any shocks, including pandemics external wars or a rising dollar.
The stated objectives of the latest programme may be different in form but essential the same in substance namely to achieve some form of macroeconomic stability.
Having been portrayed as an adjustment success story in the 1990s, Ghana was denied renewal of the IMF financial assistance at the end of 2002 after failing to implement conditions in its Poverty Reduction and Growth Facility agreement with the fund.
In May 2003, Ghana was given a three-year PRGF arrangement in support of poverty reduction strategy and to take care of fiscal slippage in the amount of US$274.20 million. The arrangement was later extended until October 31, 2006 (IMF).
Not too long after that, highly expansionary fiscal policy destabilised the economy in 2008 (an election year) with the fiscal deficit rising to 14.5 per cent of GDP, inflation to 20 per cent, the currency depreciating by 50 per cent against the dollar and official reserves fell to two months’ import cover.
The Prof. Mills government in 2009, then turned to the IMF for financial support. The three-year economic programme worth $513 million, once again focussed on fiscal adjustment and on reforms to budget management to prepare Ghana for the transition to oil producer status.
In 2014, power crisis, popularly known as dumsor, threw Ghana into economic challenges under the John Mahama government and by 2015, the country returned to the IMF for support.
The fund approved a three-year programme aimed at achieving policy credibility for the government to, among other things, restore debt sustainability to support a reform programme aimed at faster growth and job creation, while protecting social spending.
The programme inevitably led to limiting employment and wage increase and eliminating utility and petroleum subsidies.
The current programme is premised on the fact that the impact of the COVID-19 pandemic, tightening global financial conditions and Russia’s war in Ukraine exacerbated pre-existing fiscal and debt vulnerabilities, resulting in a loss of international market access.
Increasingly constrained domestic financing and reliance on monetary financing of the government, decreasing international reserves, cedi depreciation, rising inflation and plummeting domestic investor confidence, eventually triggering an acute crisis. (IMF)
So, while the main protagonists, with different President/finance minister combinations; Kufuor/Osafo-Marfo, Mills/Duffuor/, Mahama/Terkper and Akufo-Addo/ Ofori Atta, the script is essentially the same.
Ghana not alone
It is important to point out that, however, that Ghana is not alone in its most recent resort to the IMF; already African nations including Zambia, Ethiopia, Chad and Egypt have applied for debt relief using the Group of 20’s Common Framework mechanism.
By March 2023, the IMF had lending arrangements with 21 nations in the region and many programme requests, according to the IMFs Regional Economic Outlook Report, “The Big Funding Squeeze.”
The report noted that rising interest rates have increased borrowing costs for sub-Saharan African nations, adding that not a single country in the region had been able to raise financing through a dollar bond sale over the past year.
Even before the coronavirus pandemic struck, many African countries were burdened by budget deficits and high levels of debt and didn’t have as much fiscal firepower to provide relief measures or stimulate their economies as developed markets.
The regularity with which Ghana resorts to the fund for support and the fact that so many countries in the global south, in particular Africa, have had to seek help from the Bretton-Woods institution, should point to us that much more is going on here than simply lack of fiscal discipline by African governments.
Challenges with IMF Programmes
A careful analysis of the situation, reveals much more ideological, cultural, philosophical and historical factors that a 20-minute speech cannot adequately discuss.
Fund programmes are typically short-term and based on analytical tools and policy prescriptions that are ill-suited, often counter-productive, for a post-colonial economy like Ghana's, which was structured to serve external interests, not improve the living conditions of its people. (Thompson; 2022)
The fund’s debt sustainability analysis, for example, focuses almost entirely on how to service current and future debts (including debt owed to the fund) and ignores the more fundamental question of how some of the debt came to be in the first place.
A careful examination of our debts over the past 20 years would show a worrying shift from concessionary to non-concessionary loans, from cheaper bilateral and multi-lateral credit to more expensive commercial arrangements including Eurobonds, which increase the country’s vulnerability to the international capital markets.
Additionally, the IMF, working with distressed country governments, tends to focus predominantly on macroeconomic stability as a prelude to economic growth, as against real structural transformation which involves moving labour from low to higher productive activities like from agriculture to manufacturing and within sectors like from subsistence farming to high-value crops.
This structural transformation will not happen if a country does not strive for monetary and financial sovereignty.
Most of the countries referred to above are facing different levels of debt crises, with the external (mostly dollar denominated) component growing significantly.
Dollar dependency burden
For a country to be economically sovereign, it must reduce its vulnerability to external debts.
A common feature of most of these countries, with Ghana being no exception is that they tend to be dependent on imported food and imported fuel to power their plants and move their vehicles.
Based on recommendations from the World Bank during the structural adjustment programme, Ghana was advised to concentrate on the production and export of so-called high value cash crops like cocoa to the neglect of food crops like rice, maize and the production of poultry and livestock to feed itself.
This led to the country spending scare US dollars on importing food every year, while we prioritise producing so called high value cash crops like cocoa and cashew, which we don’t eat.
According to Ministry of Finance sources, Ghana’s import of essential food commodities reached an average of $2 billion dollars each year.
Key foodstuffs imported include rice, poultry, sugar and tomatoes comprise a chunk of the imports.
In relation to energy, Ghana imported $1 billion in refined petroleum in 2021, becoming the 95th largest importer of refined petroleum in the word, creating large trade deficits as we export raw materials and mostly low value-added products.
Refined petroleum and food imports alone average $3 billion per annum, the same amount of money we are getting from the IMF for the next three years.
These imports put pressure on the Ghana cedi as the country looks for more US dollars to bring the products in.
As the cedi loses value, the government borrows more dollars either through Eurobonds or the Central Bank using its reserves to artificially prop up the cedi, leading to not just higher external debt but also imported inflation as prices of these imported commodities keep rising, causing a higher cost of living.
Government in an attempt to intervene inevitably spends more and more leading to large fiscal deficits and more debt.
The country tries to attract this by attracting Foreign Direct Investment, which usually comes in the form of large multinational companies, that we give unreasonably favourable terms to, and who repatriate all their profit to their home countries, further putting pressure on the already limited dollars.
The country’s attempt to attract capital to its capital markets also only tend to attract high return seeking speculative investors who ditch our markets as soon as more favourable terms appear when the Fed hikes its interest rates and further worsen our exchange rate as we saw in the third quarter of 2022.