Ken Ofori-Atta — Minister of Finance
Ken Ofori-Atta — Minister of Finance

Signs of economic recovery beckons, but…

Almost a year after the government commenced discussions with the International Monetary Fund (IMF) for a medium-term support, a three-year Extended Credit Facility programme, costing $3 billion in financing, has been approved and the first tranche of $604 million has been received.

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For a country that has suffered a sharp downturn in its economic fortunes over the past one and a half years, this is good news.

It is instructive that although the government has assured the public that it will never resort to another IMF programme, it has ended up seeking public appreciation for eventually negotiating one in record time. There is an unusual universal accord that going to the IMF was the right path to follow.

Simply put, it was the only option left for giving succour to a Ghanaian populace caught up in a cost of living crisis imposed by sharp cedi depreciation due to foreign exchange shortages, a runaway inflation that peaked at over 50 per cent after the international capital markets closed their doors to Ghana and foreign investors in cedi denominated government bonds reversed their forex inflows into hefty outflows.

Actually, the IMF‘s approval of a support programme for Ghana has come on the back of a series of economic gains for the country in anticipation of the Fund’s intervention.

The cedi’s exchange rate against the United States(US) dollar has strengthened significantly since government and the IMF jointly announced a staff level agreement towards a programme late last year. 

Year to date depreciation of the cedi against the dollar was 21.7 per cent as of May this year, down from a full year fall of and a peak depreciation of 54.25 per cent year to date as of November last year when the forex crisis reached a high point. 

Inflation height

Similarly, consumer price inflation has fallen from a peak of about 54 per cent  to 41.2 per cent in May.

Indeed, the Bank of Ghana (BoG), at its recent Monetary Policy Committee meeting in May, opted to retain the benchmark Monetary Policy Rate at 29.5 per cent, the first time the rate was not increased in the past seven sessions.

There is good cause for optimism that the most violent macroeconomic spasms are behind the country. The cedi’s exchange rate is now close to the GH¢11 to US$1. It was reported that the cedi was one of the best performing currency in the world during the first four months of this year and inflation was on a downward trajectory, albeit partly because of the base drift effect from price change computations rather than a rapid slowdown in the rate at which prices are rising.

But the situation remains fragile. The cedi’s recent appreciation is largely the result of positive market sentiment as the country closed in on an agreement with the IMF, therefore, for those gains to be sustained, the currency must be backed by a reduction in the actual supply shortfall for forex measured against demand. 

This is where the Monetary Policy Rate (MPR) tightening by the BoG over the past 15 months to unprecedented levels is so pivotal.

Monetary policy critics

Critics of the central bank’s current monetary stance argue that with inflation coming down from its peak at the start of the year, there is no need to keep the policy rate at its current record high.

Indeed, others argue that the high MPR is actually fuelling cost push inflation rather than curbing it by dampening demand.

But the point is that the central bank’s monetary tightening is addressing the core driver of inflation, which is forex supply. 

This is prudent because Ghana’s ongoing forex shortages are the most fragile aspect of its economic circumstances. 

Portfolio reversals

Negative sentiments by foreign portfolio investors have dried up inflows while portfolio reversals and inordinately high forex denominated debt servicing obligations have intensified outflows. Indeed, some economists, with justification, point out that Ghana’s ongoing economic challenge is actually a forex crisis rather than a fiscal crisis.

The $604 million received from the IMF recently as the first tranche of the $3 billion support package is merely a drop of water in an ocean; it only replaces some 10 per cent of the gross foreign reserves depletion Ghana has suffered over the past year caused by portfolio investment outflows.

By the end of March this year, Ghana’s Gross International Reserves stood at $5.1 billion, enough for 2.4 months of import cover and down from US$6.2 billion – enough to cover 2.7 months of imports – as at the end of 2022.

The agreement negotiated with the IMF by the Ministry of Finance allows for the money to add to international reserves while also allowing the government to use the cedi equivalent, issued it by the BoG as budgetary support at the same time, it will do little to alleviate actual demand pressure of the forex available.

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Forex purchase

 BoG’s tight monetary policy is doing this though. Tight money has lowered effective demand for forex, even as the sharp increases in prices of imported goods due to cedi depreciation has lowered demand for the goods that the forex can purchase.

It is instructive that Ghana’s non-oil import bill has been falling sharply enabling the country’s merchandise trade surplus to expand further.

The non-oil import bill for the first four months of 2023 at $2.8 billion was 16.85 per cent lower than for the corresponding period of 2022. This accompanied by a smaller, 6.3 per cent fall in the oil import bill to $1.2 billion has enabled the trade deficit for the first four months of 2023 to grow to $1.6 billion, up from $1.2 billion during the corresponding period of 2022.

This is both helping to stem further cedi depreciation and to finance the overall balance of payments deficit, which consequently has fallen to $354 million for the first quarter of 2023 from the $934 million for the corresponding period of 2022.

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An intensified focus on demand management under the new IMF programme should enhance this trend further, although the impact will be curtailed by the country’s commitment to trade liberalisation; the BoG will have to discontinue forex rationing towards priority uses as soon as the forex shortages are bridged.

External creditors

How smoothly Ghana can emerge from its forex crisis still remains murky though. Public debt restructuring negotiations with external creditors – Eurobond investors and bilateral creditors both – are still ongoing so it is still uncertain what Ghana’s overall forex obligations will be, going forward.

Whatever happens with those negotiations though, Ghana will have to accept a paradigm shift with regards to the quantum of forex that will be available, since a major source of forex – net portfolio investment inflows – has all but vanished for now. 

IMF financing and loans from institutions such as Afreximbank cannot nearly make up the shortfalls, so the key to escaping the current circumstances will depend primarily on the space 
secured by external debt restructuring and continued expansion of the merchandise trade surplus, which itself will depend more on import substitution and export revenue increases at least over the short to medium term.

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This is a task that not only the government, through policy direction, but the entire populace through changes in demand and consumption patterns will need to be closely involved in.

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