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.
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.
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.