Bridgewater Insights | 21st July 2022
The huge controversy that surrounds involvement with the International Monetary Fund, (IMF) begs the question about its public view as a bail-out body or rather is an economy jailer? As the lender of last resort that allows any of its 190 member countries in financial distress and with payment deficits to borrow money temporarily and to repay debt, you would expect their involvement in economies to be welcomed with opened arms rather than with clinging fists.
The pursuit of independence of many African countries was piqued with the declaration to manage Africa’s own affairs. To what extent has this been achieved?
It is however not an honest truth that ‘managing your own affairs’ exempts a nation from asking for help during times of crisis. To some, a request for help is deemed as ‘begging’ while to others, it is the wise and humble step in times of difficulty.
There is no denying the fact that economies around the world are in challenging times and Africa is of no exception. The spillover effects of the COVID pandemic as well as the Russia- Ukraine war are the external triggers affecting most countries globally leading to high inflations, slow growth, increasing policy rates and high debts. It is also factual that aside these external triggers, some economies were already not in a healthy state. What then is the way forward?
The African Consultative Group of Finance Ministers and Central Bank Governors consisting of 54 African member states, came out with the ‘Marrakech Declaration’ package after their 2022 meeting in Marrakech-Morocco, requesting the two Bretton Woods Institutions to grant “rapid, comprehensive and substantial,” debt relief to Africa. This they believe will ease the negative impacts of the Covid-19 pandemic and the Ukraine crisis, and limit Africa’s fallout on economic growth.
There are 6 African countries on an IMF Extended Fund Facility and 18 African countries on an IMF Extended Credit Facility, with countries in the Central African region receiving more of IMF bailouts. The IMF recently approved a $22.4 million financing for Benin under an Extended Credit Facility (ECF) and a $235.6 million disbursement to Kenya's Extended Credit Facility (ECF) and Extended Fund Facility arrangements (EFF).
To the dismay of many citizens, Ghana sent a request on July 1, to the IMF for the 18th economic bail out after the Government had declared and affirmed its decision not to resort to any IMF bailout, but rather focus on alternative means to get the economy going. Why has Ghana decided to open the door she vowed never to open?
Chief among the reasons is the failure of the electronic tax (e-levy) revenue to meet expected government revenue targets. The question this generates is, would Ghana have had a different situation if the E-levy revenue met up with the expectations?
The expected revenue from the 1.5% electronic tax was estimated at 6.9 billion cedis, which is clearly not sufficient to meet the economic needs of the country. So, this generates doubts as to why the e-levy was projected to be the ‘saviour’ of Ghana’s economic woes. Indeed, what should have been the saviour has rather become the ‘John the Baptist’ to another IMF bailout.
Ghana’s Inflation reached an 18-year record rate of29.8% in June, with slowing economic growth of 3.3% in the first quarter, while the value of the cedi declined by 15.8% against the dollar in the first quarter of 2022. According to government data, Ghana's debt stock has been on the rise since 2015, steadily climbing from 54.2% of GDP that year to 78% by the end of the first quarter of 2022.
The Ghana-IMF lending relationship began in 1966 and there have since been 17 interventions largely dominated by interventions in the 1980’s. As of 2020, Ghana has had SDR 3.7 bln. lending a mount agreed, SDR 3.4 bln lending amount drawn, and SDR1.3bln amount outstanding. The SDR is the Special Drawing Rights which is currently based on a basket of five currencies: the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound and serves as the unit of account and a potential claim on the freely usable currencies of IMF members. As of April 30, 2021, the SDR/US dollar exchange rate was US$1 =SDR 0.696385, and the US dollar/SDR exchange rate was SDR 1 = US$1.43599.
The IMF noted after the 2015 bail out that, at the root of Ghana’s woes was the out-of-control government spending, largely to pay salaries of an overgrown civil service. This is corroborated by opinions of other Analysts that the biggest problem in Ghana is that 60% of its expenditure continuously goes towards paying public sector workers or interest payments, and this has been a cycle through the last three governments.
What is there to expect in this 18th IMF intervention?
Initial discussions between the IMF team and the Ghanaian authorities started from July 6-13, 2022, and even though this is an early stage in the process, the IMF team describes the mission as constructive, laying the ground for continual engagement. The situation in Ukraine compounds other pressing policy challenges like debt vulnerabilities, tightening of monetary policy conditions which increases the cost of borrowing, both domestically and globally.
The purpose of an IMF support program is to restore macroeconomic stability, support the credibility of government policies, restore confidence in the central banks’ ability to manage inflation and accumulate foreign exchange reserves to help the currency withstand headwinds.
On the fiscal side, this IMF support bail out is aimed at increasing revenues which is critical for debt sustainability while safeguarding spending on health, education, and social protection.
Consequently, there are predictions that the IMF support program will result in a cut in some flagship social and infrastructure projects in the country, critical among which is the free Senior High School program. The IMF team reassures the public that even though discussions are in the early stage, the free Senior High School policy is an innovative one that needs to be protected. What they seek to do is to boost social spending while encouraging both efficiency and sustainability. Ultimately, the IMF- supported program will protect the vulnerable and create conditions for inclusive growth.
When Ghana last sought IMF assistance in 2015, it received $918 million through an Extended Credit Facility Arrangement, equal to180% of its quota. This time, Ghana has proposed its own "Enhanced Domestic Programme" to the IMF, which would last a minimum of three years insisting that there should be no cuts to the administration's flagship programmes, such as campaign pledges to build hospitals and factories in each of the country's 216 districts and the free Secondary School scheme.
Experts think such conditions may prove complicated.
However, the fund and the Ministry of Finance and Bank of Ghana teams will continue to work together both virtually and through visits to provide technical assistance and to formulate the reform plan which can be supported by an IMF arrangement.
The economic situation is certainly challenging but is there any hope in an IMF support program that will lead to the right step towards restoring macroeconomic stability and preventing deeper crisis?
