The International Monetary Fund has projected that Ghana’s fiscal deficit for 2021 will reach 13.9 percent of Gross Domestic Product. This is 4.3 percent higher than government’s own target of 9.6 percent, but primarily that is because the IMF includes the cost of the financial sector clean up and servicing of the energy sector debts in its computations.
Government does not include those items in its fiscal deficit computations. It argues that the financial sector clean up is an extraordinary, one-off, item which does not form part of its normal fiscal activities and it therefore treats the costs incurred as a memoranda item rather than part of its income and expenditure statements. Instructively however it includes the debts incurred in financing the clean up in its public debt computations.
It further argues that the cost of its legacy energy debts are at best only a contingent liability since they have been hived off to a special purpose vehicle, ESLA Plc, which is paying them through capital market bond issuances that are serviced and ultimately amortized by income derived from special consumption levies. This effectively makes the energy debts self – amortizing.
The IMF however disagrees, pointing out that the cost of financial sector clean up cannot be regarded as one off since the bill has continued to rise by the year since 2017 and has to be refinanced regularly. Furthermore, the energy debt is ultimately government’s liability, no matter how it is structured and classified.
For this same reason the IMF has computed Ghana’s fiscal deficit for 2020 at 15.2 percent, well above government’s own computation of 11.9 percent, which was only marginally higher than its revised target of 11,7 percent.
Ultimately it is the IMF’s figures rather than government’s, that reflect the true amount of deficit financing needed.
The latest report from the Bretton Woods institution is derived from its Executive Board’s conclusion of its the Article IV consultation (1) with Ghana on July 19, 2021.
The report was generally upbeat, documenting the prudence of Ghana’s public policy responses to COVID 19.
Most importantly it sees economic growth accelerating as the economy rebounds out of the short lived recession suffered during the second and third quarters of last year.
The latest IMF report can justifiably be seen as a victory for Ghana. The IMF’s growth projections of 4.7 percent are only marginally short of government’s 5.0 percent despite the shortfall in the growth rate for the first quarter of the year at 3.1 percent, meaning that the Fund expects economic growth to pick up further during the year, even as base drift effects following the economic contraction during the second and third quarters of 2020 adds to the growth computations for 2021.
Crucially, the assessment notes that although risks associated with Ghana’s capacity to service its debts owed the Fund have risen, it is confident that the country can meet those obligations. Ghana’s United States dollar denominated bond holders as well as foreign investors holding medium and long term cedi denominated bonds will be comforted by this assessment since it also applies to them, even though the Fund concedes that the country is still at risk of debt distress.
The IMF, in diplomatically couched language, also calls for lower running costs for government’s machinery, a gradual reduction of COVID 19 instigated social intervention spending on all but the most vulnerable segments of society and a readiness to tighten monetary policy.
Perhaps most worrying for government is the IMF’s reminder that the audit of COVID 19 emergency spending in 2020, which it has called for, should be concluded quickly. Properly done that audit will reveal that a considerable amount of that purported emergency spending last year was in reality driven by the desire to win the support of electorate at the December 2020 polls through populist socio-economic initiatives.
Says the report: “An economic recovery is underway. Growth is expected to rebound to 4.7 percent in 2021, supported by a strong cocoa season and mining and services activity, and inflation remaining within the Bank of Ghana target. The current account deficit is projected to improve to 2.2 percent of GDP, supported by a pickup in oil prices, and gross international reserves are expected to remain stable. The 2021 budget envisages a fiscal deficit of 13.9 percent of GDP in 2021, including energy and financial sector costs, and a gradual medium-term fiscal adjustment which would support a decline in public debt starting in 2024. However, this outlook is subject to significant uncertainty, including from new pandemic waves and risks associated with large financing needs and increasing public debt.”
It concludes that: “The economic outlook is improving, even though risks remain, including from the evolution of the pandemic and rising debt vulnerabilities.”
The IMF’s Executive Board has signed off on the staff appraisal that visited Ghana and prepared its report.
“Executive Directors agreed with the thrust of the staff appraisal. They noted that the pandemic had a severe impact on Ghana’s economy, with slower growth, higher food prices, and increased poverty. Directors commended the Ghanaian authorities for their proactive response to the COVID-19 pandemic, which mitigated its economic impact, but contributed to a record fiscal deficit and increased public debt vulnerabilities. While there are encouraging signs of an economic recovery, they noted that it remains uneven across sectors. In this context, Directors stressed the importance of entrenching prudent macroeconomic policies, ensuring debt sustainability, and pressing ahead with structural reforms to deliver a sustainable, inclusive, and green economic recovery .
“While noting that risks to Ghana’s capacity to repay have increased, Directors concurred that they are still manageable and that Ghana’s capacity to repay the Fund remains adequate.
“Directors welcomed the fiscal adjustment envisaged in the 2021 budget. They stressed that fiscal consolidation is needed to address debt sustainability and rollover risks, as Ghana continues to be classified at high risk of debt distress. To protect the most vulnerable, considerations could be given to more progressive revenue measures and a faster return to the pre-pandemic level of spending, with a shift towards social, health, and development spending. Directors also encouraged the timely completion of the planned audit of COVID‑19 emergency spending and new expenditure arrears.
“Directors agreed that the monetary policy stance remains broadly appropriate, while noting that tighter policy would be needed if inflationary pressures materialize. Although gross international reserves are relatively high, Directors stressed the need to guard against erosion of external buffers and remain committed to a flexible exchange rate regime. Directors also encouraged the authorities to limit monetary financing of the deficit.
“Directors noted that the financial sector cleanup had made the sector more resilient but stressed that banks’ growing holdings of sovereign debt creates risks and crowds out private sector credit. In this regard, they took positive note of ongoing supervisory and regulatory reforms, which are important steps to protect financial stability. Directors also welcomed the improvements in the AML/CFT framework that allowed Ghana to exit the FATF “grey list”.
“Directors emphasized that the authorities’ structural transformation and digitalization agendas are criticalto support the recovery. They noted that the structural transformation can be complemented by the ongoing energy sector review, diversification in tourism, and the digital transition, which has the potential to reduce corruption, boost tax revenues, and improve service delivery. Directors supported continued capacity development efforts in these areas.”
The report effectively amounts to an endorsement of Ghana’s macroeconomic management even though it raises some red flags with regards to the public debt in particular.
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