Ghana’s relationship with the IMF does not seem to come to an end anytime soon. Successive governments have taken advantage of the relationship to seek refuge after mismanaging the economy.
Many of our government usually do not heed local advice and plunge the country into debt after excessive borrowing and mismanaging the economy only to run to the fund when investor confidence is lost, creditworthiness diminishes, and the center can’t hold.
This practice started immediately after the overthrow of Dr Kwame Nkrumah by the National Liberation Council (NLC), the precursor of the New Patriotic Party (NPP). Ghana went to the IMF for a bailout (1966) for the very first time 9 years after independence under a program called “Standby Arrangement”-1966 to 1969.
I consider it very important to note that it was only under Dr Kwame Nkrumah’s leadership that Ghana didn’t go to the IMF for a bailout. Ghana currently is on record to be one of the countries to have gone to the fund 18 times which mean every 4 years we run to the IMF for a bailout. Indeed, it is only the NPP government in Ghana’s history to have inherited an IMF program and in less than 4years took the country back to the fund because of mismanagement, lack of innovative ideas, thinking and corruption by the holders of power across all sectors of the economy.
Ghana’s current economic situation can be likened to the languishing of Judah in the bible as a result of mismanagement at the hands of selfish, exploitive leaders. Jeremiah did not limit culpability to Judah’s leaders but speaks more generally of the “wicked” (verse 1) or of “those who dwell there” (verse 4), who have “taken root” (verse 2), that is, become established to the point that they were prospering due to their environmentally destructive activities. Jeremiah’s complaint, therefore, had at its heart the issue of prosperity on the part of the wicked; people without scruples who take advantage of others and circumstances for their own gain (Jeremiah 12:1-4).
It is not surprising that there is hardship in Ghana because the leadership of the current government is formed on the bases of lies, deceit and most importantly for “perceived” self-aggrandizement for the president. As read in (Proverbs 29:2) When the Godly are in authority, the people rejoice. But when the wicked are in power, they groan.
CAUSES OF CONTINUOUS BAILOUT FROM IMF
Ghana has one of the widest inequalities of wages and wealth, wider than any developing country in Africa. Even though the GDP of Ghana has doubled, citizens of the country earn so little that people live salary to salary, and some can’t even afford three meals a day and pay their bills.
It is worth mentioning that the circumstances that push Ghana to go to the IMF since 1966 till date are very much the same with very little variation. After the overthrow of Kwame Nkrumah, Ghana went to the IMF after series of corruption, economic mismanagement and what was described as a slowdown of economic activities as a result of the military coup.
Against this backdrop the country has since always run to the fund for bailout after mismanaging revenue. In addition to that, there have been issues of:
- Purposive Corruption
- Mismanagement of taxpayer’s money
- Revenue shortfalls
- Perennial borrowing without putting funds to capital/infrastructure development
- Misplaced priorities by people in authority
- Import driven commodity-based economy susceptible to a myriad of external shocks.
Revenue & Taxes
The government of Ghana targeted to mobilize GH¢100.5 billion in revenues and grants. With estimated total expenditure of GH¢137.5 billion, with the aim to achieve an overall budget deficit of 7.4 percent for 2022. Fast-forward to third quarter of 2022, with an inflation rate of 29.8 percent, a 28 percent depreciation of the local currency, fiscal deficit of 14 percent and a $ 1 billion balance of payment deficit for the second quarter of 2022, drastic expenditure cuts is the key to salvage the worsening economic woes of Ghana.
The biggest danger for Ghana’s economic recovery, is sharp tightening of revenue and higher debt service and refinancing risks, as well as stress on vulnerable sovereign bond issuances and those with un-hedged dollar exposures especially with the steep depreciation of the local currency. Failure to secure financing would call for higher interest rates, further dampening growth and exacerbating fiscal cost and debt dynamics.
Impact on Economic Growth
With the growing concerns of debt sustainability looming in the country, the government had no choice but to call on support from the IMF just like all previous governments did.
We, however, have to consider the impact of this move on the economic growth of the country in the interim and medium term.
The first impact we have so far seen from the dangers spelt above is the rising cost of living which spans from the depreciation of the cedi and external global challenges. The economy of Ghana has not changed structurally over the period with major commodities being imported from developed countries. Inflation in these countries as a result of the global food shortage means that prices of imported goods have also increased exponentially within the first half of the year. The impact of this is even worse considering the rate of depreciation the Cedi has experienced since the turn of this year. Importers have had to increase the prices of goods to make up for the exchange rate shortfalls.
This and the global rise in the price of crude oil has culminated in a high cost of living especially in the major cities of the country.
To arrest this situation, the Central Bank has resorted to monetary policies that seek to stabilize the flow of money in the economy. One of such measures that they have used over the period is increasing the policy rate for banks. The rippling effect of this move is the increasing cost of loans across the Industry.
Businesses that hitherto had access to relatively cheaper loans are beginning to feel the impact of this move. The average loan rates in the country have risen from about 22 percent at the beginning of the year to 26 percent within the universal banking space and even higher in the non-bank financial institutions.
This situation adds to the production cost of businesses which translates into the prices of goods and services. Another negative impact of this move is that businesses will struggle to expand their operations because loans are now expensive, thus, they will try to manage the little they have to make ends meet.
The rising policy rate has also affected Government’s quest to borrow from the local market by increasing Treasury bill rates and bonds to attract more funds for economic development. This move even though allows citizens to make some gains on idle funds as they seek to match the prevailing inflation rate has also limited the lending scope of most financial institutions.
Some financial institutions see investment in these increasing Treasury bills as a better option for granting credit to businesses which come with a lot of uncertainties. It, therefore, crowds out local businesses in the pursuit of operational and expansive loans.
With the coming of IMF, we should expect some short-term economic gains as they come in with a reputation that drives investor confidence. We shouldn’t lose sight of the fact that most foreign investors at the turn of this year have had to liquidate their investments in Ghana for more stable economies.
This move is one of the reasons why the cedi has depreciated beyond the targets set for the year. Under our collaborations with the IMF, some of these investors are likely to consider bonds offered by the country going forward. This will lead to the stabilization of the local currency.
The downside of this move is the possible halt of some government social intervention policies which the IMF may consider not a high priority at this time.
What we need to appreciate is that the IMF is not a charitable organization. The support they offer to countries is expected to be repaid through the effective management of the economy, thus, they put a premium on how funds are judiciously managed. The woes of this country from 2020 to now find their root in the expansive spending habit of this country on a myriad projects which could have been staggered. There are so many policies that the government tried to implement in many ministries which could have been phased out slowly especially when it was obvious revenue lines of the country had been affected by both global and local mishaps.
Another obvious economic challenge that the IMF bailout will bring is the further deepening of unemployment especially. As we are all aware, the last policy credibility arrangement Ghana had in 2015 led to a backlog of young people who had completed nursing and teacher training colleges but were not placed as part of the conditionalities. This situation is likely to happen again as the growing debt portfolio vis-a-vis dwindling revenue lines means that the public payroll may have to be staggered for a while.
The obvious groups to suffer are new teachers and nurses. It will create a situation where we have an able and willing workforce whirling away because of non-existence of working opportunities.
- Electronic updating and monitoring of the public payroll to completely take off ghost names and the commissioning of a third-party monitoring team periodically.
- Restructuring of the procurement laws for public purchases to reduce nepotism and inflated contracts.
- Only sourced funded projects within realistic revenue projections should be commissioned. Politically motivated and election driven projects should be managed if not completely reduced especially in the final year of every government. The fiscal deficit regulations should be reviewed to wheat out some conditions that give leeway to the Minister of Finance to go over the agreed limit.
- Parliament must begin to start a discussion on reducing expenses on public officers by capping the number of Ministers a President is allowed to bring into his or her government.
- The discussion of moving away from ex-gratia to endowment fund should be expanded to save the country of huge debt to retiring Members of Parliament and Council of State members.
These are some of the ways to restructure the expenditure of the country as we move towards the “so called” Ghana Beyond Aid target.
Remarks on Bailout
The current economic outlook of Ghana is very scary and dire and can only be classified as a collapse economy especially with the downgrade by the rating agencies. With the current steep fast depreciation of the Cedi and the skyrocketing of inflation, the government needs to effective immediately put in a fiscal adjustment balancing measure to reduce drastically expenditure and implement a workable citizen accepted revenue mobilization drive.
|S&P||CCC+||Negative||Aug 05 2022|
|Moody’s||Caa1||Stable||Feb 04 2022|
|Fitch||B-||Negative||Jan 14 2022|
|Fitch||B||Negative||Jun 22 2021|
A junk rating in effect affects investor confidence and poses a great risk to the bond market whiles increasing the value of the country’s debt. The current country’s bond ratings are junk, which makes the country highly risked to default on her debt and Investors stand a high risk of losing their funds.