BoG needs stronger cushion

The International Monetary Fund (IMF) says the Bank of Ghana (BoG) needs to hold much more foreign currency reserves than it currently has to cushion the economy against “plausible shocks”, which could include a rapid sell-off of foreign investors’ holdings of Government bonds.

The BoG’s optimal reserve holdings should be around US$8.1billion, valued at 4.2 months of imports, to limit the cost of a crisis in the event of a large shock, the IMF said. The BoG’s actual reserve position was US$5.2billion in April, valued at 2.9 months of imports, Governor Henry Kofi Wampah said in May.

The Fund’s suggestion, contained in its latest country report published on June 27, comes amid a sharp decline in the prices of gold, cocoa and oil, the leading sources of export revenue, which could worsen the terms of trade - the ratio of export to import prices - at a time of growing appetite for imported finished products.

This rising import demand, coupled with less-than-adequate supply of foreign exchange by the BoG to banks, has caused the cedi to remain weak following its 17.5% depreciation against the dollar in 2012. The currency has further slid by about 6 percent this year.

An analysis by the IMF showed that if foreign investors, who now hold about one-third of Government three- and five-year bonds, sell half of their current holdings, the resulting capital outflow would be in the region of US$1.4billion. The analysis also showed that if cocoa and gold export earnings return to their 2009 levels, current account inflows would shrink by US$1.6billion.

“Thus, a confluence of adverse developments could seriously weaken the balance of payments, lending strong support to the model-based conclusion that current reserve levels provide an inadequate buffer against plausible country-specific shocks,” the Fund stated.

It added that building up reserve buffers to the optimal level would be possible through lower fiscal and external current account deficits.

But with the price of gold already down by more than 25 percent this year, narrowing the current account deficit from 12.2 percent of GDP in 2012 will be difficult for Government. The growing unrestrained appetite for imports, fuelled by fast-paced economic growth topping 8 percent per annum in the last half-decade, also makes it harder to reduce the current account deficit by any substantial margin.

Meanwhile, more extended commodity price declines will become problematic for the economy, said Sampson Akligoh, analyst and head of research at Databank in Accra.

“I am worried that this is happening at a time when public sector wage pressures have already stretched the budget, and there is little room for expenditure cuts.”

The IMF also reiterated its disappointment at the fiscal outturn in 2012 -- when the budget deficit was cranked up to 12 percent of GDP -- and was sceptical about Government’s ability to meet the 2013 target of 9 percent of GDP. The Fund instead projected a gap of 10 percent of GDP.

“Going forward, successful economic transformation will require a realignment of spending away from wages and subsidies toward investment in infrastructure, while structural reforms are needed to restore policy credibility and build institutional resilience to the political cycle,” it said.

Among the major actions necessary to heal Government’s unhealthy finances is rationalisation of public sector wages, which were the main source of the expenditure and deficit over-runs last year.

In April, Databank called for urgent fiscal reforms -- including rules to limit expenditure growth, deficit spending and the stock of public debt -- to restore medium-term fiscal credibility. The IMF said its discussions with Government revealed a willingness to reopen the dialogue over adoption of fiscal rules once current consolidation is firmly on track.