IMF passes verdict on Ghana's economy

The IMF team, which concluded its discussion last week Thursday noted that the economy is vulnerable to many shocks, and has stressed that the country’s economic growth at the end of this year will slide from the 7.1% recorded last year to 4.5%, which could be the lowest GDP growth in more than a decade.

Mr. Joël Toujas-Bernaté, who led the IMF mission to Ghana, stated: “Ghana continues to face significant domestic and external vulnerabilities on the back of a large fiscal deficit, a slowdown in economic growth and rising inflation.

“These vulnerabilities are putting Ghana’s medium-term prospects at risk. The mission estimates growth to decelerate to 4½ percent in 2014, from 7.1 percent in 2013, and inflation to reach an average of around 15 percent for the year.

“The fiscal deficit is expected to remain elevated at around 9¾ percent of GDP, driven by weak revenue performance, a large wage bill and substantially rising cost of debt service. The external current account deficit is projected to narrow to 10 percent of GDP as imports declined substantially due to slower growth and a large depreciation of the currency while export performance remained weak.

“The currency weakened sharply through August, before recovering very recently. In September, the issuance of a US$1billion Eurobond and the Cocoa Board (Cocobod) successfully raising US$1.7billion for the financing of a projected excellent cocoa crop were positive developments. Nonetheless, gross international reserves will remain at a low level.”

Mr. Toujas-Bernaté said while in Ghana, it had open and honest deliberations with policymakers, who showed appreciation of the risk associated with imbalances and vulnerabilities in the economy.

He said further talks on a possible programme that can be supported by the IMF will continue at the annual general meetings of the World Bank and IMF in Washington DC in October.

The central bank is confident the government’s fiscal consolidation efforts, as expected, will be strengthened under the IMF programme, which will also provide additional balance of payments support.

Ghana’s economy has been going through some economic turbulence since June last year. However, the situation seems to have gotten worse since the beginning of this year.

For the first eight months of year, the cedi depreciated against the US dollar by about 30 percent according to the Bank of Ghana, while other economists have pegged the rate of depreciation at 40%. Inflation also hit 15.9% amidst rises in utilities and fuel tariffs.

The IMF mission observed that there is need for government to further tighten its fiscal consolidation efforts, as the country’s rising debt level is worrying and must be contained by cutting the public sector wage bill and scrapping subsidies for energy and petroleum products, among other things.

Mr. Toujas-Bernaté put it more succinctly: “A more ambitious and front-loaded fiscal consolidation is needed to help place public debt on a sustainable path, and to allow monetary policy to be more effective in bringing down inflation -- including by strictly limiting budget deficit financing by the Bank of Ghana.

“Front-loaded adjustment should be realised through reductions in Ghana’s comparatively high public sector wage costs, the elimination of costly and untargeted subsidies for energy and petroleum products, and a better prioritisation of capital spending.

“On the revenue side, reduction of tax exemptions and strengthened revenue administration through a better targeting of large taxpayers appear necessary. At the same time, it will be important to expand well-targetted social protection programmes to mitigate the potential impact of fiscal consolidation measures on the most vulnerable groups of the population. In the medium-term, structural reforms and institutional changes will be key to sustainable fiscal consolidation and lasting expenditure discipline.”

Government now faces an enormous challenge in controlling its wage bill in particular, even though it recognises that the current cost of public sector wages is a continuing threat to the fiscal outlook as the wage expenditure jumped at an annual rate of 26.2 percent in the first five months of the year, faster than inflation and nominal GDP. The situation could have been worse but for workers’ considerate posture in wage negotiations and government’s own resolute stance on the issue.

Negotiations for 2015 wages, which the Finance Minister hopes to be completed before the presentation of next year’s budget in November, will however be tough as workers will look forward to reclaiming some of their lost purchasing power in 2014. The expiry of the Cost-of-Living Allowance (COLA) at year-end will also add to wage pressures.

The goal of cutting the wage-to-tax revenue ratio to 35 percent by 2017 thus seems impossible -- unless some rationalisation of the public sector workforce is carried out in addition to ongoing reforms.