'Tight' 2020 budget needed 'to contain debt build-up' – IMF to Ghana

A team of International Monetary Fund staff has concluded its 2019 Article IV Consultation Mission to Ghana and advised the Akufo-Addo government to have a tight 2020 budget so as to rein in the country’s growing debt stock.

“While 2020 budget preparations are ongoing, the mission underlined the need to adopt an appropriately tight budget to limit financing needs, contain debt build-up, and support the external position”, a statement from the IMF said, adding: “This will likely require both spending and revenue measures”.

The IMF team said it “recommended avoiding spending and financing operations outside the budget to enhance budget credibility and transparency”.

It said: “In the medium term, raising domestic revenues remains a priority to create fiscal space and buttress fiscal sustainability. The authorities should also forge ahead with the implementation of the Energy Sector Recovery Plan to limit contingent liabilities in the energy sector”.

“The monetary policy stance appears appropriate, but it should continue to remain vigilant to inflationary risks. Tightening may become necessary should inflationary or exchange rate pressures emerge. The central bank’s focus on building external buffers going into 2020 is a welcome development”, the Fund said.

Among other things, the IMF said maintaining fiscal discipline in the run-up to the 2020 elections will be critical to safeguard the macroeconomic gains achieved since 2017.

The team, led by Carlo Sdralevich, visited Accra September 30 to 11 October 2019 to conduct discussions on the 2019 Article IV Consultation, which was concluded in Washington, D.C. on the occasion of the 2019 IMF and World Bank Annual Meetings. The team held constructive and candid discussions with Vice-President Dr Mahamudu Bawumia, Finance Minister Ken Ofori-Atta, Bank of Ghana Governor Dr Ernest Addison, other senior government officials, Finance Committee of Parliament, private sector representatives, labour unions, and civil society organisations.

Mr Sdralevich said: “Ghana’s macroeconomic outlook remains favourable, supported by strong activity in the extractive industry and a safer banking system. Real GDP growth is projected at around 7 per cent in 2019. September consumer price inflation, at 7.6 per cent in the rebased CPI series, is just below the 8 per cent target. The cedi has depreciated by about 10 per cent from the beginning of 2019. Bank of Ghana’s international reserves are projected to record a build-up in 2019, supported mainly by an improving trade balance and external borrowing. The primary risk to the outlook remains policy relaxation in the run-up to the 2020 elections.

“After the successful completion of the program with the IMF, the authorities’ policies have remained prudent and maintained macroeconomic stability. Nevertheless, implementation of the 2019 budget has been challenging, owing to lower than expected revenues, frontloading of spending on some government flagship programs, and unexpected security outlays reflecting emerging security challenges from the Sahel region. In addition, longstanding losses in the energy sector have spilt over to the budget and, together with the cost of the financial sector cleanup, have contributed to the rise of public debt, projected at about 63 per cent by year-end. But, the government is committed to keeping the budget deficit (excluding financial sector restructuring and energy costs) below 5 per cent of GDP as well as a primary surplus, in line with the Fiscal Responsibility Act.

“The Bank of Ghana is well advanced in the clean-up of the savings and loans and finance house sub-sectors, another important piece in the extensive reform of the financial sector. The recapitalisation of the remaining locally-owned banks and the reduction of the overhang of nonperforming loans will be key to boosting credit to the private sector and to buttress growth in non-extractive activities. The new deposit insurance scheme, the ongoing strengthening of regulatory and supervisory regimes, and the work of the Financial Stability Council are also steps in the right direction. Going forward, both robust implementation and deepened accountability remain critical to preventing a recurrence of weaknesses in the financial sector.

“The mission analysed prospects for strong and sustained economic growth, including long-term growth targets and structural transformation envisaged under the Ghana Beyond Aid agenda, and the contribution of the financial sector to economic activity. Under the Fund’s 2018 Framework for Enhanced Engagement on Governance, the IMF team also discussed governance in the fiscal and financial sectors, including in the areas of Anti-Money Laundering and Combating the Financing of Terrorism, and recent progress in the establishment of anti-corruption institutions.

“The IMF team would like to thank the Ghanaian authorities for their hospitality and wish them every success in their ongoing efforts to raise economic growth and improve livelihoods.”