The New IMF-Ghana Entente

*22 April 2009*

The Honourable Minister of Finance and a high-powered five-person Ghanaian delegation are in Washington D.C. attending the World Bank – IMF Spring Conference as we write.

Information trickling down to us suggests that the Ghanaian team will be exploring prospects for expanded assistance to Ghana from the Bretton Woods institutions. Government of Ghana would love to receive a huge, flexible, grant-heavy IDA-type concessional package that will require only a few politically painful adjustments in its preferred policy positions. Its current PRSP (Poverty Reduction Strategy Paper – based) program with the World Bank appears stretched to its limit, however, and talk of “front loading” long-term assistance in critical areas such as water and transportation notwithstanding, Government of Ghana remains seriously exposed because of accelerating pressures on fiscal stability from SOE (state-owned enterprise) underperformance, public sector wage inflation and the weakening cedi.

So, alas, we may have to settle for a less than concessionary assistance package than we would have thought acceptable just a few months ago, if broad budget support, rather than piecemeal sector-focussed measures, is the short to medium-term government objective. That is where the IMF comes into the picture.

The International Monetary Fund, unlike its sibling the World Bank, specialises in crisis resolution rather than long-term development financing. For that reason, perhaps a bit unfairly, it has become permanently tagged with the phrase, “shock therapy”.

In 2002 Ghana was kicked out (euphemistically: “suspended”) from the Fund’s Poverty Reduction & Growth Facility program until Government of Ghana reaffirmed commitment to structural reform by doubling petroleum prices in 2003 among other measures.

By 2006 Government of Ghana had plotted a strategy to wean itself off IMF’s more stringent programs in order to create “fiscal space”. The intended goal was to free Government’s hand to borrow on the long-end of the international capital markets. The IMF’s reticence in engaging fully with our MDRI (Multilateral Debt Relief Initiative) program may have something to do with that bold step.

The success of this strategy has, evidently, been curtailed by the current global economic crisis, which, not to put too fine a point on it, afflicts the Eurobonds markets, whether in London or Luxembourg, in much the same way that other capital markets are affected (unless of course you are a dealer in American maturities). Needless to say the international money markets are also out of our reach, and even if they weren’t, borrowing on the short end would probably be unjustified in our case anyway.

So Government of Ghana has to return like the prodigal son to the IMF, and the fine points of this “entente” turn on whether the IMF will view Ghana as a “dropped-out pupil” and will insist that Government returns to complete its “pupilage” in structural reform, i.e. conclude any unfinished business from the 1980s era structural adjustment program, as it were.

If the IMF was to view things in that way, it is not too difficult to anticipate where they will concentrate THEIR priorities. All one really has to do is to look at their 2009 African Economic Outlook and factor in a few Ghana-specific contexts, such as will be elaborated by the Ghana desk at the IMF and the Fund’s country representative here, for a sound forward-looking “estimate”.

*I. **The Fine Points*

1. So called “unsustainable” subsidies will come under attack. Which is why Government has already embarked on efforts towards reducing the brunt of the assault. Expect the more audacious IMF officials to take a swipe or two at Government’s policy concerning cost-sharing which purports to treat tertiary institutions as a special breed of subvented organisation who should not attempt cost-recovery in the present dispensation. Dr. Duffuor and his lieutenants will also be grilled about health financing. Questions will be raised about why the Government did not consider it worthwhile to raise the National Health Insurance Levy and therefore to forestall any possibilities of a budget overrun in the Health Sector.

All the above discussions are of course with reference to blocking leakages, cutting waste, “rationalising” expenditures, and streamlining spending, i.e. “outgoings measures”. The next line of conversations will focus on the revenue side.

2. In recent IMF literature, African governments have been counselled to adopt “stabilisation” measures on the revenue side to rein in fiscal degeneration, while at the same time guarding against “distortionary” taxes.

One assumes that in any detailed analysis, corporate taxes will be considered a no-go area with regard to revenue mobilisation, given the already high cost of doing business in Ghana. Import taxes are tricky because a huge proportion of the inputs used by local industry for production is imported. Take security printing for instance, where the industry imports at least 80% of its production requirements from overseas. To substantially increase import taxes without fatally damaging this increasingly thriving sector of domestic industry, and others of its ilk, will require the deployment of a whole plethora of tax exemption policies which will prove increasingly difficult to enforce, vulnerable to abuse and corruption, and dare we say it, “distortionary”.

Government of Ghana could still glean a few scrapes of taxes from communication levy hikes, VAT, municipal rates, forex transactions (including remittances), and so called “luxury goods” such as alcoholic beverages. But these generally converge to consumption taxes, which while relatively easy and cheap to collect are also far from substantial and, when poorly managed, highly inflationary. The net welfare gains from such taxes rarely favour the poor and vulnerable. We suspect some clever tinkerer is even as we write cobbling together a few sub - $100 million dollar tax packages from an amalgam of these “extortionary” devices, but everyone know they won’t come to very much.

The IMF also knows this, so it is safe to assume that they will, with all feigned awkwardness, touch that raw nerve of social democrats: divestiture proceeds. Expect them to drop hints about the offloading of some of government interests in various listed and unlisted firms. Perhaps the SSNIT-intermediated ones are safe for now, but ADB, GCB and other relatively well-performing companies could be in the cross-hairs. Dr. Duffuor and his team will probably feign disgust, but they should do well to improve on their acting skills, because should the IMF not fall for it, they can expect to spend a sizable chunk of senior management time tilling the treacherous ground of privatisation in a time of growing economic, and therefore political anxiety, in Ghana. And given the growing illiquidity in the primary market, Government would have to rely on private placements, a process that requires greater skill and forbearance, to obtain optimal pricing.

3. We also suspect that some impetuous IMF analyst will raise that most sacrilegious of issues: currency devaluation. That is to say, she will float the idea, pretending as if it is all some kind of after dinner thought exercise, whether Bank of Ghana shouldn’t halt any open market operations, actual or supposed – this is after all hypothetical – designed to steady the Ghana Cedi. After all, for all you know, GHC2 to $1 isn’t all that different from GHC1.5 to $1, in the wider scheme of things, seriously, and it could create some monetary room - seriously. Just exploring, is all. We can see Dr. Duffuor pointedly ignoring her to focus on the olives, a sip of fine Perrier, and then moving on briskly to the next subject.

*II. **Our Own Thoughts*

1. Government should not make the mistake of entering into preliminary discussions of any official kind, without a comprehensive proposal of its own. Such a program should be premised on the current Joint Assistance Strategy (which is weighed towards the PRSP and therefore the GPRS II), agreed upon by most of our “development partners”, and should scheme to draw the IMF into the fold, by aligning international weight behind Ghana. The point will be to marshal all our diplomatic resources by taking the moral highground and resting on the weight of the development consensus. The effect would be to get donor agencies to help in the creation of an image of a Ghana that requires special and exceptionally lenient treatment because of its matchless pedigree in bumbling sub-Saharan Africa.

2. Government of Ghana should not be enticed into “completing” the PRGF. It should argue long, bold and comprehensively that NEARLY ALL our current and ongoing economic ills stem from the current Global Economic Crisis, and therefore that the Fund’s reformed Exogenous Shock Facility (ESF)best suits our needs, and even then only on the most concessionary terms.

They should not allow themselves to be drawn into a debate about structural reform, on the argument that structural issues are for discussion another day and preferably within the JAS framework; our current external balance and fiscal “difficulties” are however due to a purely acute and incidental phenomenon stemming from unsound regulation in other people’s economies. And that without the downside risks to growth posed by these “shocks” we would have been on course to “grow out” of our structural constraints [here, Dr. Duffuor should wear a scowl and gesticulate gracefully but authoritatively]. Then we should release a storm of statistics from everywhere indicating that not only have we exceeded expectations under the MDGs framework, but we are also on course to meet our own Middle-income objectives – if only this accursed Global Economic Crisis hadn’t reared its head!

Helpfully, Dr. Duffuor refused to succumb to pressure to initiate a fiscal stimulus for Ghana. This would have made us vulnerable to the charge that given the high import intensity of capital investment in this country, any stimulated expansion of aggregate demand will lead to pressures on the external position, and therefore on forex reserves and currency stability. Now he can say with a straight face that austerity measures are already in full swing in Ghana, thank you very much.

3. For the negotiating method we suggest to work well, we will need to embrace a new era of economic discourse in this country. Talk about Government using foreign reserves to stabilise the cedi as if by so doing the money went down the drain (the Government acquired Ghana Cedis in exchange and therefore didn’t need to print new ones) creates the impression that we ought to swallow bitter pills to cure our own maladies before asking for external vitamins to boost our strength. Nor should we spend breath on the impact on the Cedi of the redenomination, which exercise was done only on face value and according to Bank of Ghana guidelines that the nominal exchange rate floats according to market criteria. Whatever must have undermined the real exchange rate was clearly exogenous to that process. Blame Global Crisis! We should be focussed on getting the best-priced financing for this country, which in the current circumstances require that we negotiate from a stronger position.

4. Of course, it will be wise that we don’t ourselves get too “wrapped up” in our own negotiating gambits and begin to believe that we shouldn’t undertake reform at our own pace and according to our own priorities, because we can always go out and sweet-mouth our way into billions. $700 billion of so-called “development” aid over 4 decades has brought Africa little development, Ghana included. In the meantime Ghana should join those calling for an absolute, wholesale, and drastic reduction of government-to-government aid and for the channelling of multilateral finance through private sector institutions, entities and initiatives. In formal terms this will include a strengthening of the IFC and MIGA within the World Bank system at the expense of the IBRD and IDA. MIGA’s political risk insurance and revamped IFC support for international equity funds could be used jointly to dramatically accelerate FDI inflows into Africa, and Ghana too.

The government-to-government aid process forces our seniormost political managers to spend too much time on narrow spreadsheets and leave them little room to engage broadly with actual implementation of strategy. They spend too much time in useless meetings with Aid bureaucrats who speak a language that requires them a whole elected term period to learn and to master. By the time they feel strong and equipped enough to ignore the checkboxes on the monitoring and evaluation scorecards and engage in serious discussions about economic growth and development, their time to leave for another Ministry or Government altogether is already up. Civil servants cannot be expected to transcend this bureaucratic culture on behalf of Ghana, as they are themselves trained to think along the same lines. Truly out-of-the-box thinking is a function of senior political management not high-level administration.

But until that happens, and we pray it happens soon, we should grow a national consensus in short order, and at the highest levels, to prise the best deals of those hand-wringing Bretton Woods Institutions. We can tear each other apart in boisterous debates about long-term development later.

*III. **Summary*

1. Ghana left the IMF’s flagship program for the developing world, the PRGF, because the Fund appeared to be using sanctions to compel Government of Ghana (GoG) to adopt policies at the Fund’s rather than the GoG’s pace.

2. Ghana could leave because it could borrow on the long end of the international capital markets. That option is less viable now, and because Ghana’s program with the World Bank is quite stretched, Ghana is being compelled to look at the IMF, which is now awash with cash or soon will be.

3. The fear is that the IMF will like to conclude its “unfinished business” with Ghana. They may ask Government to cut waste by removing subsidies and perhaps reducing overruns in the health and education sectors. Government, cleverly, is pre-empting this, beginning with energy. They might demand that GoG raises revenue through easy to collect taxes like VAT, NHIL, and perhaps even remittances and other consumption taxes. They will ask that Government increases revenue as a fiscal stabilizer, by for instance resorting to privatisation of Government interests in listed and unlisted companies, perhaps using private placements, while maintaining some compliance with reverse-procurement rules. They could even bar the Government from intervening in the currency markets to shore up the Cedi.

4. Government of Ghana should skilfully waylay the IMF by entering into discussions with its own comprehensive “Economic Stabilisation & Growth Restoration” plan, rather than allow such a plan to emerge from the dialogue. They should blame all the ongoing problems in the economy on the Global Economic Crisis and therefore insist on Ghana’s eligibility for the Exogenous Shocks Facility, while at the same time repudiating efforts to tie this to any structural reforms discussions on the argument that Ghana was “growing out” of these problems and has only been interrupted by the Global Economic Crisis.

5. To do so convincingly will require that at the same time Government embark on the creation of a national consensus on economic growth and stabilisation based on the principle that the only enemy to economic growth in Ghana is external.

6. We should endeavour to really “grow out” of the Aid box sooner rather than later.

*The Authors are affiliated with IMANI-Ghana (www.imanighana.com), a think tank based in Accra and www.africanliberty.org *