After two decades of strong and broadly inclusive economic growth which enabled Ghana to reach middle income status and also helped the country to make significant progress towards the attainment of the Millennium Development Goals (MDGs), the country’s economic performance has weakened recently, compounded by the sharp drop in oil and commodity prices and acute power shortages. Economic growth has decelerated sharply and the fiscal and current account deficits have widened significantly, leading to a rapid depreciation of the local currency, re-emergence of double-digit inflation, and rising public debt.

The government’s efforts to achieve fiscal consolidation since mid-2013 were undermined by policy slippages, external shocks and rising interest cost. Until mid-2014, the country’s net international reserves position had weakened significantly and the cedi exchange rate depreciated sharply, fueling inflationary pressures (IMF, 2015). To deal with these challenges, the government approached the IMF for a three-year Extended Credit Facility (ECF) to support a program to achieve strong fiscal consolidation, restore macroeconomic stability and debt sustainability, and also foster market confidence to help achieve the country’s transformation objectives. The program was approved by the Fund in April 2015, to run between 2015 and 2017. This paper reviews the Fund program, with the view to establishing whether the program can help address the fiscal and macroeconomic challenges currently confronting the country and those envisaged over the medium term.

Recent Economic Developments
The growth of the Ghanaian economy in real terms has seen a significant downswing in recent years, falling from 14.0 percent in 2011 (the first time that oil production in commercial quantities came on stream) to 4.1 percent in 2014. The slowdown in growth, especially in 2013 and 2014 was due to a combination of factors, including high production cost resulting from rising interest rates and depreciation of the cedi, acute shortages of power, declining domestic demand, and unfavorable global conditions (mainly the decline in commodity prices, particularly gold and crude oil). The sharp drop in growth in 2014 was driven by a huge contraction in output from the industrial and services sectors, which recorded growth rate of 5.7 percent and 0.9 percent, respectively, in the year.

Ghana’s fiscal deficit has also remained very high in the last three years. The deficit stood at 11.6 percent in 2012 but dropped to 10.4 percent in 2013 and then to 9.4 percent in 2014. The high fiscal deficit in 2012 was attributed to the payment of accumulated arrears; significant drop in grants from donors; over-estimation of revenues from oil companies; larger than expected petroleum and utility subsidies; higher interest cost burden arising from the rise in short term domestic interest rates, and about GH₵1.0 billion recorded in the budget as a discrepancy. The drop in the global commodity prices, together with the overruns in the public sector wage bill, rising energy subsidies, and high interest costs were behind the high fiscal deficit recorded in 2013. The policy measures introduced in 2014 to contain the fiscal deficit were undermined by implementation slippages, accumulation of domestic payment arrears, increasing short-term domestic debt and the associated high debt-service costs, and the slump in crude oil prices. A US$1 billion Eurobond was successfully issued in September 2014 to partly pay some of the public debt and finance investment spending, but this was achieved at a significantly higher interest rate than other issuers in sub-Saharan Africa due to the high risks associated with Ghana’s fiscal and current account imbalances (IMF, 2015).

Inflation which stood at 8.8 percent in December 2012 rose to 13.5 percent in December 2013 on account of the removal of subsidies on petroleum products and utility tariffs, the pass-through effects of exchange rate depreciation, and the impact of the large fiscal deficit. Headline inflation peaked at 17 percent in November and December 2014, well above the 8±2 percent target range set by the Bank of Ghana despite the several hikes in the Bank’s policy rate which reached 21 percent in October 2014. The inflation rate drop marginally to 16.5 percent in January 2015 but resumed its upswing thereafter, reaching 16.9 percent in May 2015. The rising inflation rate after January 2013 was driven mainly by the large depreciation of the cedi, the financing of the fiscal deficit predominantly by the Central Bank, rising interest rates, and the effects of the petroleum product price increases.

Ghana’s public debt stock has also risen substantially since the Multilateral Debt Relief Initiative in 2006 and the country now faces a high risk of debt distress and increased overall debt vulnerability. Total public debt rose to GH₵76.1 billion in 2014 from GH₵35.1 billion in 2012 and GH₵9.8 billion in 2008. By March 2015, the total public debt stock had reached GH₵88.2 billion, implying that the public debt stock increased by GH₵53.1 billion or 151 percent between January 2013 and March 2015, causing the public debt service-to-revenue ratio to breach its indicative long term threshold. All other debt indicators have also deteriorated owing to the worsening domestic and external borrowing conditions, weak fiscal consolidation, and weakening of the cedi.

The performance of the external sector has equally been weak in the last few years due mainly to the volatility in prices of the country’s main export commodities. Large net service and income outflows and the slowdown in official and private transfers resulted in a deterioration of the current account deficit which stood at 11.7 percent of GDP in both 2012 and 2013. The weakness of the external position continued through 2014, causing the exchange rate of the cedi to depreciate sharply. New regulations adopted by the Bank of Ghana in early 2014 to stem outflows of foreign exchange had limited effect and were therefore reversed in July 2014, although a few exchange restrictions remained. For the whole of 2014, the cedi exchange rate dropped by 31.2 percent, making it the worst performing currency in the world. The currency depreciation and the economic slowdown led to a substantial contraction of imports and a narrowing in the current account deficit, which nonetheless ended at 9.2 percent of GDP in 2014.

Recognizing the need to tackle the fiscal challenges and to restore macroeconomic balance, the government formulated a home-grown stabilization and reform program, which was anchored on the second Ghana Shared Growth and Development Agenda II in early 2014. Implementation of this program was hindered by inadequate policy response, intensification of external shocks (including the fall in export commodity prices), and increased debt service costs. With no option left, the government approached the IMF for a medium term program to help address the country’s economic challenges, obtain some balance of payments support and policy credibility that the Fund programs usually bring to the markets and investors.

The IMF Program
On Friday, April 3, 2015, the Executive Board of the International Monetary Fund (IMF) approved a three-year arrangement under the Extended Credit Facility (ECF) for Ghana in the amount of SDR 664.20 million (representing 180 percent of quota or about US$918 million) with zero percent interest rate and a repayment period of 10 years to support the governments’ medium-term economic reform program. The Executive Board’s decision enabled a disbursement of SDR 83.025 million (about US$114.8 million) to take place on April 14, 2015.

The program calls for a strong front-loaded fiscal adjustment; structural reforms to strengthen public financial management and enhance fiscal discipline; rebuild external buffers to increase resilience to shocks; and enhance the effectiveness of monetary policy by limiting its fiscal dominance. The planned strong fiscal consolidation is expected to dampen economic growth and reduce inflation in the short term. Growth is however projected to pick-up in the medium term, supported by the expected coming on stream of additional crude oil production while lower inflation and interest rates, combined with a stable exchange rate environment will help support private sector activity. Real GDP growth is projected to drop to 3.5 percent in 2015 before picking up to 6.4 percent in 2016 and 9.2 percent in 2017. Non-oil real GDP growth is projected to decelerate further to 2.3 percent in 2015 before picking up thereafter, reaching 5.5 percent in 2017.

Reflecting increasing interest payments and repayments of arrears, the overall fiscal deficit (on cash basis) is projected to drop from 9.4 percent of GDP in 2014 to 7.5 percent in 2015, and then to 3.7 percent in 2017. The primary fiscal balance (on a commitment basis), however, is projected to turn from a deficit of 3.5 percent in 2014 to a surplus of 0.9 percent of GDP in 2015 and then to 3.2 percent of GDP in 2017. Despite the projected drop in the fiscal deficit and the expected expansion in oil and gas production, total public debt is expected to remain high over the program period, dropping to 62.6 percent of GDP in 2017 from 69.6 percent of GDP in 2015, but will reach a more sustainable level of about 50 percent of GDP within a decade.

Fiscal policy under the program is designed to contain public expenditure, mobilize additional revenues, and restore debt sustainability. On the revenue side, the program endorses the measures contained in the 2015 Budget approved by Parliament in November 2014. They include the imposition of a special petroleum tax of 17.5 percent as part of the rationalization of the VAT regime and changes in the petroleum products pricing structure; the implementation of VAT on fee-based financial services and the imposition of a 5 percent flat rate on real estate to broaden the tax base; extension to 2017 of the special import levy of 1–2 percent on some imported goods; and a 5 percent national fiscal stabilization levy on profits before tax of banking, insurance, other financial services, communication and brewery sectors. Other revenue measures include an increase in withholding tax on directors’ fees from 10 percent to 20 percent and on goods and services from 5 percent to 7.5 percent; increase in vehicle income tax by 5 percent; and a proposal to review corporate income tax for free zones companies (Government of Ghana, 2015).

To improve revenue collection, the existing tax exemptions will be reviewed; tax treatment of the free zones enterprises and SOEs will be streamlined; and the VAT threshold increased after the new tax policy for small business is enacted. To restore the integrity of the VAT regime, the government will implement time-bound refunds of VAT credits beginning in September 2015. The tax administration reforms which had stalled will be accelerated through the implementation of a three-year Strategic Plan developed by the Ghana Revenue Authority. Amongst others, the Plan seeks to improve tax compliance and modernize tax collections. The government also intends to amend the Petroleum Revenue Management Act (PRMA) to give the Minister of Finance more discretion to change the benchmark oil revenues under unexpected circumstances.

On the expenditure side, increases in the nominal total public wage bill will be limited to 10 percent in 2015, supported by (i) an agreement with trade unions on a 13 percent wage increase over the 2013 nominal basic wage; (ii) discontinuation of the 10 percent cost of living allowance granted in 2014; and (iii) placing of strict limit on net hiring in the public sector (which will be frozen except in education and health). In addition, subsidies for utilities and petroleum products will be fully eliminated through strict implementation of tariff and automatic price adjustment mechanisms. All outstanding payment arrears will also be cleared through cash payments and securitization with marketable financial instruments. The government will cut goods and services budget for 2015 by 17.5 percent and capital spending by 12.5 percent from the original budget to mitigate the shortfall in revenue due to the substantial decline in oil prices. The government will also ensure that total debt accumulation remains in line with the approved level in the 2015 Budget. The remaining fiscal gap will be closed by withdrawals from the Oil Stabilization Fund.

To strengthen public financial management to support the fiscal adjustment effort, the government plans to implement a number of measures. They include quarterly and annual publication of all fiscal information for public consumption to improve budget transparency; cleaning up the government payroll and strengthening control of the public wage bill; undertaking a civil service reform aimed at rationalizing the size of the civil service and enhancing productivity; reviewing the administrative and legal frameworks that protect the funding and operation of statutory funds to reduce rigidities in the budget structure and create more room for policy maneuver. In addition, the Ministry of Finance will submit a comprehensive PFM reform strategy to Cabinet for approval by August 2015 and draft bills to deal with the weaknesses in the existing PFM laws by December 2015; restore budget credibility and avoid significant overruns; increase control over budget execution and avoid the accumulation of new arrears; strengthen the medium-term fiscal framework and its forecasting models; extend the GIFMIS system to cover revenue and expenditure transactions of internally generated funds to enhance budget comprehensiveness; and strengthen treasury and cash management by centralizing all cash holdings in the Treasury Single Account (which would be adopted by Cabinet by August 2015).

On public debt, the sustainability analysis undertaken by the IMF indicates that Ghana is at a high risk of debt distress, on account of breaches in the debt-service to revenue ratio over the program period and after 2021. The program therefore calls for a prudent borrowing strategy that provides for concessional borrowing to the extent possible and prioritizing non-concessional borrowing for highly productive development projects to be implemented by the government. The government also agrees to limit its borrowing plans to loans with a minimum grant element of 35 percent, with possible exceptions, in line with the debt limits policy. The Bank of Ghana’s gross financing of the budget deficit in 2015 is to be limited to 5 percent of previous year’s revenue, using only marketable financial instruments. The rest of the domestic financing of the fiscal deficit will be from deposit money banks and non-banks through the issuance of Treasury bills and bonds. To safeguard the government’s overarching goal for debt and fiscal sustainability, the Ministry of Finance is required to develop a comprehensive Medium-Term Debt Management Strategy and submit to Cabinet for approval by end-June 2015. The government is also required to strengthen its risk management practices by developing an operational framework for building cash buffers, the management of on-lending portfolios, and reducing its exposure to contingent liabilities by minimizing the use of sovereign guarantees (IMF, 2015).

Over the program period, the Bank of Ghana monetary policy is to continue pursuing inflation targeting framework. The inflation targeting policy aims at achieving a single digit inflation rate in 2016 and over the medium term, with the support of the government’s fiscal consolidation. For 2015, however, inflation is projected to reduce to 12 percent. Guided by inflation forecasts, the Monetary Policy Committee (MPC) of the BoG will take all decisions on reference interest rates and interest rates bands. The Committee will determine both the monetary policy rate and a more transparent overnight interest rate corridor. The Bank of Ghana will also strengthen its monetary operations to steer the interbank rates towards the policy rate. To this end, Bank of Ghana will run all its liquidity operations using its own bills, while eliminating the open market operations bills. This policy is designed to increase transparency and distinguish monetary operations from the placement of public debt bonds.

To help bring inflation back into the single digit territory, Central Bank financing of government and state-owned enterprises will progressively be eliminated: from 5 percent of previous year’s revenue in 2015 and reducing the financing to zero from 2016 onwards. To institutionalize this policy, a new Act designed to significantly strengthen Bank of Ghana’s functional autonomy, governance, and ability to respond to banking sector crisis is expected to be passed by Parliament by end-December 2015. This new Act will also strengthen the Bank’s governance provisions to ensure the personal autonomy of key Management staff, Board and Audit Committee Members of the Bank. The Act will have new provisions which will allow the Bank to better respond to banking crisis situations, including details and conditions under which the Bank can provide emergency lending assistance. The requirement in the Bank of Ghana Act which requires the Bank to set annual aggregate limits for its guarantees for foreign loans by the government will also be enforced.

The Bank of Ghana is required to strengthen the interbank foreign exchange market and use market transactions to determine the daily official exchange rate. Since January this year, the Bank of Ghana has been implementing online foreign exchange trade tracking system, which is envisaged to lead to an improvement of the operations of the foreign exchange market by enhancing transparency and price discovery among market participants. In early March 2015, the Bank defined a fixed set of rules to be used to compute daily reference foreign exchange rates for the cedi against the major trading currencies based on market transactions. This was aimed at deepening the exchange rate market by unifying the Bank of Ghana and the interbank exchange rates. The compulsory surrender requirements of foreign exchange by key sectors of the economy will be eliminated by June 2016 and the Bank’s practice of securing foreign currency funding for priority sector imports will be ended.

To address concerns about deposit banks’ balance sheets, Bank of Ghana and external audit firms will undertake a special diagnostic audit of loan classification and provisioning and of restructured loans of the deposit banks. Informed by this audit, which is planned to be completed by September 2015, Bank of Ghana will develop new regulations to ensure that deposit banks meet prudent standards in their underwriting and credit evaluation practices, and do not under-provide for bad loans. Bank of Ghana will continue strengthening its oversight of microfinance institutions and cross-border and cross-sector supervision by intensifying its collaboration with central banks and regulators in the sub-region, as well as with other domestic financial sector regulators.

To strengthen the legal framework for supervising and regulating the financial system, Bank of Ghana will present to Parliament during the second quarter of 2015 the Banks and Specialized Deposit-Taking Institutions Bill and the Ghana Deposit Protection Bill for consideration and passing. These two laws will clarify the current legal framework for financial institutions and provide the Bank of Ghana with strong, comprehensive, and flexible tools for regulation, supervision and resolution in line with international best practices. The resolution tools will give Bank of Ghana the capacity to protect the value of performing assets and protect depositors while removing weak banks from the system. The Deposit Protection Bill establishes a separate institution, the Ghana Deposit Protection Corporation, with its responsibility limited to protecting deposits.

The IMF program contains three sets of conditionalities, namely prior actions, quantitative targets and structural benchmarks.

Prior Actions (8)
The program requires the government to implement eight prior actions, all of which had at mid-April 2015 been completed. They include the following:
• Implementation of the front-loaded fiscal adjustment in 2015,
• Cleaning up of the government payroll;
• Limiting monetary financing of the fiscal deficit;
• Strengthening the inflation targeting framework;
• Using market transaction to determine official exchange rate;
• Implementing full cost-recovery of petroleum products price structure;
• Announcing additional adjustment measures to mitigate the impact of lower oil prices in 2015; and
• Limiting public debt accumulation to approved level in 2015.

Quantitative Performance Criteria (5)
• A floor on the primary fiscal balance (cash), measured in terms of financing;
• A ceiling on public sector wages and salaries;
• A floor on the net international reserves of the Bank of Ghana;
• A ceiling on net domestic assets of Bank of Ghana;
• A ceiling on the net change in the stock of domestic arrears.

Continuous Performance Criteria (4)
• A ceiling on gross credit to government by the Bank of Ghana;
• A continuous non-accumulation of domestic arrears;
• A continuous non-accumulation of new external arrears; and
• A ceiling on contracting or guaranteeing of new external non-concessional debt.

Indicative Target (2)

• Twelve-month rate of consumer price inflation (with discussions with the Fund to be held if inflation does not reach the target);
• A floor on government’s poverty-reducing expenditure.

Structural Benchmarks
To monitor progress on the structural reforms, structural benchmarks have been set up to be met. Essentially the structural conditions relate to measures that the government itself outlined in its memorandum of economic and financial policies submitted to the Fund to support the request for the three-year program. These measures deal with revenue administration and tax policy, public financial management, public service reform, public debt management, and monetary policy and the financial sector. It is important to note however that all the structural benchmarks, except two, viz. roll-out of the Human Resource Management Information System (HRMIS) and the integration of the GIFMIS payroll with the HRMIS, are to be met by December 2015. The other two benchmarks are to be met by December 2016 (IMF, 2015)

The program recognizes that the country’s short and medium-term economic outlook is subject to substantial risks. On the downside, if the current electricity crisis is not swiftly addressed and also the implementation of the energy sector reform is delayed, economic growth may fall much lower than projected in the program and not strongly rebound as expected in the medium term. The slump in economic growth in 2015 may also weaken the financial sector, leading to increased non-performing loans and limiting the sector’s ability to support private sector activity. The run-up to the 2016 elections may also lead to social tensions and a strong push for policy reversal as previous election cycles have seen fiscal overruns. Moreover, with exports still dominated by primary commodities, an economic slowdown in the country’s main trading partners and a sustained decline in commodity prices on the international market will expose the country to terms of trade shocks and a substantial negative fiscal impact. An abrupt increase in global financial market volatility leading to increases in financing costs and reduced private capital inflows would also impact seriously on investment and debt management in the medium term. On the upside, quickly regaining credibility of fiscal discipline and monetary policy may lead to a more rapid decline in domestic interest rates, the cedi exchange rate and restoration of investors’ confidence. A stronger rebound in commodity prices over the medium term, including oil, would also facilitate the acceleration of some development projects (IMF, 2015).

Some Observations
The move by the government to seek external assistance from the IMF was no doubt a positive one and may come as a huge relief to the country and the investing community. The decision was not only about the balance of payments support that the country will receive to help save the domestic currency from further depreciation, but also to strengthen public finances and ensure fiscal discipline in order to restore economic stability and growth. In this way, the program advances policy credibility and confidence of the international community in the economy. The road ahead, however, looks to be long and challenging for the country. Already, skepticism over the government’s commitment to the Fund deal is growing among the international community amidst predictions that the strong fiscal tightening that the program prescribes will be politically difficult to implement.

First, one is not sure that the GDP growth targets set by the program for the medium term can be achieved. The last two years have seen a sharp slowdown of economic activity, accelerating inflation, rising public debt levels and financial vulnerabilities. Economic growth slumped in 2014 and the slowdown is predicted by the Fund to continue in 2015. The growth prospects in the medium term however look positive, especially with the coming on stream of a new oil field in the second half of 2016 and the Sankofa offshore gas production in 2017. Despite this, it is doubtful that economic growth will rise to 6.4 percent in 2016 and 9.2 percent in 2017 as projected in the program. This can only happen if the energy sector reforms are implemented swiftly and successfully, the conduct of monetary policy is directed to enhance efficiency in the banking industry to ensure cost-effective delivery of credit, and the cedi depreciation is abated. If the high interest rates, technical maintenance issues at the Jubilee oilfield, the problems encountered at the Atuabo gas plant as well as the negative impact of inflation on consumer and business confidence are not addressed quickly and sufficiently, private domestic investment will be constrained, with negative implications for the country’s growth prospects.

Second, the IMF perceives forceful and sustained implementation of the program to be essential to address the country’s fiscal and macroeconomic imbalances and enhance investor confidence in view of the downside risks that the country faces. To the Fund, the frontloaded nature of the fiscal consolidation and expected financial support from development partners should help to mitigate the program risks, and foster broad-based, inclusive growth in the medium term. The call for a sizeable and frontloaded fiscal adjustment to restore macroeconomic stability and debt sustainability implies that the fiscal deficit will be reduced at a faster pace than has previously been the case. According to the program’s projections, the fiscal deficit will be reduced from 9.4% of GDP in 2014 to 7.5% in 2015, and then sharply to 3.7% of GDP in 2017. With this, the debt-to-GDP ratio is predicted to rise initially to a peak of almost 70% at the end of 2015, and thereafter decline slowly to 62.6% of GDP in 2017. The call for a stronger fiscal consolidation is appropriate. However, the program must be seen to be credible and the targets must also be realistic. Given the weak fiscal stance, in terms of high deficits, high debt stock, rising interest burden and arrears payments, and the already subdued revenue outlook for 2015 by the precipitous fall in crude oil prices since July 2014, the envisaged sharp reduction of the fiscal deficit in the medium term appears too optimistic.

Third, one cannot disagree with the need for the government to have the commitment and discipline to implement measures to restore the country’s economic health. It is however baffling that a program that calls for a strong front-loading fiscal adjustment ended up disbursing only US$114.8 million of the approved US$918 million, back-loading disbursement into its the tail. Compared to Kenya’s February 2015 case of a one-year US$688 million Standby Agreement/Standby Credit Facility where up to 78 percent of the total facility, amounting to US$535 million was disbursed upfront, one wonders why in Ghana’s case only 12.5 percent of the total facility was disbursed upfront.

Fourth, the IMF is confident that the three-year program will trigger the release of donor funds being held up. According to the Fund, when a country has negotiated the terms and conditions of a program and agreed to what is going to be good for its development, it generally and always triggers the release of funds that sometimes had been frozen or locked up, and that Ghana’s program will have such a catalytic effect. On the contrary, some of Ghana’s donor partners have indicated that the country’s deal with the IMF does not guarantee the release of frozen funds as there are other conditions that will influence disbursement of those funds. Also, currently some of the country’s development partners have opted out of the system of transferring direct financial resources to support budget implementation under the Multi-Donor Budget Support program. Others have also been reluctant to release funds promised under the program, citing endemic corruption and fiscal indiscipline as reasons for their refusal to release the promised funds (see Business and Financial Times, 21 April 2015). In any case, the planned donor support under the program will decline steadily from 3.2 percent of GDP in 2015 to 2.2 percent of GDP in 2017 with no assurance of full disbursement.

Fifth, as part of the fiscal consolidation effort, the program seeks to retrench government expenditure by 4.1 percentage points of GDP between 2015 and 2017. Total expenditure (including arrears payments), which had initially been projected at GH₵41.2 billion for 2015 will thus be reduced to GH₵39.7 billion, with the axe falling on capital expenditure, goods and services, and transfers to the Ghana National Petroleum Corporation. This new expenditure target is sizeable and more ambitious than the planned decline of 2.9 percentage points of GDP over the same period put forward by the government in the 2015 Budget. Achieving the new expenditure targets for 2015 and the medium-term will depend on the government’s ability to tackle the structural causes of the high and growing wage bill, rising interest payments, and the inflexible statutory transfers.
On the revenue side, the precipitous fall in crude oil prices since July 2014 has already done much damage to the revenue outlook for 2015, with the oil revenue for the year revised downwards by GH₵2.7 billion (1.7% of GDP). The collapse of oil revenue has shifted the burden of increasing domestic revenue to the non-oil sector, but ironically non-oil GDP growth is expected to weaken considerably on account of the fiscal-adjustment measures and the continuing energy crisis. Growth in the non-oil sector will therefore not be able to rise up to the revenue challenge.
As we have seen, the fiscal consolidation effort under the IMF program will take place in the context of a slow growth environment which will dampen revenue generation capacity. This together with the difficulty in effecting significant expenditure retrenchment means that the planned fiscal deficit of 7.5% of GDP for 2015 seems hard to achieve. The underlying problems of the slow growth and the inability to implement strong fiscal adjustment are mainly structural in nature that short-term measures cannot fully address them. Even with the discipline, political and social determination, the fiscal deficit targets and GDP growth projections set under the program will be difficult to achieve within such a short period of three years. A gradual fiscal consolidation path over the medium term would be more realistic.

Sixth, the targeted reduction of inflation to 12 percent in 2015 and single digits by the end of 2016 and thereafter is appropriate and necessary to halt the declining real incomes and living standards. It is however hard to foresee how the inflation targets can be achieved given the strong negative pressures that the sharp depreciation of the cedi, high interest rates, and higher energy input costs will put on the domestic consumer prices. According to the Bank of Ghana, inflation expectations have heightened across consumers, businesses and the financial sector, with upward implications for pricing behavior in the medium (BoG, 2015). The IMF therefore believes that a combination of tighter monetary and fiscal policy would help to drive inflation back to the single-digit zone over the medium term. This view seems to be supported by the Bank of Ghana which concluded at its May 2015 Monetary Policy Committee meeting that the risks to both inflation and growth are elevated, but tilted more to inflation. The Committee therefore noted that a further tightening of monetary policy, complemented with sustained fiscal consolidation efforts could rein in inflation and inflation expectations. As a result, the Committee raised the monetary policy rate to 22 percent (BoG, 2015).

The implementation of the inflation targeting framework in Ghana since 2007 has not resulted in any fundamental change in liquidity management, which continues to be based on reserve money targeting. Currently, most banks participate in the interbank market, which is predominantly overnight and securitized. Payment and settlement arrangements are advanced and an auction market for treasury securities is functioning well. Concerns about the cost of sterilization appear to have at times impacted on Bank of Ghana’s operations to mop up excess liquidity, and these concerns threaten to undermine the pursuit of the Bank’s price stability mandate. More importantly, interbank rates have deviated from the policy rate by more than the targeted corridor, and the policy rate has been overtaken by the Treasury bill rates as the benchmark for market interest rates. To stabilize short term interest rates close to the policy rate, the central bank needs to target deposit banks’ excess reserves, and forward-looking liquidity operations should aim in the longer run to comply with the target path for other monetary variables, such as reserve money. Moreover, while the BoG has available traditional instruments of monetary policy, some redesign and adjusted use of these instruments could be helpful in liquidity management (IMF, 2013).

Interventions in the foreign exchange market should also support the achievement of the BoG’s monetary policy objectives. Empirical studies have shown that the pass through to domestic prices from exchange rate changes is strong and rapid in Ghana, which underscores the link between a stable exchange rate and price stability. In an inflation targeting system however, it is important that this stability is primarily achieved through appropriate macroeconomic policies and not by directly managing the exchange rate.

Seventh, there is no concrete assurance that the pressure on the cedi will abate now or sooner. As it is well known, the weakness of the domestic currency is a result of the macroeconomic imbalances, in terms of large fiscal and current account deficits leading to rising interest rates and mounting public debt. As stated earlier, the much-talked about front-loaded fiscal adjustment is unlikely to hold. Also the balance of payments support is not too strong. Therefore, there will not be any strong positive impact on the domestic currency. We also note from the IMF’s 2014 Article IV consultation report that, the Executive Board of the Fund was of the opinion that the Ghanaian authorities should “continue to allow the exchange rate to adjust to prevent further erosion of the reserve buffer” (IMF, May 2014). This opinion suggests that the cedi will not gain significant strength until the country’s macro fundamentals begin to show signs of strong improvement. Furthermore, it is expected that the inflow of the 2015 Eurobond proceeds together with the initial disbursement of the US$918 million facility will provide some respite for the cedi which has already slumped by more than 20% since the beginning of the year. Unfortunately, many analysts are of the view that if what happened after September 2014 with respect to the Eurobond and the cedi exchange rate is anything to go by then the 2015 US1.0 billion Eurobond proceeds and the Fund’s US$344.0 million support for the year will have no sustainable positive impact on the value of the cedi, and indeed the fear is that the worst of the cedi depreciation is yet to come. The cedi is losing sharply its function as a store of value, thereby making the demand for foreign currency, especially the dollar, to increase as a means of hedging against the slumping cedi value.

Eight, on the external sector, the main goal of the program is to build adequate international reserve buffers over the medium term to strengthen the economy’s capacity to withstand external shocks and support the value of the cedi. Accordingly, gross international reserves (excluding oil funds and encumbered assets) are projected to increase by nearly 75 percent, from US$4.3 billion in 2014 (covering 3 months of imports) to US$7.5 billion in 2017 (covering 4.2 months of imports), buoyed by recovery in exports as production from new oil fields comes on stream in 2016 and 2017. This target is both prudent and attainable, but could be jeopardized if commodity prices fail to recover or the anticipated increase in economic growth from 2016 sparks an unsustainable expansion of imports as happened during the previous boom.

There are also other important challenges to contend with in the attempt to strengthen the balance of payments position. First, Ghana’s wide external current account deficit has inherent structural weaknesses, making one to think that the projected reduction in the current account deficit from 9.2 percent of GDP in 2014 to 4.9 percent in 2017 appears too optimistic. This view is held because of the significant oil and gas industry-related imports as well as the continuing high consumer goods imports that may come on stream during the program period. (BoG, May 2015).

One was also expecting that the initial disbursement of the US$918 million ECF and other multilateral lender funding in the year will support the country’s external financing needs. But, given the disappointing initial disbursement of US$114.8 million, the country’s reserve coverage will most likely continue to weaken, putting enormous pressure on the cedi. The Fund expects that an increase in oil exports and lower oil imports (because of domestic gas production) will spur the current account and support foreign reserves over the medium term, not recognizing the impact of the adverse terms of trade shocks for the country’s main exports on the external accounts. According to the revised 2015 budget, lower crude oil prices will lead to a loss of government revenues of about 2 percentage points of GDP, implying that if the slump in crude oil prices continues, then the country cannot bank its hopes in building fiscal and foreign exchange buffers based on oil production and exports. In addition, the fragile global financial conditions could adversely impact on the country’s reserve accumulation, while the anticipated increase in the United States interest rates could lead to capital flow reversals.

Second, the high and rising inflation and the continuing depreciation of the cedi are seriously undermining confidence in the economy and consequently investment. Foreign direct investment and portfolio flows, the two key external financial account items, are confidence sensitive and could be at risk if the government is unable to convince investors of its commitment to long-term economic and fiscal reforms. Contrary to what some analysts believe therefore, one should not expect sufficient foreign direct investment and other capital inflows to fund the anticipated large current account deficits in 2015 and 2016. As a result, the country may not be able to maintain the projected foreign exchange reserves envisaged under the Fund program.

Third, the policy of unbridled trade liberalization has compelled Ghana, as a nation, to live virtually on imports. The increasing appetite for imports means that the demand for foreign currency especially the US dollar is growing exponentially, putting pressure on the cedi exchange rate. And with the value of the cedi depreciating on a daily basis, domestic prices of imports keep on rising and fueling inflation, with adverse implications for living conditions of Ghanaians with fixed incomes.

Ninth, the size of the country’s debt and its dynamics, fueled by high domestic interest rates and cedi depreciation against the major international currencies, are extremely disturbing. The government’s strategy to meet its debt funding needs is mainly through increasing use of dollar-denominated bonds and domestic issuances, consolidating and lengthening the duration of the country’s debt profile, and relaxing the restriction on nonresident participation in the short-term end of the domestic government debt market. The worrisome issue here is that, the current financing conditions may be tighter and costly for the country. The expected hikes in the value of the dollar and interest rates means that it will be more costly to borrow from foreign capital markets especially as the country’s currency continues to depreciate against the dollar. This can also lead to a hold-back of huge foreign inflows to the country. Already, it is reported that foreign investors reduced their holdings in Ghanaian securities by GH₵362 million in the first three months of 2015, making it the second consecutive time in six months that non-resident investors have cut their investments in the country. It is believed that the decline in foreign holdings of Ghanaian securities is due to the weakening investor appetite and loss of confidence for government’s debt because of the lingering doubts about long-term macroeconomic stability and public financial sustainability (see Boah-Mensah and Ashiadey, 2015).
In addition, the increased government liquidity risk emanating from the large gross borrowing requirements in the face of more difficult domestic and external funding conditions also poses serious challenges to fiscal consolidation and stability of the external accounts. In particular, the higher than the prevailing risk premia that the September 2014 Eurobond issuance added to the challenges of returning to the international markets ahead of the $530 million Eurobond maturing in 2017, notwithstanding the establishment of a Sinking Fund aimed at assisting with future debt repayments, is disturbing. On the domestic market, large domestic rollover needs and a front-loaded issuance calendar have caused significant upswings in all interest rates. The proposal to reduce the central bank support in financing the fiscal deficit to zero over the medium term in the current circumstance may be unrealistic.

First, the IMF deal for Ghana may ease short-term fiscal and external financing pressures in the economy, but given the design of the program, with its front-loaded fiscal consolidation and zero central bank financing of government, serious challenges could be faced over the medium term. Economic growth rate is projected to slow down for a fourth consecutive year in 2015 on the back of a severe energy crisis and the budget-tightening measures. Growth may rebound over the medium if the macroeconomic environment sees improvement, the additional oil and gas come on stream, and cost-effective solutions to address the energy crisis are found. Given that some of these growth-supporting factors are unlikely to happen at all or may happen at a later stage, the growth targets for 2016 and 2017 look too optimistic and need to be revised downwards. The fiscal targets are also optimistic given the structural weaknesses of the country’s public finance and the steep slowdown of economic growth, and should also be revised to give more space for policy maneuver to the government. The strengthening of the independence of the central bank is supported but the reduction of the bank’s financing of government to zero in 2016 is unrealistic.

Second, weak public financial management is the seed of fiscal slippages and fiscal indiscipline observed in the country over the years. To support and sustain fiscal adjustment, measures to reform and strengthen public financial management, in terms of establishing credibility, predictability and control over budget execution, are paramount. The public financial management reform should aim at modernizing the system by breaking away from the current regime of opaqueness, poor information, and weak accountability to laying the basis for a more effective corporate governance framework in the public sector. The key objectives of the reform should be to modernize the system of financial management, allow public sector officials to manage but, at the same time, hold them accountable; ensure timely provision of quality information; and eliminate waste and corruption in the use of public resources.

Third, the Financial Administration Act (FAA) and its accompanying Regulations should be amended to include an approach to financial management that focuses on outputs and responsibilities, rather than the current rules-driven approach. The new Act should be part of a broader strategy for improving financial management in the public sector. It should focus on the basics of financial management, such as being done currently with the introduction of the GIFMIS, and appropriation control and accountability arrangements for the management of budgets. The new Act should strengthen the Loans Act, 1970 (Act 335) on the issue of borrowing and issuing of guarantees. The Act should declare wasteful, fruitless, irregular, unbudgeted and over-expenditures as a financial misconduct in the public sector, and outline procedures for taking disciplinary action against public officials guilty of such misconduct.

The new Act should also seek to separate clearly responsibilities in the public sector by declaring that political heads i.e., Ministers, should be responsible for policy matters and outcomes (including seeking parliamentary approval and adoption of the ministries budgets). Head officials, viz. Chief Directors and Heads of Public Institutions, should be responsible for implementation and outputs (service delivery). This approach will give support to the new performance orientation in the public sector which relies on a performance-driven system based on measurable outputs. Chief Directors and Heads of Public Entities who are negligent and make no effort to comply with these responsibilities should be made to face disciplinary actions.

In addition, the new Act should facilitate the move towards real program budgeting in government by requiring Parliament to vote by program (main division within a vote) rather than the current ministerial votes. The program budgeting process will require information on output per program, limit the powers of Chief Directors and Heads of Public Institutions to move funds between programs, and facilitate roll-over of budgets between fiscal years.

Fourth, to achieve successful fiscal consolidation there is a strong need for expenditure control. A serious action is required to deal with the wage bill since it has been a major cause of government expenditure overruns. Although an Inter-Ministerial Committee on Payroll is currently addressing the payroll issues, this is not the first time that such a comprehensive cleaning of the payroll has taken place. But, anytime the ghost names are expunged from the system, they resurface. The problem with the public sector payroll management is both systemic and human. The system issues are currently being addressed with the implementation of GIFMIS and the new HRMIS, new payroll system, and the electronic payment voucher (E-SPV) system. The human problems have to do with officials in the public sector charged with the management of the payroll. Since the human problems are key to the deficiencies and corrupt practices currently observed with public sector payrolls, the management of the payroll should be outsourced to private companies after completion of the Inter-Ministerial Committee’s work until all the cleaning exercises and reforms currently taking place gain root and the integrity and robustness of the system are firmly established.

Second, increased domestic revenue mobilization is the other arm for successful fiscal consolidation and the crux of financing for sustainable development. To this end, the plethora of leakages arising from smuggling, foreign trade under-invoicing, bonded warehousing, free trade zone regimes, transit goods, weaknesses in excise tax and VAT (non-registration, under-declaration and categorization problems), sale of confiscated goods, and transfer pricing need to be plugged. Special tax forces, comprising the police, army, private experts, accountants and investigators, may need to be established and deployed to monitor and report on the assessment and collection of revenues from these sources. The spate of tax exemptions and special permits which allow imports to be cleared without payment of duties should all be reviewed as indicated by the government. Assessment and collection of property taxes and land rents also need to be stepped up considerably.
The government also needs to strengthen the revenue administration by setting out credible plans for further strengthening the Ghana Revenue Authority, and introducing measures to combat tax avoidance, tax evasion, and corruption at all levels. The tax laws and regulations should be simplified and strengthened to combat tax evasion while increased international tax cooperation can help to substantially reduce or eliminate illicit financial flows. Opportunities for tax avoidance can also be reduced through increased fairness and transparency of the tax system. The tax base also has to be broadened by taking steps to integrate the large informal sector into the formal economy. The excessive tax incentives in the extractive industry, including concessions and royalty agreements, should also be addressed.
Fifth, while many of the elements of a functioning inflation targeting regime are in place in the country, the current policy mix poses challenges. In moving forward, there is the need to generally strengthen the interest rate transmission channel by ensuring that there is an effective policy rate that provides a meaningful signal for expectations as well as a strong pass-through to market interest rates. Also, although important progress has been made in developing the monetary policy implementation framework, important challenges remain in the conduct of monetary operations. For an inflation targeting regime, liquidity management requires a clearer short-term focus to ensure stability and balance in the market for bank reserves, together with improved forecasts, and some adjustment of its instruments. In addition, improved coordination of fiscal and monetary policy will help improve liquidity management and hence, the implementation of monetary policy.

Sixth, to help strengthen the inflation targeting framework, the program requires the government to amend the Bank of Ghana Act to include a provision to remove the fiscal dominance in the Bank of Ghana’s monetary policy. Much as the recent large fiscal deficits were heavily monetized by the Bank of Ghana, with obviously negative repercussions on price stability, care should be taken not to involve in policy overkill in trying to address this issue. One of the goals of central bank lending to government is to smooth out tax revenue fluctuations and thus assist the government in managing its liquidity. Taking away this support at a time when the domestic debt market is still developing could worsen the financing conditions faced by the government. It would also effectively transfer the lender-of-last resort function of the central bank to other domestic creditors, which could exacerbate the crowding out of the private sector. It is therefore necessary to proceed cautiously in implementing the zero-financing of government by the Central Bank as this can become very problematic.

Seventh, the recognition of the need to implement a comprehensive reform of the civil service is supported. This reform should however focus on employment and wage policy since the high government wage bill reflects structural lapses in these two areas. The objectives of the reform should be to link public sector pay to productivity, position, and qualification; maintain the competitiveness of public sector incomes relative to the private sector; and determine the optimal number of workers needed to efficiently deliver public services. In the short-term, the wage bill can be contained and the size of the civil service reduced by combining attrition with a selective hiring freeze (as is currently the case); (ii) centralizing recruitment; (iii) cleaning and performing regular audits of the new payroll system to maintain its integrity; and (iv) avoiding across-the-board salary increases.

The reform should also involve a consolidation of basic salaries, allowances, in-kind and non-monetary benefits into single remuneration packages for post levels in the civil service and sub-vented organizations. The pay scale should also be decompressed gradually to facilitate recruitment and retention of skilled personnel. A tighter link between pay and performance will also give workers an incentive to improve efficiency and productivity.

The policy of net freeze on employment and non-replacement of departing public sector employees’ in the public sector, except in education and health sectors, as a means of containing the wage bill may need to be reviewed. As observed by the Institute for Fiscal Studies (IFS), the high public sector wages and salaries bill reflects structural lapses in recruitment and the wage policy itself. In the past, repeated wage overruns have emanated from serious weaknesses in payroll management and recruitment in sub-vented agencies. Control of the wage bill was lost because staffing and wage demands and negotiations occurred outside the budget process, and were not subject to budgetary constraints, policy priority objectives, productivity growth and trade-offs among competing spending needs. Second, the two big sectors, viz. education and health, that account for over 60.0 percent of the total MDAs wages and salaries are not affected by the net freeze on employment policy. By excluding education and health sectors, the net freeze on hiring policy still leaves room for further growth in payroll numbers in these two areas, which will not lead to a significant reduction in the total wage bill (IFS, 2014). In addition to combining attrition with selective hiring freeze, there is the need to re-centralize recruitment in the Office of the Head of Civil Service; implement measures to improve data inaccuracies, robustness of controls, and enhancement of capacity for smooth operation. There should also be an annual audit of the civil service personnel database.
The decision of the government to undertake a functional review of the civil service to provide an objective basis for a plan and schedule for right-sizing as part of the employment reform is a laudable one. This exercise should be extended to sub-vented agencies most of which are deemed to be overstaffed. Sub-vented agencies that are no longer relevant to the government’s objectives should be liquidated and those that need to be partially or fully commercialized should be instructed to do so within an agreed time frame. Government should also strengthen oversight of state-owned enterprises financial operations by systematically monitoring them and demanding reports to show that their financial risks are properly evaluated and mitigated. To this end, the capacity of the State Enterprises Commission should be strengthened to enable it closely monitor performance contracts signed by the enterprises. Priority should be given to the four largest enterprises – Volta River Authority, Electricity Company of Ghana, Tema Oil Refinery, and Ghana Water Company Limited – that pose substantial fiscal risks. Because the financial situation of these four SOEs critically depends on pricing, the recent reform of utility pricing that allow for full recovery of costs is commendable. The State Enterprises Commission should ensure that state-owned enterprises do not only observe codes of good governance but also their financial statements are prepared every year and audited by reputable private firms that adhere to international standards.

Eighth, the introduction of performance orientation in the public sector to ensure that service delivery and public spending become more efficient is strongly supported. The signing of performance contracts should however be extended to all heads of public institutions and their directors. To ensure that the performance contracts support good financial management, they should outline clearly the Chief Directors and heads of other public institutions responsibilities relating to budget control and framework for rewards and sanctions. The new HRMIS should be supported by a well-designed performance management and development system (PMDS) to give full effect to the institution of performance orientation and accountability in the public sector.

Finally, the country’s manufacturing sector should be revived to help conserve foreign exchange and support the value of the cedi, suppress inflation, support economic growth and boost exports. This is where the government’s transformation agenda, a central plank of which is diversification of production and export base, becomes very critical. While market forces are recognized as important in mediating economic exchanges, the state must retain the right and possibilities to manage economic issues in a strategic way to achieve national objectives. Economic policies must emphasize the centrality of adding value to natural resources and being able as a country to produce some of the basic necessities of life, such as food, water and clothing. To this effect, the unbridled trade liberalization policy needs to be reviewed, with the view to curbing the importation of agro-processed commodities, textiles and pharmaceuticals that can be produced competitively in the country. Both tax policy and policy reforms in the business environment should be used to create incentive structures that boost domestic manufacturing for consumption and exports. Expanding businesses access to credit and international (export) markets, reducing business risks and the soaring interest rates, creating a congenial business environment, and dealing with the energy crisis and transportation problems will all support domestic production in a significant way. Consideration should also be given to the imposition of a special levy on items that can be produced competitively in the country. In this regard, the government’s industrial policy that aims at providing support for land reform processes and the enhancement of labor productivity through the application of new technologies should be pursued relentlessly.

Ghana’s medium-term development prospects have been put at risk after two decades of strong and broadly inclusive growth, due to large fiscal and external imbalances in recent years which have led to a slowdown of economic growth. Recognizing the need for strong reforms to achieve fiscal consolidation and debt sustainability, the government sought for an IMF-support program aimed at restoring macroeconomic stability and sustaining economic growth. While the IMF program is a welcome deal and may ease the fiscal and external pressures, sticking to it in its current form would be problematic. A number of the program targets and benchmarks appear too optimistic given the downside risks to the economy. The projected slowdown of the economy in 2015 will be the lowest in more than two decades, making the expected strong rebound over the medium term too optimistic. Unless the macroeconomic environment improves significantly, the additional oil and gas come on stream, and cost-effective solutions to address the energy
crisis are found, the growth targets in the medium term will be difficult to achieve. The fiscal deficit targets are also too ambitious given the structural weaknesses, poor management of the country’s public finance, and the slowdown of economic growth. The zero financing of government by the Central Bank over the medium term is also unrealistic and could have negative growth implications. The program therefore needs to be re-examined, with the view to adjusting the fiscal and growth targets to more realistic levels. There is also the need to front-load the financial support to complement the front-loaded fiscal consolidation. Additional fiscal and non-fiscal measures are required to ensure the program’s success.

Comments and enquiries on this publication should be addressed to the Institute for Fiscal Studies, Accra through

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