Explainer-Why Ghana has returned to the IMF

2022.07.07 15:16

Hundreds took to the streets of Ghana’s capital Accra last week to protest over its deteriorating economy. Days later, the government of one of West Africa’s most prosperous nations announced it would begin formal talks with the International Monetary Fund (IMF) for support.

It was a decision many analysts long thought inevitable, despite repeated pledges from finance minister Ken Ofori-Atta to never again seek IMF assistance. Why did the country reverse course, and what could the IMF demand in return?

WHY NOW?

Inflation hit an 18-year high of 27.6% in May, capping off a year of accelerating prices. Growth slowed to 3.3% in the first quarter, and the value of the cedi currency has declined 23.5% against the dollar since the year began.[L1N2YG1CH]

In a statement outlining its plan for approaching the Fund, the government blamed its woes on a combination of recent external forces, including COVID-19, the Ukraine crisis, and American and Chinese economic slumps.

Finance minister Ken Ofori-Atta told lawmakers last month that pandemic-related expenditure amounted to 18.19 billion cedis ($2.26 billion) as of May 2022. The country received $1.23 billion in COVID-19 relief funding from the IMF and World Bank over that period, he said.

Prices of imported goods rose more than domestically produced ones for the second month in a row in May, with cereals — 20% of which Ghana imports from Russia — having repeatedly seen some of the largest price hikes. Petroleum prices have nearly doubled year-on-year.

Authorities were still unsure about seeking IMF support only two weeks ago, but found their hands tied after lawmakers stalled a $1 billion loan, and an unpopular electronic payments tax meant to generate revenues, underperformed, Eurasia Group Africa head Amaka Anku said in a note.

DEBT AND DEFICIT

Authorities hope an IMF programme would relieve Ghana’s nearly $1 billion balance-of-payments deficit, which central bank governor Ernest Addison said in May results from a capital exodus caused by global factors.

But experts say the root of Ghana’s problem is likely fiscal, as it utilizes continuously greater loans to plug its double-digit fiscal deficit.

“Our biggest problem is that around 60% of our expenditure continuously goes towards paying public sector workers or interest payments,” said William Duncan, founder of the Ghana-based Spear Capital & Advisory. “It’s been a cycle through the last three governments.”

Ghana’s debt stock has more than doubled since 2015, steadily climbing from 54.2% of GDP that year to 76.6% at the end of 2021, according to government data.

The finance ministry’s plan for amortizing that debt rests squarely with the IMF, which it said would help the country regain access to international capital markets and roll over existing debt after recent credit rating downgrades cooled lender interest.

Many have questioned the sustainability of that strategy. Interest payments have been the government’s largest annual expense since 2019 and were its second largest expense for five straight years prior to that, finance ministry figures show.

While Ghana’s Eurobonds rallied on the news the government would seek IMF help, yields for all but the issue maturing this year still remain above 10%, the level seen as cutting a country off from issuing new debt as it becomes too expensive.

PROGRAMME PROPOSAL

When Ghana last sought IMF assistance in 2015, it received $918 million through an Extended Credit Facility Arrangement, equal to 180% of its quota.

This time, Ghana has proposed it’s own “Enhanced Domestic Programme” to the IMF, which would last a minimum of three years.

It insists there be no cuts to the administration’s flagship programmes, such as campaign pledges to build hospitals and factories in each of the country’s 216 districts and a free secondary school scheme.

And though debt servicing cost just under 48% of government revenue in 2021, the finance ministry’s proposal doesn’t require debt restructuring.

Experts think such conditions may prove complicated.

“A program would support creditors’ confidence, tempering the rise in government’s borrowing costs, but equally come with conditionality on fiscal consolidation that could prove challenging to meet,” said Aiste Makareviciute at Moody’s (NYSE:MCO).