A trilemma of issues faces the Ghanaian economy- rising debt levels, a worsening health crisis, and widening vulnerabilities posed by the pandemic on various sectors of the economy within the short to medium-term.
Early last year, when the spread of the coronavirus pandemic forced Ghana into a partial lockdown, the IMF provided $1 billion in emergency funds to Ghana in April, to contain the spread of the pandemic and support affected households and firms. Subsequently, the World Bank also agreed to a debt stand still with the country estimated to free up approximately $500 million in the short term through deferred interest and principal payments.
These notwithstanding, public agitations and concerns was rife, as the country’s debt-to-GDP ratio was forecasted by the International Monetary Fund (IMF) to end 2020 at 76.7 percent (actual- 74.4% as of November 2020). This was against the backdrop of Government’s increased borrowing earmarked for the COVID-19 response, and the likelihood of a spike in government spending as a result of the elections in that year. Some pundits were of the view that the government should go the length of opting for a downgrade in its status as a lower middle-income country due to the rising debt levels.
Such issues as aforementioned have resurfaced as the country battles with a second wave of the coronavirus pandemic and the debt-to-GDP ratio is likely to reach unsustainable levels. Like other African countries faced with worsening financial conditions due to the economic fallout of the coronavirus pandemic, and with similar characteristics as Ghana in terms of income status (lower middle-income status), Kenya has reached a staff-level agreement with the IMF on a three-year, $2.4 billion financing package in efforts to stabilize, help reduce its high debts relative to GDP and to help in its next phase of response to the COVID-19 pandemic.
However, considering prevailing conditions, the question that begs answering is whether Ghana is likely to follow suit or else attempt a debt restructuring or debt-repayment delay to help rebuild its finances. This is amid recent forecast by Moody’s ratings agency that Ghana’s debt-to-GDP ratio is likely to hit 80 percent by year-end 2021.
According to a report by the Economist Intelligence Unit (EIU), London-based business intelligence and advisory firm, Ghana is unlikely to seek a program from the IMF in spite of the current struggles with the coronavirus pandemic.
The report highlighted that this was the case as a result of concerns of losing investor confidence, basically on issues pertaining to fiscal sustainability. Thus, the government would rather prioritise policy independence than opt for a return to the IMF.
“Although Ghana would benefit from a formal IMF programme, (owing to investor concerns regarding fiscal sustainability), the government will prioritise policy independence and be reluctant to return to the Fund.”
Economic Intelligence Unit
Yet, the Governor of the central bank in a recent MPC meeting indicated that chances that the government would return to a path of fiscal consolidation was very slim due to the recent concerns of a second wave of the coronavirus pandemic.
However, suppose that EIU’s projections suffices, what it would mean is that, the government would have to ‘piously’ commit to reduce spending on infrastructure expenditure that have negative returns on investment, cut down spending on recurrent expenditure that do not produce any returns to pay back borrowed funds. Also, reduce tax exemptions and tax cuts that do not generate enough economic activity in the medium term to increase economic growth.
Whether the government will return to the IMF to negotiate a ‘handout’ or a debt restructuring or debt repayment delay depends on the government’s orientation to borrowing. Time is always of the essence!
