The International Monetary Fund (IMF) has warned Ghana against excessive monetary financing of its deficit, urging Monetary authorities to pursue tighter monetary policy to contain any inflationary pressures . According to the IMF, the current monetary policy stance in the country is appropriate to spark the needed economic activity.
“Directors agreed that the monetary policy stance remains broadly appropriate, while noting that tighter policy would be needed if inflationary pressures materialize. Although gross international reserves are relatively high, Directors stressed the need to guard against erosion of external buffers and remain committed to a flexible exchange rate regime. Directors also encouraged the authorities to limit monetary financing of the deficit”.
The IMF noted that the pandemic had a severe impact on Ghana’s economy, with slower growth, higher food prices, and increased poverty. The Fund, however, commended the Ghanaian authorities for their proactive response to the COVID-19 pandemic, which mitigated its economic impact, “but contributed to a record fiscal deficit and increased public debt vulnerabilities”.
Impact on the Economy
“The pandemic had a severe impact on economic activity. Growth slowed to 0.4 percent in 2020 from 6.5 percent in 2019, food prices spiked, and poverty increased. The fiscal deficit including energy and financial sector costs worsened to 15.2 percent of GDP, with a further 2.1 percent of GDP in additional spending financed through the accumulation of domestic arrears. Public debt rose to 79 percent of GDP.
“The current account deficit widened slightly to 3.1 percent of GDP as the decline in oil exports was partially offset by higher gold prices, resilient remittances, and weaker imports. The Ghanaian Cedi remained stable against the US dollar, partly due to central bank intervention, and gross international reserves remained at 3.2 months of imports.
“External and domestic financing conditions tightened considerably at the start of the pandemic, but have improved since, and Ghana successfully returned to international capital markets for a US$3 billion Eurobond issuance in March 2021”.
The Fund, in its recent 2021 Article IV Consultation with Ghana, indicated that the economy is on track to rebound after the devastating effects of the pandemic on the country’s growth trajectory.
Even though there are encouraging signs of an economic recovery, the Fund noted that “it remains uneven across sectors”. In this context, the IMF “stressed the importance of entrenching prudent macroeconomic policies, ensuring debt sustainability, and pressing ahead with structural reforms to deliver a sustainable, inclusive, and green economic recovery”.
Furthermore, the IMF noted that risks to Ghana’s capacity to repay have increased, however, it concurred that they are still manageable and that Ghana’s capacity to repay the Fund remains adequate.
Need for fiscal consolidation
Meanwhile, the IMF welcomed the fiscal adjustment envisaged in the 2021 budget, stressing that fiscal consolidation is needed to address debt sustainability and rollover risks, as Ghana continues to be classified at high risk of debt distress.
“To protect the most vulnerable, considerations could be given to more progressive revenue measures and a faster return to the pre-pandemic level of spending, with a shift towards social, health, and development spending. Directors also encouraged the timely completion of the planned audit of COVID‑19 emergency spending and new expenditure arrears”.
Also, the IMF noted that the financial sector clean-up had made the sector more resilient but stressed that banks’ growing holdings of sovereign debt creates risks and crowds out private sector credit. In this regard, the Fund took positive note of ongoing supervisory and regulatory reforms, which are important steps to protect financial stability.
The Executive Directors of the IMF emphasized that the government’s structural transformation and digitalization agenda are critical to support the recovery. They noted that the structural transformation can be complemented by the ongoing energy sector review, diversification in tourism, and the digital transition, which has the potential to reduce corruption, boost tax revenues, and improve service delivery.