IMF: the bitter pill needed to heal the economy

The decision by Ghana’s economic managers to request assistance from the International Monetary Fund (IMF) started the 2022 mid-year off with a jolt.

In a letter signed by the Information Minister, the President authorized the Finance Minister to commence formal engagements with the IMF, inviting the Fund to support an economic programme put together by Ghana.

In a tweet, the IMF’s Country Director stated that the Fund was ready to help Ghana restore macroeconomic stability, safeguard debt sustainability, and promote inclusive and sustainable growth.

Many Ghanaians were shocked by this development because the current economic managers had repeatedly assured them that they would not request an IMF bailout despite the country’s growing economic instability and prevailing hardships.

In Ghana and many other developing countries, speculation about the IMF’s participation in the economy has been greeted with bad publicity. Public comments on IMF have been generally unfavorable if not hostile. Undesirable remarks from a variety of organizations, including journalists, legislators, government officials, academics and social scientists, have made any IMF-related activities appear more negative to the typical Ghanaian. These disapproving comments have ranged from relatively mild criticism to fairly strong accusations. However, the IMF since its establishment in 1944, has aided many developing countries in navigating a myriad of challenging economic situations

IMF and its activities

The Bretton Woods institution, has evolved and adapted to the ever-changing world economy and has supported developing countries through surveillance and capacity-building activities, as well as concessional financial support to help developing countries achieve, maintain, or restore a stable and sustainable macroeconomic position consistent with strong growth.

The surveillance activities of the IMF have mainly involved the continuous monitoring of members’ economic and financial policies and discussions with government on how their economic policies affect stability. The IMF has also supported countries to explore desirable policy adjustments.

Capacity-building activities of the IMF have primarily focused on how countries can boost domestic revenues, manage public finances and monetary policy, regulate the financial system, and develop statistical systems to help them implement sound policies and good practices.

Ghana has been a member of the IMF since 20^th September 1957, and has received several assistance from the Fund. In April 2020, Ghana received a one billion USD ($1, 000,000,000) package from IMF to support its fight against the COVID-19 pandemic. Again, in August 2021, Ghana received a sum of one billion USD ($1, 000,000,000) from IMF to boost its post-COVID-19 economic recovery. The assistance was intended to provide more policy space to aid Ghana’s efforts to combat the impact of the pandemic on lives and livelihoods. Despite these inflows, the economy hasn’t made much progress.

Why the present deteriorating economic conditions

It would not be wrong to say that Ghana’s present deteriorating economic situation could be attributed to a combination of external shocks and weak economic management. In recent years, Ghana has absorbed external shocks which have significantly impacted the economy. The global economy has suffered profound uncertainty and fragility. Global economic recession among many other factors, which were a direct result of the COVID-19 pandemic, affected many countries’ financial stability; even the developed countries were not spared. Countries like Ghana aligned monetary and fiscal stimulus policies in response to the recessive impact of the COVID-19 pandemic.

However, the Russia-Ukraine war increased geopolitical risk and uncertainty, exacerbating already-existing Covid-related supply bottlenecks. It has created new worldwide market disruptions, which may account for some of the heightened inflationary pressures caused by the food component, high global oil prices, and disruptions in global supply chains.

The adverse impact of these global external factors coupled with the sovereign credit rating downgrades of Ghana by Fitch and Moody’s have not only led to widened yield spreads on both cedi-denominated Government of Ghana bonds and the country’s Eurobonds but has also  affected Ghana’s ability to access credit from the International Capital Market.

Before the pandemic and the war, there were calls for financial discipline by the World Bank, IMF, and other civil societies as the country’s debt level were becoming rather unsustainable. Regardless of these calls, not much was done about the dire economic situation in the country. The country’s insatiable appetite for borrowing was exceptionally strong, and there were several complaints regarding the value generated from the activities on which these borrowed monies were spent. This call, however, received little attention. As a result, the already existing problem has been exacerbated.

Our expanding expenditure line items, such as debt payment obligations and employee compensations are currently contributing considerably to the government’s failure to meet its fiscal estimates for 2022. The E-levy, which was intended to aid in fiscal consolidation and lower the country’s debt, is almost becoming nuisance tax.

Justification for the bailout

With our debt to GDP ratio exceeding 78%, current inflation rate reaching almost 30%, our widening budget deficit, policy rate of 19%, making cost of borrowings high, it appears that Ghana has no alternative than to run to the IMF to seek refuge.

Again, the lack of access to the International Capital Market due to our downgrade, coupled with the import dependent nature of the economy has created market uncertainty and has heightened speculations about the adequacy of our foreign reserves to shore up the cedi. The greater concern is that these conditions will worsen if the country does not seek refuge, especially because some major multinational corporations have declared dividends are likely to repatriate their next batch of profits.

The bailout is a bitter pill that must be swallowed if Ghana’s economy is to regain confidence, trust, and credibility. The IMF may impose some conditions on the economy. There may be review of some expenditure items. Government may also be required to give up policy autonomy in exchange for some funding. However, those pruning processes are necessary to bring stability to our economic fundamentals

The macroeconomic climate must be stable for industries and businesses to prosper. When economic fundamentals repeatedly point in the wrong direction, it affects planning and growth prospects, and it may heighten investor uncertainty, perhaps leading to capital outflows. This might have serious ramifications for our economy

Conclusion

It is imperative that Ghanaians embrace the government’s choice to engage the IMF, as this is currently the bitter pill that needs to be swallowed; having regard to our economic hardship.

Most importantly, Ghana needs to intensify discussions on having a long-term sustainable plan for economic freedom and structural development in order to avoid the cycle of taking bitter pills to augment economic difficulties. Prevention they say, is always better than cure.

Contact: nanayawbenyah@gmail.com

Frank is a Chartered Accountant, a Chartered Tax Practitioner and a Chartered Global Investment Analyst.