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Another love affair with the IMF comes to an end

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On her visit in December to Ghana’s capital, Accra, the Managing Director of the International Monetary Fund (IMF), Christine Lagarde, extolled the government’s economic management in the last two years, which has produced rising economic growth, declining inflation and interest rates, and improving public finances.

The economic gains reflect the government’s stronger implementation of the IMF-supported financial and economic program which it inherited in 2017 from the previous administration. The program, which began in 2015, is due to be completed in April, and despite its accomplishments, the government has ruled out a follow-up arrangement.

Ms. Lagarde’s visit therefore had the semblance of a mission to say adieu. However, whether this marks a certain end to Ghana’s habitual romance with the Fund is an open question, which rests on whether the country applies the experience of the past to illuminate the path of its future.

Four years ago, the economy was in dire straits, with GDP growth that was slackening amid high inflation, outsize budget deficits, and ballooning public debt. The former administration, under President John Mahama, at first demurred when suggestions to turn to the IMF for a rescue program were made.

As confidence in the economy plummeted, however, it called in the Washington-based lender for discussions that led to a program supported with a US$918 million loan from the Fund’s extended credit facility. The program was built on fiscal consolidation (that is, expenditure containment plus tax increases to induce reductions in government borrowing) to restore macroeconomic stability, high economic growth, and debt sustainability.

In 2015, the first year of the program, the fiscal deficit was reduced from 7.4% to 4.9% of GDP, partly helped by donors unfreezing previously-withheld budget support. Although the macroeconomic environment remained volatile initially, noticeable improvements emerged in the second half of 2016, when the exchange rate stabilized and inflation began finally to retreat.

The fiscal deficit was projected to fall again in 2016, to less than 4% of GDP, but this turned out to be grossly overoptimistic. Ignoring underperforming budget revenues, the administration spent lavishly, but ultimately fruitlessly, in a bid to retain power in an election year. The actual budget gap that resulted was 6.5% of GDP, with a substantial backlog of unpaid bills.

As Mr. Akufo-Addo swore the presidential oath of office under a hot Accra sky on January 7, 2017, his New Patriotic Party (NPP) government had the daunting task of bringing the IMF-supported program back on track after the 2016 derailment.

This entailed significant expenditure tightening and more buoyant tax collection. Set against the grand promises to the electorate—such as tax cuts, free public senior high school education and a factory per district—on which the NPP rode to power, it became obvious that a cautious fiscal policy balancing act was required. The government’s first budget balanced the conflicting demands relatively well, as it cut taxes while reining in spending to check the deficit, which fell to 4.8% of GDP.

The expenditure retrenchment slowed the roll-out of the government’s major policies. For example, free public senior high school education was offered to new, but not continuing, students when the government introduced it in 2017, and coverage for all students is still not expected until September 2019.

Provisional fiscal data indicate that the government continued its policy of fiscal restraint in 2018, enabling the macroeconomic gains the economy has enjoyed since 2017 to be consolidated. Consumer price inflation, which stood at 15.4% at the end of 2016, decelerated to 9.4% last December, and the exchange rate has been relatively stable as well.

Interest rates have been trending downwards, sliding from the twenties to the teens, although the cost of credit to the private sector remains prohibitive. Thanks to this stability, as well as an increase in oil production, the economy is growing much faster than in the recent past, with real GDP climbing by 8.1% in 2017 and 5.6% in 2018. There is a less glossy side of things, though, which is the bank failures that have occurred due to considerable bad debts in the sector, poor corporate governance, and slack regulation over a long period of time.

The central bank, under new management since 2017, has taken gallant steps to fix the problems. Shareholders have been made to inject fresh capital into banks, some lenders have been consolidated, and more stringent corporate governance rules have been established. Nonetheless, confidence in the financial sector is not at its best and will take a while to be restored fully.

When all is considered, the economy today is in a healthier state than at the beginning of the IMF-supported program and before the current administration’s term began. That explains the IMF chief’s positive assessment and praise of the government. Ms. Lagarde was equally open about the outstanding challenges and risks, identifying, in particular, the still-high public debt burden, fiscal risks from the substantially-indebted energy sector, and weak revenue mobilization.

So far, both the rhetoric and actions of the government signify that these and other important challenges are not lost on it. However, there is a sense of quiet trepidation among many economists over whether the flame of reform would be kept alive after the program with the Fund terminates.

 

A feeling of déjà vu

The IMF has had a dominant influence on Ghanaian policymaking for more than half a century. By one count, the country has had an extraordinary 16 programs with the IMF since signing up as a member in 1957. This implies a program every four years, on average.

The first call for assistance happened in 1965, when the first post-independence government, led by Kwame Nkrumah, decided to seek an external rescue from run-down foreign reserves and onerous external debts. It transpired that Nkrumah was not at ease with the terms of the assistance package and consequently drew back from the plan.

After he lost power through a military coup in 1966, the successor government, the National Liberation Council (NLC), went back to the IMF for loans and stabilization programs to help fix the macroeconomic problems inherited from the previous regime. So did the civilian Progress Party (PP) government, which succeeded the NLC from 1969-72. Although the country turned inward after that, the Fund provided financial help a couple of times again before the end of the 1970s. In the 1980s, following a decade of precipitous economic decline, the IMF, together with the World Bank, came to Ghana’s rescue with the Structural Adjustment Program (SAP), which succeeded in reviving the economy. The relationship has developed during the Fourth Republic (1993-date), with every government having either inherited or arranged its own Fund-assisted program.

In general, economic performance has tended to improve whenever the IMF is around. However, the inevitable tension between the Fund’s conditionality and national economic sovereignty means that Ghanaian governments are always eager to regain full control of their policies. That accounts for the current administration’s stance against procuring further loans or programs from the Fund.

One is reminded of a similar decision by the previous NPP administration, led by President John Agyekum Kufuor, in 2006 at the end of an IMF program supported by loans and debt reliefs. Within two years of exiting the program, economic management discipline collapsed and the IMF was sent for again. The lesson for Mr. Akufo-Addo and his government is obvious.

 

Three S’s

Two types of crises lead countries to seek the assistance of the IMF, which exists as a global lender of last resort. The first is a domestic economic crisis, invariably caused by a government’s economic mismanagement. The second is an external or imported crisis, which may be due to trade shocks (such as a drop in export earnings) or capital flow shocks (investor flight) that leave a hole in the balance of payments. In Ghana, both types of crises typically accompany and reinforce each other. What’s more, the all-too-frequent trips to the IMF reflect the fact that these crises have been taking place all too frequently.

Three conditions are needed to reverse the stop-go cycle in economic performance and the recurring associations with the IMF. First, sound economic management needs to be entrenched through strong and independent domestic institutions that serve as a bulwark against the abuse of policymaking discretion by politicians.

This is the role that the IMF has traditionally played in Ghana, and it is time that institutions responsible for restraining excesses in government, especially the country’s parliament, lived up to their mandate. A strong civil society is also crucial to increase the checks on politicians. This has already emerged in Ghana, albeit with weaknesses. A strong civil society would not only contribute to an enhanced public debate over policy choices, but deepen scrutiny of those policies and enhance accountability.

It is equally vital that the country addresses the boom and bust cycles associated with its dependence on mostly commodity exports for external sustenance. This requires structural transformation that will shift the economic base towards more value-added manufacturing, which will also accelerate job creation. To this end, the government’s intent to diversify the economy through industrialization is well-judged.

The priority should not be to ensure that every district gets a new factory—whatever it takes—but to facilitate the emergence of competitive and efficient industries which can plug themselves into global supply chains to diversify and boost export earnings. The day that this materializes, Ghana will have taken a significant leap forward towards realizing the economic self-reliance that it has perpetually hankered for.

 

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Economy

Infrastructure moves to the front burner

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The beginning of the major rainy season, which lasts from April to June, is the beginning of rising anger and expense for Ghanaian motorists. Heavy rains cause already poor roads to further deteriorate, exposing deep potholes that slow down traffic and increase motoring risk—not to speak of causing damage to vehicles. Rural roads are especially parlous, and non-existent in some places, limiting movement and economic opportunity for millions of people. This has stirred up resentment among citizens, with growing incidents of violent protests against poor road conditions.

The paucity of good roads is the most striking indication of Ghana’s infrastructure woes. Although the country’s infrastructure has been built up steadily from the ruins of the 1970s-80s, infrastructure provision, from roads to ports, schools, hospitals, and utility systems, has persistently lagged demand, creating a huge and constantly accumulating deficit. Compounding the insufficiency of investment is poor maintenance of existing infrastructure, which reduces its reliability, lifespan, and benefits to the economy. The cost of the infrastructure deficit is felt in reduced productivity, decreased economic growth, and a lower quality of life.

In the last few years, government capital investment, already low by historical standards, has been cut due to austerity. From 3.9% of GDP in 2013, central government capital spending declined to 3.6% of GDP in 2016, and dropped further to 1.6% of GDP in 2018. In addition to this expenditure, a number of statutory funds, including an education trust fund and a road fund, receive resources from the government for infrastructure investment. These resources have also been curtailed with the purpose of curbing the budget deficit.  

The government’s 2019 fiscal policy aims to reverse the trend of budget cuts by increasing central government capital investment to 2.5% of GDP, as well as allocating more resources to the infrastructure-dedicated education and road funds. This is not all: in April, the administration launched a US$2 billion package of infrastructure investment, which will be funded by China through an infrastructure-for-bauxite agreement. The deal requires Sinohydro, a Chinese state-owned construction company, to build US$2 billion worth of infrastructure for Ghana, which will be paid back by ferrying an equivalent amount of the country’s bauxite to China.

Three quarters of the Sinohydro investment is going into roads, reflecting the dire state of affairs in that area. Out of the country’s 72,381-kilometer road network, only 39% is classified as good, with 32% in fair condition and the remaining 29% in poor condition. The proportion of roads that is asphalted is a measly 23%. Sinohydro will construct new roads and interchanges, including the first ever interchanges in the north and west of the country, and rehabilitate crumbling roads. The non-road infrastructure that it will develop includes hospitals, housing, court buildings, and industrial parks.

Revived attention is being paid to rail transport, too, although the plans proposed are so grand as to seem incredible at times. It is no exaggeration to state that the existing rail network is obsolete and anachronistic, with most of it in disuse, as a result of which rail travel accounts for a miniscule share (less than 2% versus 97% for road) of the transport market. The Ministry of Railways Development, created by the government in 2017, proposes to rehabilitate the entire network, which is concentrated in the south, and to extend it to the north, with linkages to Ghana’s northern neighbors. A portion of the state’s petroleum revenues is being invested to revamp key sections of the network, while public-private partnerships are being considered for large-scale investments.

To expand education infrastructure, the government has secured US$500 million, by collateralizing 40% of the education trust fund, to fund new classrooms, dormitories, dining halls, and teachers’ housing in senior high schools, which have experienced an explosion in their populations since the coming into effect of the free senior high school policy two years ago. A further US$1 billion is to be raised in a similar way to boost infrastructure in basic and tertiary schools.

The increase in infrastructure investment will generate multiple economic benefits. In the short term, construction activity will provide jobs and incomes, and drive economic growth. Successful delivery of projects will enable beneficiary communities to enjoy new and improved roads, schools, hospitals, and other amenities. This in turn will support enhanced livelihoods while widening economic opportunities.

For these benefits to multiply to the point where the productive capacity of the economy is permanently strengthened, the country needs to sustain high levels of infrastructure investment for a long period of time. And it must do this without borrowing excessively, since the public debt burden is already large—58% of GDP in 2018—and expensive to service. This means the government must focus its efforts on growing domestic revenue, which is presently low (15.6% of GDP), to provide resources for increased capital investment.

It is vital also to improve the efficiency of public investment by reforming the way it is planned and executed. Due to poor planning, many infrastructure projects that are started suffer long delays before completion or may not be completed at all. As a result, the investments do not yield their full benefits. One study has found that one-third of capital projects begun by local governments do not get completed. Essentially, officials are more inclined to initiate new projects than finish ongoing ones. This practice represents an expensive waste of resources and needs to be checked.

Poor infrastructure is one of the characteristics of poor countries. As Ghana has ambitions to become an industrialized, prosperous nation which does not depend on aid, it cannot afford to spend meagerly on infrastructure, which is needed to drive the economy’s transformation. On top of ensuring that every citizen eventually obtains reliable electricity, clean water, a decent education, efficient transport services, first-class healthcare, and the like, raising capital investment in an efficient way will spur higher productivity in the economy, bolster competitiveness, and catalyze industrialization. The government would do well therefore to keep the infrastructure issue on the policy front burner.

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