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Ghana’s Budget Discipline Key to Cedi’s Performance for Rest of Year



  • Central Bank’s target of US$800-million inflows by end-March very positive for FX liquidity and price stability.

Further depreciation of Ghana’s Cedi in 2019 is limited based on our outlook on key economic indicators and foreign exchange inflows this year. This expectation firmly stems from our view that we are to witness another period of discipline from the economic authorities regarding the budget deficit.

Ghana delivered a strong performance on the budget in the last two years, which attracted significant portfolio investments into the country. The deficit was reduced from 8.7% of gross domestic product in 2016 to 5.9% of GDP in 2017 and further to 3.8% last year, (rebasing may have influenced this) according to latest data release by the Ministry of Finance on 4 March 2019. While the New Patriotic Party government which came into office at the beginning of 2017 must take credit for this performance, it is also noted that this performance was under the watch of the International Monetary Fund.

The nearly US$1-billion Economic Credit Facility Program with the Fund came to an end in December (IMF Executive Board to meet in April to appraise Ghana’s performance, the 7th and 8th reviews) so this year marks a fiscal test for the Akufo-Addo government. We are confident that the government will stay within the deficit target. We expect that the new Fiscal Council, (set up by the President last year for the promotion of sustainable fiscal policies) and the enactment of a law this year capping the deficit shortfall at 5% of GDP in any given year, to underpin the restrain.

That said, we observe that for both years, the government had to sacrifice some planned expenditures to achieve the deficit targets as tax revenues underperformed. In 2018 for instance, almost 1 billion Cedis worth of spending was sacrificed as taxes missed the target by 800 million Cedis. We urge the government not to lose focus on enforcing tax compliance this year since it could greatly improve the fiscal outcome and calm a lot of nerves among the investor community. Investors are on tether hooks to see what will happen without the IMF watchdog. While this posture may slow portfolio investments in the first-half, positive budget delivery during the period is bound to convince many people to return to Ghana’s bond market.


Compared with the closing rate in December 2018, the Cedi has lost over 10% to the US Dollar, 2019 year to date, trading currently around 5.51 per dollar. We note that this performance was driven largely by external developments, and on the lighter side by the wait-and-see attitude of investors in relation to the budget as to whether there would still be discipline without an IMF watch.

Talking of external environment, the US Fed’s interest rate increases in 2018 and the US-China trade issues have tilted the risk-on effect in favor of developed markets. Ghana like all emerging and frontier markets has suffered from capital flights. The consequent decline in foreign exchange supply on the local market has impacted the Cedi’s performance.

Ghana is targeting a budget deficit of 4.2% of GDP this year and we foresee the authorities steadily delivering on this through the year. Ghana should therefore win back the appetite of offshore investors for its bonds and stocks halfway through the year. This will culminate with the Fed’s target this year to do only two interest rate increases compared with four upward adjustments in 2018. In addition to Ghana’s positive trade balance, which we forecast to remain in surplus for a third year in 2019 on increased hydrocarbon production, we think the Cedi’s losses to the US Dollar will be limited going forward.

Given the recent developments in exchange rate, we expect inflation numbers for February and March to reflect high pass-through effects of currency weakness before tapering off from April as the authorities take delivery of major foreign exchange supply principally through the Eurobond Program. Ghana’s inflation eased to 9% in January and we see it remaining between single digit or closely around 10% in the first half, on stable utility prices and increased foreign exchange supply.

The Central Bank is making financing arrangements to replenish its reserves with US$800-million as early as the end of March, according to various reports and government sources. Hopefully the country’s final two reviews under the IMF Program will be favorable. This will make way for the disbursement of approximately US$200-million to Ghana. A Eurobond sale, which we see happening any time after the IMF review is set to boost supply—currently the target is US$3-billion. A good performance in the cocoa sector also means a busy minor season with Ghana Cocobod ready to draw down US$300-million from its annual syndication. Increased oil production should see the country earn more foreign exchange from the commodity than a year ago— operator of Jubilee and TEN oil fields Tullow Oil Plc forecasts combined production of over 180,000 barrels per day in 2019 from 58,100 barrels per day last year. Lastly an initial draw down of US$647-million of a US$2-billion deal with China’s Sinohydro Corp. for roads may start trickling in this year, which will help to beef up foreign reserves of the country.

Considering Ghana’s restrictive budget, positive trade balance, single digit inflation and the expected foreign exchange inflows, we think that the Cedi’s recent depreciation is short lived, and stability should return soon.


Victor Yaw Asante is the Head of Commercial, Corporate and Investment Banking (CCIB) at First National Bank Ghana. Victor started his career at Unilever and has held several managerial roles in leading financial institutions in Ghana and elsewhere and has covered other key markets like London, Cameroun, Cote D’Ivoire, Gambia, Botswana and Sierra Leone. Victor holds an MBA in Marketing.

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Another love affair with the IMF comes to an end



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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