A new $918m deal with the IMF should alleviate some of Ghana’s fiscal pressures and help restore investor confidence ahead of a critical bond issue, but further reforms will be needed to balance the budget.
The IMF agreed an extended three-year credit facility on April 3, saying it was aimed at restoring “debt sustainability and macroeconomic stability to foster a return to high growth and job creation, while protecting social spending”. Ghana entered into negotiations with the IMF in 2014 following increased exogenous pressure on what had been one of the world’s fastest-growing economies.
Ghana’s currency, the cedi, fell due to dropping prices for major commodity exports including oil and gold, leading the government to miss its budget deficit target. The current deficit is forecast at 7.5%, down from the past three years when it has averaged about 10%, but still higher than the previous target of 6.5%. Meanwhile, the cedi has lost nearly 20% of its value since the beginning of the year.
While the government successfully issued an oversubscribed $1bn eurobond at a lower-than-expected coupon rate of 8.125% in September 2014, borrowing costs have since risen to five-year highs, increasing interest payments on existing debt.
The IMF funds are expected to help put Ghana on a sounder financial footing, with the government receiving the first disbursement of $114.8m in mid-April. The hope is that the measures will enhance Ghana’s creditworthiness before another planned $1bn eurobond sale expected in June. The government said in March that it had begun talks with a consortium of banks over a possible $1bn bridge finance loan, which it had hoped to complete before July. However, the head of the parliamentary finance committee told Reuters in mid-April that the government has decided not to pursue the loan option.
Contingent on reforms
The IMF credit is contingent on the government meeting programme objectives on fiscal deficit as well as reforms on public finance management, monetary policy and tax management, among other measures. Another main aim of the deal is to improve the transparency of public finances, including providing better access to data on how budgets are prepared and executed.
“We received a very strong commitment from the authorities for implementing this programme,” Joel Toujas-Bernate, the IMF mission chief in Ghana, said, noting that this had been achieved even in the run up to elections next year. The political situation is highly competitive following President John Dramani Mahama’s tight and initially disputed victory in late 2012.
Toujas-Bernate said Ghana had already started implementing reforms, and that the IMF would monitor progress through regular reviews of the government’s progress. Ahead of the programme, the authorities have raised taxes, including value-added tax on petroleum products.
Ghana has been one of Africa’s best economic performers in recent years, but a slow change in some of its headline figures show the difficulties it faces in ensuring growth is inclusive and sustainable. Inflation swelled to 17% last year and the government is targeting growth of 3.9% this year – well above the average in advanced economies but the slowest Ghana has experienced in 20 years and down from an estimated 4.2% in 2014. In the past five years, growth has averaged 8.6%, according to Fitch Ratings, which estimates growth to moderate to 3.4% in 2015.
The environment prompted the ratings agency to lower its outlook to negative in March, despite the expectation of an IMF deal. Fitch said the IMF agreement should ease some of the pressure, but noted that Ghana had a record of increasing public spending ahead of elections, which could make fiscal tightening more difficult.
Fitch, which affirmed its ratings for Ghana’s long-term foreign and local currency debt, said it expected Ghana to overshoot its fiscal deficit target this year with a deficit of 8%, warning that the IMF target of a 3.5% deficit by 2017 was “too optimistic”. Debt had risen to 67% of GDP, and 55% of that was denominated in foreign currency – leaving Ghana vulnerable to further depreciation of the cedi, Fitch added.
The negative debt dynamics were also the main reason behind Moody’s decision to downgrade Ghana’s debt the day before the Fitch report. Moody downgraded Ghana’s rating by one notch to “B3” from “B2”, with a negative outlook, noting fiscal imbalances and an increasing debt burden.
As June approaches, investors and analysts will be watching the eurobond issue with interest as well as closely monitoring progress on the IMF deal, and the government’s commitment to meeting the conditions of the agreement.