Economic outlook for Ghana remains favourable – says IMF

Sierra Leone Telegraph: 13 December 2019:

The Executive Board of the International Monetary Fund (IMF) last week concluded its Article IV consultation with the authorities in Ghana. Yesterday, the Board published a statement, in which it says that the outlook for Ghana remains favourable; growth is expected to increase from 6.3 percent in 2018 to 7 percent in 2019, and to average around 5 percent over the next few years, supported by new potential oil discoveries and mining.

Consumer price inflation has stayed close to the centre of the target band in recent months, despite the pass-through from Cedi depreciation and higher utility tariffs, and is expected to decline to around 6 percent over the medium term. International reserves remain stable, thanks in part to external borrowing, the report said.

According to the statement, the government headline deficit is projected to reach 4.7 percent of GDP in 2019, driven by lower-than-expected revenues, spending on flagship programs, and unexpected security outlays due to emerging security challenges in the region.

After including energy and financial sector costs, this corresponds to an overall deficit of 7 percent of GDP in 2019. Central government debt is expected to increase to 63 percent by the end of 2019, driven in part by exceptional energy and financial sector costs.

The 2020 budget is projected to deliver a headline deficit (excluding energy and financial sector costs) of 4.9 percent of GDP, equivalent to an overall deficit of 6.4 percent of GDP. At current policies, the overall deficit is projected to stabilize over the medium-term to about 5 percent of GDP.

Downside risks affecting this baseline forecast include spending pressures in the context of the 2020 election, financing challenges—possibly triggered by tighter global conditions—and larger-than-expected energy and financial sector costs.

On the upside, over the medium-term Ghana could benefit from new oil discoveries, higher cocoa prices, rapid diversification driven by the authorities’ industrialization efforts, and the potential for domestic revenue mobilization reforms.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They commended the Ghanaian authorities for the strong macroeconomic performance and laying the foundations for sustained and more inclusive growth.

Against the backdrop of external risks and the upcoming elections, Directors stressed that important challenges remain, especially entrenching prudent macroeconomic policies, ensuring debt sustainability, and pressing ahead with structural reforms, which are essential to successfully implement the authorities’ “Ghana beyond Aid” agenda and reduce poverty and inequality.

Directors welcomed the authorities’ commitment to fiscal discipline and the fiscal rules introduced by the 2018 Fiscal Responsibility Act. They underscored that fiscal discipline through the rigorous implementation of the 2020 budget law is key to maintaining macroeconomic stability. While welcoming progress in debt management, Directors expressed concern about Ghana’s high risk of debt distress, and highlighted the need to strengthen the fiscal rules and phase out off‑budget operations.

In addition, most Directors urged the authorities to avoid new collateralized borrowing to help reduce public debt and improve fiscal transparency. Directors emphasized that a more ambitious fiscal stance, based on a comprehensive domestic revenue mobilization strategy, would help anchor debt dynamics on a clearly declining path, contain financing needs, create buffers for contingent liabilities, and support a stronger external position.

They welcomed the Fund’s capacity development efforts to bolster the authorities’ fiscal reforms. A number of Directors suggested the adoption of a formal debt anchor to guide the authorities’ debt sustainability efforts over the medium term.

With inflation close to the central target of the Bank of Ghana, Directors agreed that the monetary policy stance seems appropriate, although tighter policies would be warranted if inflationary pressures materialize.

They stressed the need to increase international reserves by limiting central bank intervention and to entrench monetary financing limits in domestic law to protect the Bank of Ghana’s balance sheet and strengthen the inflation targeting framework. Over the medium term, Directors recommended lowering the inflation target range.

Directors welcomed recent steps taken to move the energy sector back to financial health. They indicated that the implementation of the Energy Sector Recovery Program supported by the World Bank and key stakeholders, including adhering to the automatic pricing formula for electricity tariffs and reinstituting private sector participation, is crucial to limit costs to the government and to the public.

Directors welcomed the progress in the clean‑up of the financial sector and recent improvements in banking sector performance. However, they urged the authorities to complete the financial sector restructuring while mitigating its fiscal costs.

This requires implementing upfront reimbursement caps, addressing weaknesses in a state‑owned bank, accelerating measures to reduce the NPL overhang, completing regulatory reforms, and stepping up recovery of funds from complicit directors and shareholders of failed institutions.

Directors considered that continuing the development gains of recent decades will require boosting export competitiveness, increasing economic diversification, and accelerating productivity growth. Improving the business environment and promoting digitalization would also boost opportunities.

Directors encouraged the authorities to continue strengthening the anti‑corruption framework, in particular by enhancing the capacity of law enforcement and prosecutorial bodies. They welcomed the government’s collaboration with the Financial Action Task Force (FATF) and the Inter‑Governmental Action Group against Money Laundering in West Africa to improve the AML/CFT framework and eventually exit the FATF “grey list.”

 

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