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HGDS

By Emmanuel Buadi Mensah

Ghanas Fate and Choices under the

IMF Program
Introduction
The decision of government to go for a bail-out at IMF in August 2014 came as a surprise to the
international investment community, but not to Ghanaian economists and analysts who chronicled the
seeming failure in policy formulation and implementation following the 2012 general elections. For a
model country and a poster child of economic growth and investment opportunities; having achieved
high growth rates which looked inclusive on the outside for more than a decade, the turnaround was a
manifestation of the inexactitude in macroeconomic management. Ghanas growth averaged 6% from
2001 to 2010, and peaked at 14.8% in 2011 after being buoyed by oil discovery, strong growth in the
mining sector and bumper cocoa. This strong growth made Ghana the likely destination of FDI in West
Africa. Following the pattern of this impressive growth, the current economic slump and its consequent
bail-out package is expected because the economic growth was precarious. Higher commodity prices,
increase in productivity from the agricultural sector together with growth in the services sector, and the
discovery of oil boosted GDP growth that peaked at 14.8% in 2011.

Overview of Macro-Economic Projections

The analysis of the Ghanaian economic environment for the focal period will be undertaken using
trends in the following macro-economic metrics (variables); total productivity analysed into nominal
gross domestic product (GDP), real GDP (non-oil sector), and real GDP per capita, inflation (proxied by
the consumer price index), interest rate (average lending rate, policy rate), exchange rate, balance of
payments (export and imports), demographics (population dynamics and per capita income dynamics).

Gross Domestic Product

The Ghanaian economy is estimated to grow in 2015 by about 3.5% of which 2.3% is attributable to the
non-oil sector. This marks a stark deviation from expected estimates in the immediate periods after the
global financial crises. Projections by the International Monetary Fund indicate that by 2017, growth will
be around 9.2% inclusive of the oil and gas sector and 5.5% without the oil and gas sector. For 2016
however, the trends evinced in 2015 is envisaged to be reversed following the strategies to be adopted
in the extended credit facility provided by the Fund. Non-oil sector growth is estimated 4.7% with the oil
sector contributing 1.7% to growth in output. Figure 1 below is indicative of the fact that, from 2011 to
mid-2014, the oil and gas sector was a major driver of growth as non-oil sector growth shrinked
following perennial energy crises and the decline in the prices of commodities on the global markets.
Growth and output projections appear to be based on the countrys further expansion in output in the oil
and gas sector and the commercial production of gas which is deemed to commence in 2015. The
estimates also appear to be banked on the stability and recovery of global crude and commodity prices.
These are all factors which are completely extraneous although necessary to the current challenges in
total productivity of the economy. The immediate reparation of the damages caused by unstable power
supply will be instructive. This by no means delinks this fact from underlying challenges in the broad
O&G sector. All in all, the outlook provided by the projections as shown in Figures 1 and 2 below, will
be hard to reach. The danger will be an erosion of the policy credibility (the anchor) of this entire facility
and program, particularly when projections for the past 3 fiscal period have been widely missed.

16

200,000

14

180,000

12

160,000

10

140,000

120,000
6

100,000
4

80,000
2

60,000

0
20

11

20

12

20

13

(E
14
0
2

)
st

(P
15
20

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1
20

P
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GDP(Constant Prices)%
Real GDP (Non Oil)%
Real GDP Per Capita%

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7
01

j
ro
(P

40,000
20

11

20

12

20

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(P
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1

20

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17
20

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(P

Nominal GDP (Millions of GHS)

[Figure 1: Trends in Output (GDP)]

[Figure 2: Trends in Nominal GDP]

[Source: IMF and MOFEP, 2015]

[Source: IMF and MOFEP, 2015]

Price Signals (Inflation, Interest Rates and Exchange Rates)

Price stability (general price of goods and services - CPI, interest rates, and exchange rates) are all
important functions of the FUND from its inception. So that in the eventual mismanagement of any of
these price indicators, by a member of the FUND, the latter provides a recovery roadmap for the
restoration of these indicators to normalcy. It is also the case that, when these indicators are dancing
to the tune of mismanagement, the output of the economy suffers (declines) a condition Ghanas
economy appears to be suffering from. This would usually require a simulation of the economy back to
levels close to full employment and productivity. This will usually require change in policy direction,
reform of government expenditure trends and most importantly an injection into the economy (driven by
government). It is certainly not a good time for austerity. But, balancing the prospects of injection
against leakages in the government expenditure, makes economic sense in such times. This is a
phenomenon which has been proven the world over! So that, the quest for recovery, is argued, will
bring hardships in the interim for better prospects in the immediate future. The futuristic projections for
economic recovery will have to be based on sound fundamentals which might not necessarily be reliant
on price related information. Consequently when the FUND projects price stability based on increases
in output to be driven by recovery in domestic productivity and increases in crude oil and gas
production within the immediate short term, one can only question if all inherent risks have been duly
considered. One such notable risk is the recent postponement of the adjudication of the maritime
boundary dispute between Ghana and Cote dIvoire, which has significant implication on the entire
value chain of that industry and the outlook of the economy based on which price stability projections
have been made. This will mean that forecast decline in per unit cost of power will not be achieved as
projected and this will be transmitted into domestic productivity which will not pick up quickly as the
FUND estimates. Recovery will therefore be far off than immediate. More specifically, the FUND
together with government agree on addressing leakages of the public largesse in the light of the public
wage bill (which is seen as a measure to decreasing monetary pressure), while maintaining

investments in some social interventionist programs (protecting the vulnerable in society following
austerity). To this end, the program does little to accurately communicate the likely savings to be
realized from this action and the possible returns in output that such action is likely to generate. The
result we estimate will be the possible loss of value in this savings, if the action is at all pursued by
government. Otherwise, severe risks exist for the non-adherence to the strategies by government,
which could impact on the projections on inflation.
Having recorded and maintained a single digit inflation for 2010 to the first half of 2012, inflation picks
up a rising trend in the later part of 2012. This can be adduced to the rather expansionary fiscal policy
of government during electioneering periods, and the cost of sticking the general increment in prices
relatively low for three consecutive years.
25.0
22.5
20.0
17.5
15.0
12.5
10.0
7.5
5.0

20

11

20

12

20

13

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1
20

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17

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20

CPI (Annual Average %)

CPI (End of Period %)
CPI(Excluding Food-Annual Average %)

[Figure 1: Inflation trends for 2011-2017]

Despite several hikes in the policy interest rates

in 2014 up to 21 percent, headline inflation
reached 17.0% by the close 2014, well above the
8 +/-2 percent target range of BoG. Inflation was
driven by the lagged effects of administered price
increases, and a 31 percent depreciation of the
currency during 2014 (in US$ per Cedi).Core
inflation will continue to increase, although
headline is expected to slow down marginally.
Government aims to reduce inflation to 12
percent by close of 2015. However, achieving
such a target and attempting to further restore it
to a single digit regime will require an effective
restoration of the monetary policy transmission
mechanism and the inflation targeting framework.

[Source: IMF and MOFEP, 2015]

A closer look at the trends for interest rates in Ghana reveals the ineffectiveness of the transmission
mechanism from the policy rates (used by BoG as a driver of commercial base rates). Compounding
the problem is the non-responsiveness of inflation to policy rates as the transmission mechanism
appears ineffective. In 2014 policy rates went up to about 21% while the headline inflation was around
17.0% completely outside the targeted band of 8 +/- 2%. The challenge going forward is that, the Fund
estimates that the rates of inflation will decline as government projections appear to suggest. But one
can only see this as a mere economic aphorism as the transmission mechanism from policy rate to
interest rates and subsequently inflationary rates has been ineffective rendering the conduct of
monetary policy almost impossible. It has just been weeks after the official signing of the ECF and the
Central Bank already appears to be taking contradictory positions in the monetary policy space;
increasing the policy rate by 100 basis points to 22% and admonishing commercial banks to decrease
the lending rates. The Central Bank again envisages to eliminate its support of state owned enterprises, by
limiting its financing of government deficits to 5percent of previous years revenue. Much as it sounds a
proactive position for the central bank to take, the actual execution of this policy and its direct impact as
against the current position is not mentioned. Could it be there for dressing the policy books?

Exchange Rate
The local currency did not perform well against other major trading currencies. It is indeed one of the
major reasons besides the deteriorating fiscal space that warranted the call for multilateral assistance
from the FUND. Given the challenges regarding the monetary pressure discussed above, the plummet
of the value of the local currency is expected; reaching a record low in the third quarter or 2014. Using
the US dollar as a proxy for the exchange rate (without conceding its relationship with other trading
currencies), the Cedis value plummeted over the
period as shown in Figure 2 below;
Given this trend, it is possible that the value of the
4.0
dollar (US) could hit the GHS 4.5 mark before the
end of the 2015 fiscal year, if supply bottlenecks
3.5
are not effectively dealt with, together with other
3.0
structural economic issues that can earn the
country sufficient foreign exchange. Government
2.5
is expected through the support from the
2.0
International Monetary Fund to anchor the
expectations of market players and speculators
1.5
alike to avert the attacks on the local currency.
Deployed successfully the value of the cedi is
1.0
2010
2011
2012
2013
2014
2015
2016
2017
expected to stabilize in the immediate short term.
Exchange Rate (GHS/$)

[Figure 2: Trend in the Value of the $US, Increasing=Depreciation]

[Source: BOG, 2015]
There is the expectation on the part of government and the FUND that the ECF will unlock frozen
donor supports and foreign direct investments which will increase inflows of foreign currency;
increasing the supply and effectively stabilizing the cedi. True as it may be for the case of donor funds,
same cannot be said of FDIs as the key drivers of FDIs are mutually exclusive of conditions that drive
donor support. With the maintenance of price stability posing a challenge and not ending anytime soon
at least within the forecasts made, together with other challenges associated with the cost of doing
business, the drive in FDI envisaged by government and the FUND might be misleading. Reports by
some analysts appear to suggest a decline in portfolio investments held by foreign nationals in the
country which appears to be sending a signal to the global investment community (resulting from the
reversal of QE strategies in the US). Granted that the fears of the writers regarding FDIs and donor
support are allayed, it is also relatively difficult to appreciate how these inflows will provide short to
medium term lasting solutions without monetary policy and price stability mechanisms functioning
effectively.
The outlook above could only imply pressure on the external economy of the country; price stability
challenges, non-fuctioning interest rate mechanisms, and a volatile exchange rate (and a limited forex
reserve) could mean the following: high cost of local production (which will significantly be constricted
by crises in the energy sector which appears to last until mid 2016), which will drive the import bill up.
But with limited supply of forex, the volume of imports will not be commensurate to augment local

production and in some cases restrict the import of some category of goods and services, further
pushing prices up and complicating the monetary policy objective for the government.
Take a look at the trends in the projections provided by the Fund together with government in the ECF
for the external trade balances;

18,000
17,000
16,000
15,000
14,000
13,000
12,000
11,000
10,000

20

11

20

12

20

13
20

(E
14

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1
20

)
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P
(
5

20

)
roj
P
(
6

20

P
7(

)
roj

Import-FOB ($Usmln)
Export-FOB ($Usmln)

[Figure 6: Trends in Export and Import]

[Source: IMF and BOG, 2015]
No clear explanations appear to be provided for the increases in the absolute values of imports and
exports for 2015-2017 and most importantly the estimated y-o-y decline in the trade balance, besides
increases in crude oil production, commercial production of gas, increases in construction and
manufacturing, all of which are predicated on conditions which lie outside of the absolute control of the
government. Energy crises which is driving down productivity in manufacturing and construction
appears to be a problem which will be protracted late into the 2016 electioneering year, increases in the
production of hydrocarbons and gas, appear to be significantly affected by maritime disputes, and other
structural challenges confronting the sector (which is operating at sub-optimal levels). Thus the
foundations for the estimations are not solid, which renders estimations for the external outlook as well
quite ambitious, particularly when government does not provide clear explanations on reasons why
targets for the management of the economy are missed. It is more worrying when one considers the
fact that such external balances play a crucial role in the determination of the y-o-y financing need
which will be drawn from the FUNDs $US918mln.
It should be clear by now that, our economic woes are far from over, and most importantly the
diagnosis we are being provided although great, cannot completely restore the stability we desire, given
that sensitive issues ranging from policy credibility to corruption have been raised and their attending
effects on the economy adequately established appear to have fallen on deaf ears of government. To
highlight a few of these issues;

(i) The debt stock of Ghana is looming therefore government should limit inappropriate external
financing of infrastructure particularly in reference to the STX deal and the Chinese
Development Bank loan;
(ii) Passage of the fiscal responsibility law to ensure the sustainability of the proposed fiscal
consolidation. IMANI has repeatedly urged government to stabilize the macroeconomic
environment and the general price level to effect a reduction in cost of credit. Particularly,
concerted effort should be made to achieve fiscal consolidation by passing the Fiscal
Responsibility Law which will strengthen the disciplinary machinery of public finance;
(iii) Clean the payroll fraud and align productivity with pay;
(iv) Pause the excessive monetization of the fiscal deficit, re-anchor inflation expectation and
ensure the effectiveness of the monetary transmission mechanism;
(v) Create the right regulatory environment to encourage local production and reverse the declining
trend of the manufacturing sector. Incentivize non-traditional exporters to expand the export
base of Ghana. This will increase foreign exchange earnings and hedge the local currency
against exogenous shocks, consequently reducing the pass-through effect of exchange rate
depreciation;
(vi) The erratic power supply (dumsor) is a major binding constraint on businesses. Government
should exploit and invest in alternative sources of energy as the current source of energy is not
reliable because of the hydrological risk. The energy sector should be reformed and the
government should not only allow but incentivize the private sector to participate in energy
generation;
Having failed on heeding to the calls above, the government has accepted the terms in the ECF, and
promises to live by them, as it will improve upon the international investment image of the economy
(policy credibility) and not necessarily for the money. A comparative analysis of the general conditions
in the ECF agreed with government will show similarities if not the same issues mentioned above,
which exposes the possible lack of commitment from government to implement the conditions in the
ECF to the latter particularly going into an electioneering year; a condition to which the FUND cannot
claim oblivion. Some of the conditions include;
(i) The Fund proposes a reduction of the galloping fiscal deficit to ensure debt sustainability. The
Fund argues for the strengthening the fiscal position by mobilizing additional revenues,
restraining the wage bill and other primary spending, while making space for priority spending.
(ii) Eliminate fiscal dominance of monetary policy through tax policy and tax administration
reforms;
(iii) Restore the effectiveness of the inflation-targeting monetary policy, while safeguarding financial
sector stability.

(iv) Eliminate ghost names and rationalize public sector workers.

In the light of the above and a host of other issues not covered in this brief, the objective of restoring
macro-economic stability within the medium term to bring back the economy to winning ways; appears
to be founded on indicators and estimations that will drive us farther away from this objective. Again
guidelines for the implementation of some of the strategies which have been discussed (i.e freedom to
information, fiscal responsibility law et al) which will empower civil society to engage in ensuring that
the program is implemented to the latter also appear elusive, as has been in the past with the only
punishment being freezing of donor funds. The solutions stair us in the face, we need the commitment
and resolve to pursue them, at the expense of political expediency.

Emmanuel Buadi Mensah works in the finance and economics department at IMANI.
For interviews, Please contact Mr. Emmanuel Buadi Mensah at ebmensah@imanighana.org

AN IMANI REVIEW 2015