Ghana: Can IMF Deal Help Economic Recovery?

According to a recent statement by the Ghana Statistics Service, Ghana is suffering from the highest inflation rate in 20 years, which rose to 31.6% in July.

In recent months, rising food and fuel prices and supply chain shocks from the war in Ukraine have severely affected the country’s already vulnerable economy, prompting the need for talks with the IMF on the seventeenth bailout.

The price of diesel has more than doubled in one year, while petrol has risen by 83.2%, causing transport costs to rise, which has had a knock-on effect on the prices of essential commodities.

Households in Ghana are now dealing with higher prices for imported and local food products, with grapes, cooking oil, wheat flour, millet, bambara beans and watermelon at least 50% more expensive than last year. Prices for solid fuels such as firewood or charcoal have increased by more than 80% between 2021 and 2022.

The current energy crisis has a twofold impact on Ghana. As oil is Ghana’s second largest export product at $2.71 billion in 2020, behind gold ($5.93 billion) and cocoa beans ($1.28 billion), the country’s oil industry will benefit from the global sharp rise in oil prices.

In the first half of 2022, the only revenue that exceeded the government’s budget assumptions was oil revenue, while cocoa production fell sharply compared to last year.

Paradoxically, Ghana’s domestic consumption is largely dependent on refined oil imports. The country’s only refinery, the Tema Oil Refinery, has a limited capacity of 30,000 barrels per day (bpd), while the country produces about 170,000 barrels per day of crude oil destined for export.

Existing problems have worsened

This dependence on imports is exacerbating the fragile economic situation caused by heavy government spending prior to the Covid-19 pandemic.

While inflation is a global phenomenon – the US inflation rate has nearly quadrupled in the past two years – it has disproportionately affected Ghana since the war in Ukraine began.

Apart from Nigeria, where inflation rose by 18.6% in June, the prices of goods in other West African countries were much lower. Inflation rates in Togo and Côte d’Ivoire, Ghana’s two neighboring countries, rose by only 5.4% and 6.8% respectively in June.

“Even though countries are exposed to similar economic shocks, they experience different effects because of the state of the economy that existed before the shock,” explains Dennis Nsafoa, associate professor of economics at Niagara University in Toronto.

In the case of Ghana, the country’s fiscal position was difficult even before the Covid-19 crisis began, with a debt-to-GDP ratio of 64% in 2019, the reason being that the government entered a phase of significant public spending at the time.

Two major fiscal policy measures have contributed to the government’s budget deficit: a clean-up of the banking sector, which led to a reduction in the number of banks, and the abolition of the senior school fee, which means that education costs are taken over by the government for students aged 15 to 18.

“The government’s strategy was to push the economy towards certain goals that were supposed to benefit the population in the long run, but they could not foresee the successive economic shocks that were to occur,” says Nsafoa.

“These programs have eliminated Ghana’s fiscal space and the country has thus been hit hard by the economic downturn as a result of the Covid-19 pandemic.”

According to the IMF, during the global pandemic, Ghana’s public debt increased from 65% to 80% of GDP.

“Investors found the government’s fiscal efforts to maintain debt sustainability insufficient, which led to downgrades, withdrawal of non-resident investors from the domestic bond market, and loss of access to international capital markets,” the Washington institution notes.

In addition, Ghana’s currency, the cedi, has lost 47.1% against the dollar since the start of the year, making it the worst performing currency in Africa after the Zimbabwean dollar and fueling import inflation.

How to resist the rise of inflation?

In response to an ever-increasing budget deficit, the Central Bank of Ghana has sold foreign assets to prop up the economy.

As a result, Ghana’s net foreign assets rose from $3 billion in May 2021 to a negative value of $126 million in May 2022, according to the Bank of Ghana’s latest monthly monetary survey.

Traditionally, Ghana’s balance of payments runs a current account deficit. In recent years, its financial and capital account has remained relatively high as a result of foreign portfolio investment and foreign direct investment, mainly in the country’s cocoa, gold and oil industries. However, about three months ago, Ghana’s capital account figures turned negative as a result of the sale of all its international reserves by the Bank of Ghana.

“It is unbearable. The Bank of Ghana cannot repeat this pattern in the next half of 2022 or it will run out of international reserves, which will scare away many investors,” Nsafoa asserts.

“It is time for the fiscal government, namely the Ministry of Finance, to find a way to go into the international market and borrow on its own instead of relying on the Bank of Ghana,” says Nsafoa.

But with Ghana repeatedly defaulting on its budget in recent years, credit rating agencies have consistently downgraded the country, making it difficult to attract investors.

On August 10, Fitch Ratings downgraded Ghana to CCC from B-, just after S&P downgraded Ghana’s local and foreign currency credit rating from B-/B to CCC+/C.

In response, the government said that credit rating agencies were preventing the country from accessing global capital markets.

“[We] disappointed by S&P’s decision to downgrade Ghana despite the bold policies adopted in 2022 to address macro-budget challenges and debt sustainability,” Ghana’s Ministry of Finance said at the time.