The International Monetary Fund (IMF) says the financial sector clean-up in Ghana has made the sector more resilient.
In its executive board Article IV Consultation with Ghana, the Fund stresses, however, that “banks’ growing holdings of sovereign debt creates risks and crowds out private sector credit”.
The IMF executive directors also took positive note of the ongoing supervisory and regulatory reforms, which are important steps to protect financial stability. And the Fund welcomed the improvements in the framework for anti-money-laundering/combating the financing of terrorism (AML/CFT) which allowed Ghana to exit the Financial Action Task Force (FATF) “grey list” last month.
The IMF said its assessment is based on the new wave of COVID-19, rising debt stock and the government’s large financing needs.
“An economic recovery is under way. Growth is expected to rebound to 4.7% in 2021, supported by a strong cocoa season and mining and services activity, and inflation remaining within the Bank of Ghana (BoG) target,” the report from the consultation says. “The current account deficit is projected to improve to 2.2% of gross domestic product (GDP), supported by a pick-up in oil prices, and gross international reserves are expected to remain stable.”
Ease off on monetary response
The directors agree that the monetary policy stance remains broadly appropriate, while noting that tighter policy will be needed if inflationary pressures materialise.
Although gross international reserves are relatively high, the directors stress the need to guard against erosion of external buffers and remain committed to a flexible exchange rate regime.
They have also encouraged officials in Ghana to limit monetary financing of the deficit.
Public debt
The IMF says the government’s response has helped contain the COVID pandemic and support the economy, but at the cost of a record fiscal deficit.
“The economic outlook is improving, even though risks remain, including from the evolution of the pandemic and rising debt vulnerabilities,” the Fund reports.
The pandemic had a severe impact on economic activity. Growth slowed to 0.4% in 2020 from 6.5% in 2019, food prices spiked and poverty increased. The fiscal deficit, including energy and financial sector costs, increased to 15.2% of GDP, with a further 2.1% of GDP in additional spending financed through by accumulating domestic arrears.
Public debt rose to 79% of GDP. The current account deficit widened slightly to 3.1% of GDP as the decline in oil exports was partly offset by higher gold prices, resilient remittances and weaker imports.
The Ghanaian cedi remained stable against the US dollar, partly through central bank intervention, and gross international reserves remained at 3.2 months of imports.
External and domestic financing conditions tightened considerably at the start of the pandemic, but have improved since, and Ghana successfully returned to the international capital markets for a US$3 billion Eurobond in March 2021.
Recovery under way
Growth is expected to rebound to 4.7% in 2021, supported by a strong cocoa season and mining and services activity, and inflation to remain within the Bank of Ghana target.
The current account deficit is projected to improve to 2.2% of GDP, supported by a pick-up in oil prices, and gross international reserves are projected to remain stable.
“The 2021 Budget envisages a fiscal deficit of 13.9% of GDP in 2021, including energy and financial sector costs, and a gradual medium-term fiscal adjustment which would support a decline in public debt starting in 2024. However, this outlook is subject to significant uncertainty, including from new pandemic waves and risks associated with large financing needs and increasing public debt,” the IMF says.
The Fund stresses the importance of entrenching prudent macroeconomic policies, ensuring debt sustainability and pressing ahead with structural reforms to deliver a sustainable, inclusive and green economic recovery.
Although noting that the risks to Ghana’s capacity to repay have increased, the IMF adds that these are still manageable and that Ghana’s capacity to repay the Fund remains adequate.
It also welcomes the fiscal adjustment envisaged in the 2021 Budget. Fiscal consolidation is needed to address debt sustainability and rollover risk, the Fund says, as Ghana continues to be classified as being at high risk of debt distress.
“To protect the most vulnerable, considerations could be given to more progressive revenue measures and a faster return to the pre-pandemic level of spending, with a shift towards social, health and development spending,” the directors suggest. The executive directors are also encouraging timely completion of the planned audit of COVID‑19 emergency spending and new expenditure arrears.
The Fund agrees that the monetary policy stance remains broadly appropriate, while noting that tighter policy will be needed if inflationary pressures materialise, although gross international reserves are relatively high.
There is also a need to guard against erosion of external buffers and remain committed to a flexible exchange rate regime.
The board concluded the Article IV consultation with Ghana on 19 July 2021. It is expected that the next Article IV consultation with Ghana will be held in line with the standard, 12-month cycle.
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