Ghana gets $602 million IMF loan, readies oil production

The IMF approved a $602.6 million loan to Ghana July 15 to help the West African nation tackle budget imbalances while preparing for the start of oil production.

The loan is the largest IMF financing package to date for an African country during the current global financial crisis.

Ghana’s 24 million people have shared Africa’s growth upswing over the past decade. Its governance and business climate ratings are among the best in sub-Saharan Africa, and its human development indicators rank in the top quarter. But, although poverty has fallen sharply, 30 percent of the population still live on less than $1.25 a day, and nearly 10 percent of the population remain undernourished.

IMF support is being provided under the Poverty Reduction and Growth Facility (PRGF). Under the PRGF-supported program, the government is targeting a substantial phased reduction of the fiscal deficit. This would cut public sector borrowing and allow Ghana to reverse the sharp deterioration in the public debt-to-GDP ratio since 2006.

Economic stewardship passed to a new government in 2009. The new administration’s first priority was to address the macroeconomic imbalances caused by highly expansionary fiscal policies in 2007–08, and respond to the risks from the emerging global recession.

Domestic overheating

Ghana’s inflation—already higher than the African average—rose from the 10 percent range in 2007 to more than 20 percent by early 2009. This partly reflected global food and fuel price shocks, but more importantly an overheated domestic economy due to highly expansionary fiscal policies and rapid credit growth.

The fiscal deficit, which had already risen to 9 percent of GDP in 2007, rose to 14½ percent of GDP in 2008, boosted by strong pre-election government spending growth, notably including high public sector wage increases, petroleum product subsidies, and new infrastructure projects.

Despite some tightening of monetary policy, rising import demand increased the external current account deficit to more than 19 percent of GDP in 2008. Notwithstanding generally strong capital inflows, this deficit proved unfinanceable, resulting in a drawdown of official reserves and a 25 percent depreciation of the currency through 2008.

Ghana’s macroeconomic imbalances were compounded from end-2008 by the global financial crisis. Commodity prices moved in Ghana’s favor, with gold and cocoa prices—its main exports—remaining strong, while oil import costs receded (see chart). However, this is projected to be more than offset in 2009 by a slump in private remittances and foreign direct investments. Consistent with this, the currency remained under pressure through May 2009, and official reserves declined further in the first quarter, to a little under 2 months of import cover.

Resilient commodity exports, combined with strong, rain-fed agricultural yields, are projected to cushion Ghana from the global recession. Provisionally, growth is projected to slow to 4½ percent in 2009, rising to 5 percent in 2010, but risks may be on the downside. Spillovers from the weak global economy may broaden, and a pullback in banking credit is possible following a recent deterioration in loan performance.

Adjustment program

In June 2009, the authorities adopted new budget measures to ensure that the 2009 deficit target is met. Given the limited scope to expand public borrowing, Ghana has no scope for countercyclical fiscal policy, and the government stands ready to cut spending further if the slowing economy leads to revenue shortfalls.

For 2010, further budget savings of about 3½ percent of GDP will be needed. The government intends to meet this goal through new revenue mobilization, tight oversight over the public sector wage bill, and by avoiding energy subsidies, which have been costly in the past.

The start of oil production in 2011 is projected to generate new budget resources of up to 7 percent of GDP, on an annual basis. The government intends to dedicate revenues partly to reduce Ghana’s fiscal deficit and strengthen debt sustainability, and partly to finance growth-promoting infrastructure investments, helping Ghana meet its goal of middle-income status over the next decade.

Since proven oil reserves are modest, and peak production could be relatively short lived, there will be a premium on using oil wealth wisely. The government’s reform program includes a number of steps to help in this regard.

Peter Allum, IMF African Department, Jul. 16th, 2009