Ghana: Staff Report for the 2014 Article IV Consultation
Author:
International Monetary Fund. African Dept.
Search for other papers by International Monetary Fund. African Dept. in
Current site
Google Scholar Close
Publication Date:
30 May 2014
eISBN:
9781616355609
Language:
English
Keywords:
ISCR; CR; deficit; real GDP; GDP deflator; authority; monetary policy; balance of payments; exchange rate; debt service; private sector; Current account
Download PDF (1.2 MB)

This 2014 Article IV Consultation highlights the emergence of large fiscal and external imbalances since 2012, which has created significant challenges for Ghana. A swift return to macroeconomic stability in 2013 was thwarted by weaker external and domestic conditions. Reflecting lower gold and cocoa exports, the current account deficit exceeded 12 percent of GDP. Although recently revised estimates point to an only moderate slowdown in growth to about 7 percent, the fiscal deficit target of 9 percent of GDP was missed by about 1 percentage point. Ghana’ short-term economic outlook is subject to significant risks, and growth is projected to slow to 4¾ percent in 2014.

Abstract

This 2014 Article IV Consultation highlights the emergence of large fiscal and external imbalances since 2012, which has created significant challenges for Ghana. A swift return to macroeconomic stability in 2013 was thwarted by weaker external and domestic conditions. Reflecting lower gold and cocoa exports, the current account deficit exceeded 12 percent of GDP. Although recently revised estimates point to an only moderate slowdown in growth to about 7 percent, the fiscal deficit target of 9 percent of GDP was missed by about 1 percentage point. Ghana’ short-term economic outlook is subject to significant risks, and growth is projected to slow to 4¾ percent in 2014.

Background and Recent Developments

1. Political uncertainty has been resolved. President Mahama’s National Democratic Congress was reelected in December 2012 by a small margin in the popular vote, but with a sizeable parliamentary majority. Following a challenge by the opposition party, the supreme court confirmed the election results in September, ending a period of political uncertainty.

2. Ghana has experienced strong and broadly inclusive growth over the past two decades and its medium-term prospects are supported by rising energy production. The country has outperformed regional peers in reducing poverty and improving social indicators. Robust democratic credentials and a highly-rated business climate (Box 1) have helped attract significant FDI, supporting a strong growth record and graduation to lower-middle income status. Over the medium term, growing energy production will boost exports and carry the potential of easing one of Ghana’s main growth constraints by making the provision of energy more reliable.

A01ufig01

Poverty Ratio

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

Sources: World Bank, World Development Indicators, 2013.

3. The government’s transformation agenda is focused on economic diversification, social inclusion, and macroeconomic stability (Box 2). A key aspect of the strategy is a major shift of public expenditure from current to capital spending, to ensure that Ghana’s still new oil and gas resources are channeled into productive investment, as mandated in the Petroleum Revenue Management Act.

4. However, the emergence of large fiscal and external imbalances since 2012 has created significant challenges. The fiscal (cash) deficit rose to 12 percent of GDP in 2012, fueled by a large public sector wage bill and costly energy subsidies. The fiscal expansion was accompanied by a growing current account deficit that exceeded significant FDI, loans, and portfolio inflows attracted by high interest rates on domestic bonds. As a result, public debt increased significantly and the international reserve position weakened alongside a depreciating currency.

5. A swift return to macroeconomic stability in 2013 was thwarted by weaker domestic and external conditions and ongoing difficulties in controlling public wages:

  • Economic growth slowed from previously high levels (Figure 1). While oil production grew strongly, non-oil growth was affected by disruptions in power supply in the first half of the year and falling gold production related to the drop in world prices. High interest rates and rising import costs due to the depreciation began to depress private sector activity. Staff assumes a growth deceleration to 5½ percent in 2013.

Doing Business in Ghana: Opportunities and Bottlenecks

Ghana’s governance and business environment is highly rated and has continued to improve. Ghana’s ratings in the World Bank’s governance and business indicators are significantly above those of its peers and regional benchmarks. Its ratings have continued to improve, accelerating past even the average upper-middle income country in most areas of governance and business climate.

A01ufig02

Ease of Doing Business

(Percentile rank; 100= best)

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

A01ufig02a

World Bank Governance Indicators

(higher = better governance)

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

However, businesses face a number of important constraints. An analysis by the U.S. and Ghanaian governments, based on firm-level surveys, has identified lack of access to affordable credit and unreliable electricity supply as principal constraints on growth. The same factors were confirmed as key bottlenecks in a recent informal sector survey conducted by the World Bank. Both present a particularly heavy burden for small and medium-sized, labor-intensive enterprises, where growth is most inclusive.

A01ufig03

Biggest obstacle faced by informal sector firms

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

A01ufig03a

Sources of financing day-to-day operations

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

Unlocking Ghana’s strong private sector growth potential will require changes in policies. Ghana’s financial sector is relatively well developed and competitive, but will only provide sufficiently affordable credit to the private sector once the government reduces its borrowing needs. New gas production will help meet growing energy demand, but reliable electricity supply will require significant public and private investments in the power sector, which are currently hampered by concerns over the financial viability of the state-owned energy companies. Further tariff adjustments, along with reductions in commercial and technical losses, will be needed to ensure cost recovery.

Inclusive Growth and Economic Transformation

Ghana has experienced strong and broadly inclusive growth over the past 20 years, evidenced by significant improvements in poverty and social indicators and its transition to lower middle-income status. Nevertheless, about a quarter of the population still lives below the poverty line, and 6–7 million jobs (more than half of the current labor force) will need to be created in the next two decades, to absorb new entrants into the labor market. Success will hinge on complementing rising production from extractive industries with diversified, private sector-led growth in more labor-intensive sectors.1

The government’s transformation agenda pursues three broad objectives:

  • Economic diversification. Ghana’s economy, and particularly employment, still relies heavily on agriculture, and some 80 percent of jobs are in the informal sector. At the same time, the concentration of exports in three commodities (gold, cocoa, and oil) makes the economy vulnerable to terms-of-trade shocks. The government’s strategy is to leverage Ghana’s new oil and gas resources toward the creation of a robust manufacturing sector and higher-value agriculture. This will require significant infrastructure investments and removal of the main bottlenecks to growth—inadequate electricity supply and lack of affordable financing (see Box 1). To this end, Ghana’s Petroleum Revenue Management Act dedicates at least 70 percent of benchmark oil revenue to investments in identified priority areas, including road and infrastructure improvements, agricultural modernization, and capacity building (including in the oil and gas sector).

  • Social inclusion. To make further advancements in poverty reduction, ensure that the benefits of growth are widely shared, and build a workforce ready to take on higher-skilled jobs, the government wants to further strengthen Ghana’s social safety net and continue investments in utilities, health, and education.

  • Macroeconomic stability. The government has emphasized the importance of a stable macroeconomic environment and sustainable debt dynamics for the achievement of its growth and development objectives. It is targeting a gradual fiscal consolidation to reduce the twin deficit and lower inflation over the medium term.

A01ufig04

Sectoral Employment and Output Shares

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

1 See 2013 Article IV Staff Report (13/187), Appendix II, for a more detailed discussion.
Figure 1.
Figure 1.

Ghana: Real Sector Indicators

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

Source: Ghanaian authorities and IMF staff estimates and projections.1 The CIEA is the Bank of Ghana's composite index of real economic activity.

  • The fiscal target was missed, despite significant measures to contain the deficit (Figure 2). Faced with shortfalls in tax collection and grants, relative to budget targets, and ongoing overruns in the wage bill, the government imposed levies on certain imports and on profits of specific sectors mid-year. It also reinstated the fuel-price adjustment mechanism to eliminate subsidies; sharply raised electricity and water tariffs (the former by 60 percent); and compressed other spending. While these measures were in line with recommendations in the 2013 Article IV consultation, the weaker-than-anticipated economic environment would have demanded a stronger and earlier effort. The cash deficit reached an estimated 10.9 percent of GDP, versus a 9 percent target. Domestic arrears declined marginally, implying a slightly smaller deficit (10.8 percent of GDP) on a commitment basis.

  • Inflation ended the year at 13½ percent, above the 9+/-2 percent target range. Large administered price hikes contributed to this outcome, though staff’s estimate of core inflation (excluding high administered, but also low food price increases) was even larger at 15 percent. Faced with growing liquidity from a high fiscal deficit and currency swaps with local banks, the BOG ramped up sterilization operations, while steering interbank rates close to the policy rate. The latter was raised in February 2014 by 200 basis points to 18 percent, and in April, the BOG increased reserve requirements from 9 to 11 percent and tightened limits on banks’ net open positions. Government bond rates, which had declined to 19 percent during 2013, helped by a US$1 billion Eurobond, climbed again to 23 percent in early 2014.

A01ufig05

Interbank Liquidity Index 1/

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

1 Interbank liquidity index computed by BOG based on the average daily bid-ask spread; daily change of overnight rate; daily turnover,
A01ufig05a

Sterilization: Stock Open Market Operations

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

  • The external position has become increasingly fragile. With weaker gold and cocoa exports, the estimated current account deficit rose above 13 percent of GDP in 2013, with some 7 percent of GDP financed by FDI (Figure 3). As a result, the cedi depreciated by close to 15 percent in 2013 and 18 percent in the first quarter of 2014 alone, while spreads on Ghana’s Eurobonds are now the highest among SSA frontier markets. An exchange market pressure index—combining changes in the exchange rate, interest rates, and reserves—has recently risen above 2009 levels, but remains below 2012 peaks.

    A01ufig06

    Sovereign Spread, SSA Frontier Markets

    (USD-denominated, basis points)

    Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

    Sources: * Security specific spread.** JP Morgan Bond Index Global (EMBIG).
    A01ufig07

    Exchange Market Pressure Index (EMP) and components

    Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

    Sources: Ghanaian authorities; and IMF staff estimates

Figure 2.
Figure 2.

Ghana: Fiscal Indicators

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

Source: Ghanaian authorities and IMF staff estimates.1/ Includes deferred wages and arrears to state-owned enterprises.
Figure 3.
Figure 3.

Ghana: Ghana: External Indicators

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

Source: Ghanaian authorities and IMF staff estimates.

Outlook and Risks

Rising vulnerabilities were a central focus of the discussions. Staff saw serious risks to the government’s transformation agenda. It cautioned that macroeconomic stability will need to be restored to preserve a positive medium-term outlook.

6. The government’s policy is guided by a gradual reduction in macroeconomic imbalances to preserve economic growth. The 2014 budget foresees a reduction in primary current spending by about 3 percentage points of GDP, mainly through tight limits on the wage bill and elimination of subsidies. This would make room for a larger capital budget, higher interest payments, and clearance of arrears. Revenue is projected to increase by 2½ percentage points of GDP, reflecting tax policy measures and revenue administration reforms (see next section). Based on these plans and projected growth of 8 percent, the budget envisages a deficit of 8.5 percent of GDP this year and a mediumterm deficit of 6 percent of GDP in 2016. The fiscal adjustment is expected to be mirrored in a gradual reduction in external imbalances, a stabilization of the currency, and a declining inflation path, with continued strong growth.

Ghana: Authorities' Budget Scenario, 2013–16

(In percent of GDP)

article image
Sources: Ghanaian authorities.

Excludes deferred wage payments.

Also includes deferred wage payments and discrepancy (for 2013)

7. Staff saw the government’s targets at risk in the absence of additional fiscal measures, pointing to the macroeconomic costs of large fiscal imbalances. Constrained foreign financing and limited scope to boost exports in the short term will keep pressure on the cedi, forcing an adjustment in imports and keeping inflation high. Staff’s baseline assumes a contraction in the current account deficit by 2½ percentage points of GDP in 2014, with high interest rates and the depreciation slowing growth to a projected 4¾ percent. This will raise government interest payments and dampen revenue, implying a projected fiscal deficit of 10¼ percent of GDP. Any slippages in ambitious primary current spending projections would raise the deficit further.

8. Staff stressed more serious risks to this outlook in the event of a further deterioration in the external environment (see Appendix I). Ghana’s main vulnerability arises from its large twin deficits in the context of a low reserve buffer, sustained by swaps and bridging loans (Box 3). The sum of Ghana’s non-FDI financed current account deficit, amortization on foreign loans, maturing domestic bonds held by non-residents, and maturing swaps and bridging loans, amounts to a total gross external financing need of $4.3 billion in 2014—corresponding to about three-quarters of the reserve stock at end-2013. Against this background, a further weakening in the terms of trade, or a larger outflow of foreign financing, could have a significant impact on reserves and force a more drastic depreciation and import compression. Interest rates would have to be hiked by more to contain an accelerating inflation rate, while lower revenue combined with higher interest payments would further widen the fiscal deficit. In this case, the economic costs in terms of growth and employment, and the efforts needed to restore stability, would be significant.

Reserve Adequacy

After a second year of large balance of payments deficits and ongoing pressures, Ghana’s gross international reserves (GIR) declined to US$4.7 billion at end-March 2014, covering 2.7 months of prospective imports.1

A standardized approach assesses Ghana’s gross reserves to be below adequate levels. Following Dabla-Norris et al. (2011), the net benefit of holding reserves is calculated based on the expected cost of a crisis given the stock of reserves, fundamentals (exchange rate regime, fiscal balance, institutions), exposure to shocks (external demand, FDI, aid), and the opportunity cost of holding reserves, quantified as the “normal” range of the interest differential over 10-year U.S. bonds (300 to 400 bps).2 The approach suggests that Ghana’s international reserves should have covered 3.4-4.7 months of imports in 2013, under the 50 percent default probability of a shock. Reserves should be higher (4.1-5.6 months of imports) for a shock probability of 60 percent. In the medium term, with a stronger fiscal position, reserves are expected to exceed benchmark levels.

A01ufig08

Optimal Reserve Coverage, 2013-2018

(in Month of Prospective Imports)*

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

*Cost of holding reserves of 3 to 4 percent.

Ghana’s balance of payments is subject to significant short-term and seasonal pressures. A further deterioration in the terms of trade, such as a drop in gold prices to US$1,000 per ounce, could wipe off an additional US$800 million in reserves. Moreover, the traditional weakening of the BOP position in the first three quarters could be exacerbated by prospective financial outflows:

Bond rollovers. About one-fourth (GH¢5.6 billion) of Ghana’s domestic debt at end-2013 was held by foreigners. Of this, about GH¢870 million will mature in 2014 (nearly all by June), adding to short-term pressures. Reflecting virtually no foreign rollover in February, the baseline assumes a similar outcome also for other bonds. Early redemptions—costly, due to an illiquid secondary market—are not assumed, but could exacerbate outflows.

Commercial banks. During 2013, banks significantly reduced their net foreign assets by borrowing from foreign affiliates to meet high dollar demand. These flows are assumed to be reversed in 2014, with early reversal potentially adding to seasonal pressures.

BOG swaps and bridging loans. Gross reserves are subject to rollover risks from swap engagements with several commercial banks and short-term bridging loans with foreign institutions.

1Includes US$600 million of oil funds, the use of which may require parliamentary approval. 2 The analysis uses historical averages to avoid a result where a higher risk perception reduces the reserve benchmark.

9. Apart from short-term risks, the authorities’ gradual fiscal adjustment implies continuing vulnerabilities and significant costs over the medium term. It would keep the fiscal and current account deficits elevated and above external sustainability benchmarks (Box 4), prolonging the need for a tight monetary policy stance and leaving external buffers low. Moreover, Ghana’s risk of debt distress would be approaching high levels, with the public debt ratio remaining close to 60 percent of GDP and debt service absorbing some 40-50 percent of revenue.1

10. Staff recommended a more ambitious adjustment scenario. Additional consolidation of close to 2 percentage points of GDP in 2014, combined with a more significant adjustment over the medium term, could set off a virtuous cycle, where lower fiscal deficits and falling interest rates would create room for higher social and infrastructure spending and a crowdingin of private sector activity. In the short run, growth will be subject to two offsetting factors, with the contractionary impact of fiscal consolidation assumed to be fully neutralized by the positive impact of lower interest rates and contained depreciation. In the medium term, the positive impact is expected to dominate, resulting in higher growth and significantly lower debt and debt-service ratios.

Macroeconomic Indicators, 2012-2019

article image
Sources: Ghanaian authorities and IMF staff projections.
A01ufig12

Indicators of Public Sector Indebtedness Under Alternative Scenarios

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

External Sustainability

Mediumterm current account benchmarks for Ghana range from -4.4 to -2.1 percent of GDP. Various approaches to external sustainability suggest that the current account adjustment, and the associated fiscal consolidation, should be stronger than currently projected. Without additional fiscal adjustment, the analysis would imply a modest cedi overvaluation of 6.9-14.4 percent in the medium term.

Baseline projections imply a narrowing of the current account deficit to 6¾ percent of GDP in 2019. This reflects moderate fiscal consolidation, less reliance on expensive fuel imports as gas comes on stream, and a significant increase in oil production. The difference to the last Article IV assessment (8½ percent of GDP) is mainly attributed to an upward revision of oil production and the depreciation that has already taken place.

Three approaches are used—an external sustainability (ES), a macroeconomic balance (MB), and a model-based approach—to provide a robust assessment of external sustainability.

The ES approach yields a current account benchmark of -4.2 percent of GDP. The benchmark is derived on the basis of a fixed NFA target of -40 percent of GDP (the median of middle-income countries), as well as staff’s growth and inflation projections. While useful as an accounting identity, this approach abstracts from the country's underlying fundamentals.

Current Account Benchmarks, 2019

(in Percent of GDP)

article image

Applications of the MB approach yield current account benchmarks between -4.4 and -2.1 percent of GDP in 2019. This approach estimates Ghana’s benchmark on the basis of its fundamentals relative to its trading partners, with Ghana’s relatively high GDP per capita growth and its oil trade balance driving much of the results. While providing a multilaterally consistent benchmark, the MB approach does not capture the potential use of Ghana’s recent oil windfall for infrastructure investments over the medium term.

A01ufig14

Current Account, 2014-2019

(in Percent of GDP)

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

To account for oil production and infrastructure investment needs, the model by Araujo et al. (2012) is calibrated to Ghana.1 The model incorporates the main features of a capital-scarce and resource-rich developing economy (including investment inefficiencies and adjustment costs). As the paths of the current account, as well as private and public consumption and investment implied by the model, are the result of a social welfare maximization problem, they can be considered benchmarks.

The model provides a current account benchmark of -4.3 percent of GDP in 2019, and advocates for stronger fiscal consolidation than currently projected. Ghana’s optimal paths are calibrated based on a long-run NFA target of -40 percent of GDP, and an efficiency level of public investment derived from Gupta et al. (2011).2 Given these assumptions, the model suggests that the current account deficit does not strongly deviate from benchmark levels in the short run, though government consumption and investment are too high and private investment is too low.3 For the medium term, the model implies an “optimal” narrowing of the current account deficit to 4¼ percent of GDP, implying an additional adjustment of 2½ percent of GDP over staff’s baseline projections.

MediumTerm Current Account Adjustment Model vs. Projections

(In percent of GDP)

article image

The main part of the adjustment would “optimally” come from lower public expenditure (2¾ percent of GDP). The optimal breakdown between consumption and investment depends on the efficiency of public capital. Under the model’s assumption (based on historical data), the projected high level of public investment would account for about 60 percent of the excess public expenditure relative to the model. However, an assumed increase in the efficiency index by only 5 percentage points would raise benchmark capital expenditure to currently projected levels in the medium run. In this scenario, the main part of fiscal consolidation would need to come from a further reduction in public consumption.

A01ufig15

Current Account

(in Percent of GDP)

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

A01ufig15a

Government Consumption

(in Percent of GDP)

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

A01ufig15b

Government Investment

(in Percent of GDP)

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

A01ufig15c

Private Investment

(in Percent of GDP)

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

1 Auraujo, Juliana, Bin Li, Marcos Poplawski-Ribeiro, and Luis-Felipe Zanna (2012): Current account norms in natural resource rich and capital scarce economies. IMF WP 13/80. 2 Gupta, Sanjeev, Alvar Kangur, Chris Papageorgiou, and Abdoul Wane (2011): Efficiency-adjusted public capital and growth. IMF WP 11/217. 3 Official data for consumption and investment have been revised substantially since the last Article IV assessment. Government investment figures include transfers to statutory funds that are primarily used for investment purposes.

Policies to Safeguard Stability and Growth

A. Fiscal Policy: Adjustment and Resilience

To restore confidence and build resilience, staff recommended a comprehensive policy package that (i) targets additional fiscal adjustment of about 1¾ percent of GDP in 2014, and (ii) entrenches the structural and legislative reforms that ensure more significant and durable consolidation over the medium-term

11. The authorities agreed with staff on the need to reduce the fiscal deficit, pointing to the significant measures already underway. They saw the current challenges as temporary, stressing that their measures will take some time to materialize fully and that their policies needed to be viewed in a medium-term context. In addition to regular adjustments of fuel and utility prices, budget measures include:

  • Revenue mobilization. The VAT rate was raised by 2.5 percentage points and coverage was broadened to previously exempted activities; an ad valorem tax on fuel was introduced; and taxes were raised on rent for non-residential accommodation, management and technical services fees, and free zone companies selling on the local market.

  • Wage bill control. Tight budget limits on the wage bill (proposed freeze on wage increases and net hiring in most sectors) are being complemented by a range of measures to improve monitoring and control, including an improved payroll database, audits, and the introduction of an electronic payment voucher system. The implementation of HRMIS (a comprehensive personnel data base) and its integration with GIFMIS, once completed, should greatly facilitate strategic HR management.

  • Prioritized capital spending. This is implemented through a moratorium on new contracts; alignment of investment programs of statutory funds with national priorities to avoid duplications; and the planned creation a Ghana Infrastructure Fund (GIF), to leverage private financing of infrastructure projects and improve their selection and implementation. The authorities took note of the mission’s advice to carefully assess fiscal risks arising from contingent liabilities and to reconsider a permanent earmarking of VAT revenue to the GIF.

12. While agreeing with the thrust of these reforms, the mission argued for deeper irreversible reforms to entrench significant medium-term consolidation. A credible program for reducing the public wage bill, including streamlining of subvented agencies, will be key for addressing imbalances, restoring confidence, and creating fiscal space for priority spending. At the same time, public financial management reforms should be accelerated and combined with a relaxation of rigid earmarking of tax revenue. Staff also saw scope for raising revenue by reducing tax expenditure and increasing compliance, in line with the recommendations of recent Fund technical assistance missions. The mission identified a set of measures (text table) that should allow a larger deficit reduction, in line with staff’s proposed adjustment scenario (4½ percent of GDP deficit in 2016 and 1¾ percent in 2019). In addition, it stressed that increased transparency of revenue and expenditure allocations at all levels of the public sector will be important for a successful prioritization of scarce resources to support the government’s transformation agenda.

Staff-Proposed Menu of Additional medium-termStructural Measures

article image

13. To contain immediate vulnerabilities, staff urged the adoption of additional short-term measures. While recognizing the limited space for large upfront adjustments, staff saw scope for additional savings of about 1¾ percent of GDP this year, through a combination of revenue and expenditure measures (text table). To achieve the desired outcome, staff stressed the need to enforce budget discipline in all areas. Existing commitments, such as tight wage limits and no aggregate subsidies on fuel and utilities, will need to be rigorously enforced. This will require that electricity tariffs rise temporarily above cost-recovery levels—once gas comes on stream—to compensate for the under-pricing that is currently taking place.

Staff-Proposed Menu of Additional Short-term Adjustment Measures

article image

14. In early April, the government issued a policy statement to parliament, aimed at addressing the current economic challenges. Subsequently, it provided a more detailed report on its Economic and Financial Policies for the Medium Term to the Fund and other development partners. The policy document maintains the government’s fiscal targets, clarifies the 2014 budget measures, and outlines additional reforms to safeguard the medium-term consolidation path. The additional measures include intentions to rationalize the public service, restructure statutory funds to reduce budget rigidities, and enhance revenue administration through ongoing GRA reforms and a revision of tax laws.

15. Staff welcomes the government’s homegrown strategy to address the current macroeconomic imbalances. The policy documents provide a clear and comprehensive description of the government’s reform agenda, covering the key fiscal challenges. This is an important first step that now needs to be translated into specific, quantified, and time-bound actions, particularly with respect to the planned rationalization of the public service and tax policy measures. In light of Ghana’s significant fiscal and external imbalances, staff would strongly encourage the government to target a larger and more frontloaded fiscal consolidation.

B. Monetary Policy: Supporting Macroeconomic Stability

Staff supported the tightening of monetary policy. It expressed reservations about the effectiveness of recent foreign exchange regulations, and agreed with the BOG that these measures alone will not solve the underlying pressures in the foreign exchange market.

16. Staff supported the recent policy rate adjustment, anticipating that further tightening may be warranted in light of rising inflation and a depreciating currency. Second-round effects of large administered price increases and rising inflation expectations may call for further rate hikes to steer inflation back toward the end-year target band of 9.5+/-2 percent. A tight monetary policy stance will also support a smooth adjustment of the exchange rate, which should be allowed to adjust to prevent further erosion of an already low reserve buffer. To contain short-term pressures, staff advised the BOG to continue its efforts to lengthen the maturity structure of its existing swaps and bridging loans beyond the third quarter of 2014. Once external pressures subside, reserves should be rebuilt, and the volume of swaps should be reduced and limited to the management of seasonal balance of payments volatility.

17. Staff welcomed improvements in monetary policy operations, while advocating against direct government financing and for more transparent foreign exchange operations. The BOG made progress in strengthening its liquidity management framework, evidenced by the convergence of the overnight interbank rate with the policy rate (Figure 4). Staff also commended the BOG for enhancing the use of its model-based inflation forecasting tool to support Monetary Policy Committee decisions and for reducing the gap between its transaction and interbank exchange rate and shifting toward the latter for its own transactions.2 Staff suggested to:

Figure 4.
Figure 4.

Ghana: Monetary and Financial Indicators

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

Source: Ghanaian authorities; DataStream; and IMF staff estimates.

  • Reduce direct government financing which amounted to 7½ percent of current-year revenue in 2013 (exceeding the BOG’s own target of 5 percent). Besides boosting liquidity, deficit financing raises concerns about fiscal dominance and the credibility of the inflation-targeting framework. The BOG agreed that it will be important to keep its deficit financing at, or below, the 5 percent target in 2014, which is comparable with provisions in other countries in the region.

  • Adopt a unified market-determined exchange rate: The current use of different exchange rates lacks transparency, can create distortions, and gives rise to a multiple-currency practice. Following the introduction of an electronic platform, the BOG is working with banks on establishing a system of more frequent adjustments in the interbank rate to better reflect market conditions. This should facilitate unification, while effective price discovery would be improved by allowing more foreign exchange transactions to pass through the market.

  • Increase the inflation target horizon: Replacing the end-year inflation target with a rolling target, set for a 1-2 year policy horizon, would further enhance the credibility of the IT framework. The BOG will consider this proposal.

18. Staff expressed reservations about some of the new foreign exchange regulations, aimed at curbing foreign currency shortages and dollarization. The new regulations reinforce preexisting requirements for the repatriation of export proceeds, ban foreign-currency denominated loans to nonforeign exchange earners, impose the creation of margin accounts for import bills, tighten operating procedures for forex bureaus, and circumscribe the use of foreign exchange held in foreign currency accounts. While noting that restrictions on foreign-currency loans have been adopted by many countries as a macro-prudential measure to contain exposures, staff recommended a review of all measures after an appropriate evaluation period to mitigate any unintended consequences, such as reduced foreign exchange inflows as a result of rising transaction costs.3 The BOG agreed with this proposal and with the need to address the root causes of current imbalances. Staff supported steps taken by the authorities to prevent the misuse of foreign exchange bureaus for money laundering, while arguing that de-dollarization is best achieved in a stable macroeconomic environment.

C. Financial Sector: Containing Exposure to Short-Term Risks

The financial sector is adequately capitalized and liquid, but increasing exposures will need to be monitored closely.

19. Stress tests conducted by the BOG based on end-2013 data point to adequate buffers in most banks and the system in aggregate. Only one bank would have negative capital under various stress tests, while about two-thirds of all banks (representing about two-thirds of total assets) would stay above the regulatory minimum capital requirement. Hence, potential recapitalization needs based on estimates of direct impact would likely be small, relative to GDP. On the funding side, conditions have remained stable, as banks rely mainly on domestic deposits as a steady financing source. Staff welcomed the authorities’ new stresstesting model, and encouraged developing it further and testing for a wider range of shocks, including scenarios with tail risk, to ascertain the robustness of the system.

Summary of Selected Stress Test Results

article image
Source: Bank of Ghana

Assumes a migration/reclassification of 17 percent of all loans to a riskier category.

20. Staff pointed to emerging vulnerabilities that may not be fully captured in the stress test and, if compounded, could pose challenges to the system. Asset quality is likely to decline if macroeconomic imbalances persist and the economy slows down, while banks’ significant holdings of government securities expose them to interest rate and sovereign risks. Most strikingly, bank’s (mainly short-term) foreign borrowing has more than tripled in 2013. Much of the borrowing originates from parent institutions, and the associated foreign exchange risk is in large part covered by swap contracts with the BOG. Banks’ direct exposure to foreign-exchange risk was curtailed in April by a reduction in net open position limits to 5 percent of capital for single currency and 10 percent for aggregate exposure, while the BOG’s recent ban on on-lending to non-foreign exchange earners should contain indirect exposures.

A01ufig16

Commercial Banks Foreign Assets and Liabilities

(million GHc)

Citation: IMF Staff Country Reports 2014, 129; 10.5089/9781616355609.002.A001

Sources: BOG

21. The mission advised the authorities to strengthen their crisis prevention and management capabilities. Stronger off-site supervision capabilities to complement on-site inspections are an effective way to identify major build-up of risks. Communication with banks—especially on emergency liquidity provision and modalities of BOG or government support—could also be improved. Staff further encouraged the BOG to conduct contingency planning and crisis simulation exercises to help identify gaps in the framework. Expedited completion and adoption of new banking sector legislation, drafted with extensive IMF technical assistance, will be important to clarify and enhance the BOG’s powers with respect to consolidated and cross-border supervision, as well as crisis management and resolution. A deposit insurance act, recommended in the 2011 FSAP Update, is expected to be submitted to parliament this year.

Staff Appraisal

22. Short-term vulnerabilities have risen significantly amid high fiscal and current account deficits. The international reserve position has weakened alongside mounting public debt. High interest rates and a depreciating currency have begun to depress private sector activity, and spreads on Ghana’s Eurobonds have risen above those of regional peers.

23. Additional measures are required to contain short-term risks and safeguard the government’s transformation agenda. Despite significant policy efforts, the 2014 fiscal deficit of 8½ percent of GDP is unlikely to be met in the absence of further measures. Staff welcomes the authorities’ recent policy documents. They now need to be complemented by additional short-term measures to contain the 2014 deficit and by specific action plans to entrench significant and durable consolidation over the medium term. Swift implementation of a strong package of policy measures is needed to restore confidence in the government’s ability to address large imbalances and to provide the needed space for infrastructure and social priority spending.

24. The case for stronger consolidation is supported by staff’s external stability assessment and debt sustainability analysis. The medium-term analysis suggests that Ghana’s real effective exchange would be modestly overvalued without further adjustment. A model-based approach confirms that the main part of the adjustment should come from lower public expenditure. Further delays in fiscal consolidation would keep public debt and debt service at uncomfortably high levels.

25. Further monetary policy tightening may be needed to tame inflationary pressures. Faced with second-round effects of large administered price increases and a depreciating currency, the recent hike in the policy rate and the subsequent tightening of reserve requirements may not be sufficient to steer inflation back into the target range. The BOG should continue to manage liquidity tightly and refrain from direct financing of the fiscal deficit. The exchange rate should be allowed to adjust to prevent further erosion of an already low reserve buffer, and the authorities need to begin rebuilding the buffer as market conditions permit.

26. The new foreign exchange regulations will not be effective, unless the underlying macroeconomic imbalances are resolved. The BOG’s agreement to review these measures with the objective of mitigating any unintended consequences and removing the exchange restrictions is welcome. As the restrictions are not imposed for balance of payments reasons, staff does not recommend their approval. In preparing to move to a fully market-determined exchange rate system, the BOG should allow more foreign exchange transactions to pass through the market.

27. The financial sector is adequately capitalized and liquid, but increasing exposures will need to be monitored closely. Stress tests conducted by the BOG suggest that buffers are adequate in most banks and the system in aggregate. Nevertheless, the weaker macroeconomic outlook and currency depreciation expose the financial sector to currency and credit risks, warranting a strengthening of crisis prevention and management capabilities.

28. Data provision, while broadly adequate for standard surveillance, should be strengthened. In current circumstances, effective surveillance warrants a more timely provision of critical highfrequency data to monitor risks.

29. It is recommended that the next Article IV Consultation be held on the regular twelvemonth cycle.

Table 1.

Ghana: Selected Economic and Financial Indicators, 2012–19

article image
Sources: Ghanaian authorities; and Fund staff estimates and projections.

Including public enterprises and errors and omissions.

Table 2A.

Ghana: Summary of Budgetary Central Government Operations, 2012–19

(GFS 2001, Cash Basis)

article image
Sources: Ghanaian authorities; and IMF staff estimates and projections.

Excludes deferred wage payments which are reported on an independent line.

Includes payments of cash arrears and promisory notes to statutory funds.

Table 2B.

Ghana: Summary of Budgetary Central Government Operations, 2012–19

(GFS 2001, Cash Basis)

article image
Sources: Ghanaian authorities; and IMF staff estimates and projections.

Excludes deferred wage payments which are reported on an independent line.

Includes payments of cash arrears and promisory notes to statutory funds.

Table 2C.

Ghana: Ghana: Summary of Budgetary Central Government Operations, 2012–19

(GFS 2001, Commitment Basis)

article image
Sources: Ghanaian authorities; and IMF staff estimates and projections.

Excludes deferred wage payments which are reported on an independent line.

Includes new arrears classified under this definition.

Includes cash arrears and promisory notes to statutory funds.

Includes new project-arrears.

Net transfers to Oil Fund abd divestiture receipts (net).

Reflects net change in arrears stock (excludes government liabilities to state-owned enterprises).

Table 2D.

Ghana: Summary of Budgetary Central Government Operations, 2012–19

(GFS 2001, Commitment Basis)

article image
Sources: Ghanaian authorities; and IMF staff estimates and projections.

Excludes deferred wage payments which are reported on an independent line.

Includes new arrears classified under this definition.

Includes cash arrears and promisory notes to statutory funds.

Includes new project-arrears.

Net transfers to Oil Fund abd divestiture receipts (net).

Reflects net change in arrears stock (excludes government liabilities to state-owned enterprises).

Table 3.

Ghana: Monetary Survey, 2011–141

article image
Sources: Ghanaian authorities; and Fund staff estimates and projections.

End of period.

Include public enterprises and the local government.

Including valuation.

Bank of Ghana’s Base Money definition, does not include foreign currency deposits.

Does not include foreign currency deposits.

Includes foreign currency deposits.

Table 4.

Ghana: Balance of Payments, 2012–19

article image
Sources: Ghanaian authorities; and Fund staff estimates and projections.
Table 5.

Ghana: Financial Soundness Indicators, 2008–13

article image
Source: Bank of Ghana.
Table 6.

Ghana: Selected Indicators on the Millennium Development Goals, 1990-2013

article image
Source: World Development Indicators database, 2014.

Appendix I. Risk Assessment Matrix

article image
article image
1

See Supplement on Joint IMF and World Bank Debt Sustainability Analysis.

2

The BOG previously conducted all its transactions using the weighted average of reported bank-customer exchange rates of the previous day, after discretionary removal of outliers (transaction rate). It now uses the average interbank rateof the previous day for most of its own transactions. While this shift does not fully remove the existing multiple-currency practice, it is a step toward its elimination.

3

The ban on foreign-currency denominated loans to non-foreign exchange earners, which includes importers, constitutes the withdrawal of a normal, short-term banking and credit facility and gives rise to an exchange restriction. Another exchange restriction arises from the requirement for importers to submit to their commercial bank customs entry forms not yet submitted for any past foreign exchange transactions related to imports before foreign exchange may be transferred abroad for any further import transaction. The BOG assured staff that it will remove both restrictions following its planned review of the regulations in May.

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Ghana: Staff Report for the 2014 Article IV Consultation
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2014: Issue 129
Publisher:
International Monetary Fund
ISBN:
9781616355609
ISSN:
1934-7685
Pages:
73
DOI:
https://doi.org/10.5089/9781616355609.002

Poverty Ratio

Ease of Doing Business

(Percentile rank; 100= best)

World Bank Governance Indicators

(higher = better governance)

Biggest obstacle faced by informal sector firms

Sources of financing day-to-day operations

Sectoral Employment and Output Shares
Figure 1.

Ghana: Real Sector Indicators

Interbank Liquidity Index 1/

Sterilization: Stock Open Market Operations

Sovereign Spread, SSA Frontier Markets

(USD-denominated, basis points)

Exchange Market Pressure Index (EMP) and components
Figure 2.

Ghana: Fiscal Indicators
Figure 3.

Ghana: Ghana: External Indicators

Optimal Reserve Coverage, 2013-2018

(in Month of Prospective Imports)*

Indicators of Public Sector Indebtedness Under Alternative Scenarios

Current Account, 2014-2019

(in Percent of GDP)

Current Account

(in Percent of GDP)

Government Consumption

(in Percent of GDP)

Government Investment

(in Percent of GDP)

Private Investment

(in Percent of GDP)
Figure 4.

Ghana: Monetary and Financial Indicators

Commercial Banks Foreign Assets and Liabilities

(million GHc)