Ghana: Third Review under the Extended Credit Facility Arrangement and Request for Waiver for Nonobservance of Performance Criteria, and Modifications of Performance Criteria—Debt Sustainability Analysis

Program implementation remains broadly satisfactory, but the economic outlook remains difficult and fiscal challenges are mounting. The growth outlook for 2016 and 2017 has weakened, mainly due to disruptions in oil production, while non-oil economic activity is expected to remain subdued due to continued fiscal consolidation and tight monetary policy. There was broad agreement with the authorities on the need to sustain a tight monetary stance given the still high inflation and to strengthen the fiscal adjustment under the program to cover key state-owned enterprises. Discussions addressed the following issues, in particular

Abstract

Program implementation remains broadly satisfactory, but the economic outlook remains difficult and fiscal challenges are mounting. The growth outlook for 2016 and 2017 has weakened, mainly due to disruptions in oil production, while non-oil economic activity is expected to remain subdued due to continued fiscal consolidation and tight monetary policy. There was broad agreement with the authorities on the need to sustain a tight monetary stance given the still high inflation and to strengthen the fiscal adjustment under the program to cover key state-owned enterprises. Discussions addressed the following issues, in particular

A. Background and Macroeconomic Assumptions

1. Ghana met the fiscal performance criterion for the third time under the third review of the Fund-supported program, while budget financing is on track to be fully financed for 2016. Ghana has over-performed under the Fund-supported program on the fiscal front and generated a small primary surplus in 2015, while the performance criterion on the wage bill was missed. The 2016 budget, prepared in the run-up to the presidential and parliament elections scheduled for December 2016, included additional fiscal measures to achieve an overall deficit of 5.0 percent of GDP. The authorities plan to further cut expenditures in response to lower-than-budgeted oil revenues. Aggressive domestic financing towards the end of 2015 enabled the authorities to fill out the shortfall in the 2015 Eurobond and even save around US$ 500 million out of its proceeds. Building on the cash buffer, budget financing through medium-term securities has exceeded target and are on track to be fully financed in 2016.

2. Nonresidents’ demand for Ghana’s debt remain strong. Despite global headwinds which started in mid-2015, the share of nonresidents’ holdings3 of domestic marketable debt has increased. In September, 2016, a Eurobond of USD 750 million with a coupon of 9.25 percent and final maturity of 6 years was issued. As part of its medium-term debt management strategy, in August 2016, the authorities executed a tender offer to buy back up to US$100 million of the Eurobond maturing October 2017. The buyback was financed through the use of cash buffer accumulated in the Sinking Fund. In addition, US$30.4 million was bought back in the secondary market, using the proceeds from the 2015 Eurobond. A part of the proceeds from the latest Eurobond issued will be used to further buy-back the remaining balance of the 2017 Eurobond.

3. Gross financing needs (GFN) peaked in 2015 at 23.6 percent of GDP and are projected to come down gradually. In 2015, about half of the GFN (including domestic short-term debt coming due) was financed through short-term domestic debt, and the remaining half roughly equally through medium-term securities and external financing. A key objective of the medium-term debt management strategy (MTDS)4 is to reduce the pressures on the domestic debt market and to lengthen the average maturity of domestic debt by reducing the issuance of short-term domestic debt. In the first half of 2016, the aggressive implementation of this strategy appears to have produced results, as T-Bills rates began to decline and non-resident participation has increased substantially, contributing to the reduction of near-term GFN. However, given the continued volatility in the external financing environment, sustained efforts to implement, with support from the World Bank, the MTDS objectives will be key to help reduce debt vulnerabilities, while deepening the domestic debt market will help to secure a more stable source of funding at lower cost and risk.

Key Macroeconomic Assumptions

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4. The long-term macroeconomic projections remain broadly unchanged with some revisions in near-term projections (see Table below). Economic growth in 2015 turned out to be 0.9 percentage points higher than previously projected. The exchange rate has stabilized since the fall of 2015. Despite the slump in commodity prices and non-oil commodities, the current account deficit was lower than envisaged at 7.5 percent of GDP. Fiscal projections in 2016 reflect additional measures of 1 percent points of GDP. The medium- and long-term projections reflect the latest estimates and changes in fiscal policy but key macro variables remain broadly unchanged (see Box below).

5. The new contracting of nonconcessional external debt has been lower than envisaged under the program. The total amount of contracting and guaranteeing of nonconcessional external debt in 2015 was US$ 1,510 million against the limits of US$ 2,500 million, due to the smaller Eurobond issuance by US$ 500 million and some delays in loan negotiations for project financing (including a US$350 million loan for GNPC). The debt limits for debt management purpose5 was set at US$1,150 million for 2016 at the second review (and would be raised by USD 25 million to accommodate a possible increase in a World Bank’s program loan). The debt limit for projects was set at US$ 1,000 million, and a separate limit of US$350 million will be created to accommodate the delayed GNPC’s loan. The forthcoming external nonconcesional borrowing for a debt management purpose should be anchored in a DSA, the revised MTDS, and a comprehensive analysis of cost-risk tradeoffs of alternative debt management strategies, taking account of the risks associated with exchange rate fluctuations and an expected reduction of risk premia.

Baseline Macroeconomic Assumptions

Real GDP-growth: Real growth turned out to be 3.9 percent in 2015, which is better than previously envisaged despite fiscal consolidation under the program, power shortages owing to shortfalls in power generation, and the decline in non-oil commodity production. Non-oil growth is expected to remain subdued in 2016 (3.7 percent) due to tight monetary and fiscal policy, but pick up from 2017 onwards with a long-run steady-state growth rate of 6 percent. On the other hand, the recent disorder of an offshore oil-pumping facility at Jubilee would deviate oil production significantly downwards from the original program, resulting in overall GDP growth of only 3.3 percent in 2016. Real total GDP growth in the long run will depend on oil production (currently expected to peak in 2020), with the possibility of new oil discoveries and gas production implying significant upside potential.

Inflation: Inflation (CPI) was about 18 percent in 2015, slightly higher than in 2014. Volatile exchange rate, though significantly stabilized, power shortages, and the recent substantial hikes in utility rates have weighed on BoG’s efforts to reduce inflation. However, as fiscal dominance of monetary policy subsides under the fiscal consolidation program, including the elimination of central bank financing to the government from 2016 onwards, and BoG restores the effectiveness of its inflation targeting monetary policy framework, inflation should move back close to BOG’s medium-term target of 82 2 percent. Inflation rates are projected to converge to around 7 percent over the projection period.

Government balances: The overall cash fiscal deficit was significantly reduced to 6.3 percent of GDP in 2015 from 10.1 percent in 2014, with slightly higher interest bills amounting to some 6.5 percent of GDP in 2015. The program envisages further fiscal consolidation in 2016, to bring the overall cash deficit to around 5.0 percent of GDP. The expected longer-term increase in hydrocarbon revenues will contribute to maintaining the overall deficits at a sustainable level. The primary surplus is projected to stay in the positive territory in the long-run.

Current account balance: Over the past years the current account deficit has been unsustainably high at around 10 percent of GDP. The net impact on the current account of recent declines in oil prices would be relatively small in the near-term given that Ghana still imports significant amount of refined oil. The price of oil is assumed to recover to around US$60 per barrel by 2020 from around US$ 52 in 2015, and subsequently stabilize in real terms afterwards. With the tightening of fiscal and monetary policies, the current account deficit would improve to below 5 percent of GDP in 2018 from around 7.5 percent in 2015. In the long-run, with increased oil/gas production accompanied by an improvement in oil prices, the deficit is projected to decline gradually to below 4 percent of GDP. Gross international reserves would steadily increase and maintain above 3-month of imports with a further gradual build-up towards the end of the projection period (the recent broadening of the coverage of services account (BoP) has worsened its months-of-imports reserves coverage).

Financing flows: Ghana has enjoyed high FDI inflows over the past years, even under increasing uncertainties surrounding the Ghanaian economy, reaching about 8 percent of GDP in 2015, mainly driven by the hydrocarbon sector. Thanks to ongoing development of the existing fields, FDI is projected to remain at around 7 percent of GDP over the medium term, and then gradually decline to around 3 percent of GDP in the long run. Consistent with Ghana’s improving income status and wealth, inflows from grants are projected to decline to less than 1 percent of GDP in the medium to long term. Borrowing is projected to become increasingly non-concessional and these loans are expected to be used for key infrastructure projects to raise the potential growth rate. A series of issuances of Eurobonds are envisaged to rollover maturing Eurobonds, which are assumed to be repaid in amortization payments rather than a bullet payment.

B. External Debt Sustainability Analysis6

6. The debt trajectories remain the same as in the previous DSA with two indicators breaching the thresholds under the baseline. 7 The PV of debt-to-GDP ratio would breach the threshold in 2016 though the ratio is trending down with a peak in 2015. On the other hand, debt service-to-revenue ratio is projected to hover above the threshold over the projection period with some spikes associated with Eurobond redemptions. Recently-issued Eurobonds have an amortization nature, with a somewhat smooth redemption schedule. Revenue enhancement measures supported by proactive debt management to further smooth and lengthen the maturity profile would improve this indicator.

7. The debt outlook remains sensitive to standard shocks to key macro variables. Under the standard stress tests, the relevant debt indicators are worst and the most extreme over the first 10-year projection period to the exchange rate and exports shocks, leading to breaches of other indicators against the thresholds in addition to the debt service-to-revenue ratio.

C. Public Debt Sustainability Analysis

8. Strong fiscal adjustments and an adequate financing package should lower Ghana’s total public debt (Table 4, Figure 3). Though PV of debt-to-GDP ratio would breach the public debt benchmark in the first few years, it is expected to decline to around 40 percent of GDP by the end of the projection period with fiscal reforms on track. The other debt indicators are also expected to improve and stabilize. Though all indicators show sustainable paths under the baseline scenario, they could be on an explosive path under the historical and the most extreme shock scenario (with abrupt real exchange rate depreciation).

9. Contingent liabilities emanating from state-owned enterprises (SOEs) and NPLs of the banking sector associated with these entities are concerns. There had been legacy issues in SOEs, including inefficient management, limited revenue generating capacity partly due to low levels of administered tariff setting, and cross arrears with the government and other SoEs. The authorities have recently raised tariffs and levies on petroleum products to address SOEs imbalances and plan on comprehensively clearing their arrears and restructuring their unsustainable debt. They also plan to improve the SOE governance and the government oversight with support of the World Bank. Although in aggregate, the banking system is profitable and has adequate levels of capital and liquidity, a recently-conducted Asset Quality Review revealed weaknesses in loan classification and provisioning practices among some banks. The BoG has designed with IMF staff, a roadmap for enhancing the resilience of the banking sector and will require banks to re-classify loans to SOEs and book additional provisions if necessary. The comprehensive reform program for SOEs should also help to enhance the soundness of the banking sector. The staff will continue to monitor these vulnerabilities and contingent liabilities to avoid them jeopardizing debt sustainability.

D. Conclusion

10. Sustained fiscal adjustment and an appropriate choice of financing options are crucially important. The staff has been having dialogue with the authorities on how best the budget can be financed in this difficult election year to avoid excessive reliance on short-term debt. Robust nonresidents’ demand for domestic debt and the issuance of a Eurobond has dissipated the rollover risk associated with the 2017 Eurobond and enabled the build-up of cash buffers to avoid taking on debt at excessively high costs. Ghana should continue to engage with development partners to seek as much concessional loans as possible to strengthen debt sustainability. Against these backdrops, the possible waning of appetite for Ghanaian debt from nonresident investors continues to be one of the most significant risks. Restoring confidence on the external front with an appropriate macroeconomic policy package under the Fund program is also warranted.

11. The authorities broadly concurred with the staff’s views on debt sustainability and reaffirmed their commitments to fiscal consolidation even during the election year, to strengthen debt sustainability. They still see a lots of merits in seeking non-concessional borrowing from the global capital markets, taking account of best financing mix depending on market conditions.

Table 1.

Ghana: External Debt Sustainability Framework, Baseline Scenario, 2013–36 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt. PPG external debt is based on the residency criterion, thus including local debt held by nonresidents. Also included are SoE’s debt and the central bank’s liabilities for a reserve management purpose.

Derived as [r - g - p(1+g)]/(1+g+p+gp) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 2.

Ghana: Public Sector Debt Sustainability Framework, Baseline Scenario, 2013–36

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

The domestic debt covers the debt stock of the central government. The external debt covers the central government, SoEs, and the central bank’s liabiliteis contracted for a reserve management purpose. In this table, “foreign-currency denominated” should be read as “external”.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt (including BoG’s liabilities for a reserve management purpose) at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 3.

Ghana: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2016–36

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Table 4.

Ghana: Sensitivity Analysis for Key Indicators of Public Debt, 2016–36

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Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Figure 1.
Figure 1.

Ghana: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2016–36 1/

Citation: IMF Staff Country Reports 2016, 321; 10.5089/9781475543582.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2026. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock
Figure 2.
Figure 2.

Ghana: Indicators of Public Debt Under Alternative Scenarios, 2016–36 1/

Citation: IMF Staff Country Reports 2016, 321; 10.5089/9781475543582.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2026.2/ Revenues are defined inclusive of grants.
1

Prepared in collaboration with Ghanaian authorities. The previous DSA was prepared in January 2016 (IMF Country Report No. 16/16).

2

The World Bank’s Country Policy and Institutions Assessment (CPIA) ranks Ghana as a medium performer in terms of the quality of policy and institutions (the average CPIA in 2012–14 is 3.61). Thus, the external debt burden thresholds for Ghana are (i) PV of debt-to-GDP ratio: 40 percent; (ii) PV of debt-to-exports ratio: 150 percent; (iii) PV of debt-to-revenue ratio: 250 percent; (iv) debt service-to-exports ratio: 20 percent: and (v) debt service-to-revenue ratio: 20 percent. The 2014 CPIA has been released in July 2015 by the World Bank, and Ghana’s score has deteriorated to 3.37, which contributed to the downgrading of Ghana to a medium performer from a high performer.

3

As in the previous DSA, this DSA uses the residency criterion for defining external debt to reflect properly the vulnerabilities associated with nonresidents’ holdings of domestic debt. Nonresidents can purchase domestic bonds with a maturity of 2 years and longer.

4

In April /May 2015, the IMF and World Bank provided technical assistance to develop the Medium-term Debt Management Strategy.

5

From the second review onwards, non-concessional debt limits have been set separately for a debt management purpose where the non-concessional borrowing, including a Eurobond, is used to improve the overall public debt profile, and for projects integral to national development. The latter is set on a cumulative basis from the beginning of 2015.

6

Hereafter, public external debt covers those contracted or guaranteed by the central government, and major state-owned enterprises (SOEs), and short-term liabilities contracted by the central bank for a reserve management purpose. These BoG liabilities do not include swaps contracted with resident banks and fully collateralized credit lines with foreign institutions.

7

The relatively larger breaches in the near-term are due in part to the BoG’s short-term liabilities. Debt services include nonresidents’ holdings of local currency-denominated domestic debt based on the residency criterion.

Ghana: Third Review Under the Extended Credit Facility Arrangement and Request for Waiver for Nonobservance of Performance Criteria, and Modifications of Performance Criteria-Press Release; Staff Report; and Statement by the Excutive Director for Ghana
Author: International Monetary Fund. African Dept.