IMF – Ghana Extended Credit Facility Arrangement 2015

The Covenant of Circumcision

Truly, that was all I could think about reading the Extended Credit Facility Arrangement.  “We have one more chance to throw away the old ways, get it right and move into success”.  It felt like an Abrahamic promise - “… walk before me faithfully and be blameless.  Then I will make my covenant between me and you and will greatly increase your numbers.” - Genesis 17: 1 – 2

When the IMF discussions begun it was clear that Ghana had lost its way at least as far as the quality of our economic foresight ad planning was concerned and at worst because of wilful mismanagement and possibly incompetence.  And this was not about political leadership but generally, throughout the public sector.

Reading the terms of the possible agreement from the Press Release, it was apparent that in deed both tragedies drove us to the brink.  More sobering is the possibility that in the absence of enforcement, this may not be our last visit to the alchemists at the IMF. 

Why am I taking such a dour stance considering the generally positive public sentiment following the announcement?  After all, the agreement promises some stability for the Cedi.  Which is what for most people the truest signal of fair weather or wrathful storms upon our livelihoods.  So I invite you to read the text again even if you already have, quietly, and reflect on the meanings of each line. 

The Objectives

The Fund was here to fix a problem very much the making of excessive spending and unproductive enterprise as much as it was the result of straight-jacking the most effective part of the economy – the private sector. 

Over the last 20 years, Government has borrowed hugely and spend with dubious returns on ‘development’, ‘social intervention’ and ‘infrastructure’.   All the time pushing more of private enterprise into services, and at once both coddling and enticing our inefficient agricultural sector into a state of sleepwalking.   In depth and breadth of actionable policy and implemented policy, scant attention and energy has been devoted to ensuring transformative outcomes.

So they came, the team from the IMF, in smart suits and bespectacled, to decide the rightness of our judgement and if we passed muster,

·         reach agreement on government’s economic and financial program subject to approval by IMF Management and the Executive Board, and  

·         discuss a possible three-year, US$940 million Extended Credit Facility (ECF) arrangement support by the IMF scheduled in early April 2015

2012 – 2014: Three Difficult Years

The questions for me are what brought the judgement of Government into question in the first place?  And why did we need this smart-suited and bespectacled team to play headmaster to an unruly Government and public sector?

I focus on Government and public sector because all the reasons enumerated for the economic drought and the blight of opportunity we are enduring, were essentially fiscal in nature.  No talk of a black market in currency market in the face of responsible fiscal and monetary policy, no mention of Unions recklessly driving productivity to the ground, no hint of uncreative, criminal private investments causing catastrophic economic system failure. 

In fairness, the Fund was not here at the behest of labour or the private sector so that silence may not ruddy healthiness in those areas.  Perhaps the leading bodies and minds that represent private enterprise and labour would do well to commission a similarly deep root-and-branch review of how their constituents may have contributed to the current situation.

Back to the Ghana – IMF Agreement though, the Fund described the three unpleasant economic instances in which we have wallowed as:

·         declining economic growth in which economic growth reached its lowest level in many years in 2014.  The low point was 2014 when non-oil GDP growing at 4.1%, already high interest rates defied gravity, and the Cedi began a charge of rapid descent to oblivion.  Of course, the ‘ordinary Ghanaian on the street’ found suddenly he never had enough money to do anything like before and stayed home so aggregate demand dropped and, finally the almighty ‘dumsor’ gripped us unrelentingly and ever-tighter;

·         increasing inflation rates that touched reached 17 percent  bankrupting businesses and homes as debt levels rose, even as Government borrowed to fund its ballooning wage bill, poorly targeted energy subsidies in the face of revenue shortages as commodity prices fell; and lastly,

·         financial vulnerabilities that weakened our external position and put pressure on the exchange rate, and our net international reserves which now just a few days of imports

Look at the plans side-by-side, the priorities of the Fund and Government are completely congruous as are their priorities, aims, imperatives and action plans.  I am wondering, as I am sure you are, which of these things we cannot do and why.  I must ask why we are here signing an agreement that confers a scarlet label of ‘willful failure’ on the outcome of 20 years of fiscal and monetary management of the Ghanaian economy.  If this is simply a case of Ghana implementing so disastrously to warrant the headmaster’s supervision, surely, we can make the right laws, change some and scrap what no longer works.   

The Architecture of the Program

Government’s Reform Agenda

Before, anyone faints from a flashback to the days of Structural Adjustment, the Agreement the Fund said, “… explicitly accommodates for the expansion and the safeguard of priority spending, in particular social protection programs such as the Livelihood Empowerment Against Poverty (LEAP).”

·         Priorities

o   restore debt sustainability through a sustained fiscal consolidation

o   support growth with adequate capital spending and reduction in financing costs

·         Pillars

o   transparent budget process restraining and prioritising public expenditure

o   increasing tax collection

o   strengthening the effectiveness of central bank monetary policies

·         Medium-term Aims

o   fiscal discipline and economic growth

o   achieving a single digit inflation rate

·         Key Elements

o   improving transparency in the budget process

o   enhancing revenue mobilisation

o   strengthening fiscal institutions 

o   strengthen control of the wage bill

o   strengthened independence of Bank of Ghana

2015: Cut the Fiscal Deficit

Then it hit me.  Political integrity and will in the design and implementation of budgets, policies and plans!  That is the elephant in the room and the ghost which was not named.  It is sorely needed now if we are to follow through on actions to:

·         reduce the fiscal deficit over the medium term by eliminating distortive and inefficient energy subsidies, wisely tax energy products, consistently and rigorously contain the Government wage bill; and

·         finance the 2% shortfall in 2015 budget revenue projections by reducing budget ceilings for current and capital spending and limiting any withdrawals from the oil stabilisation fund

What Happens During the ECF Agreement

If Government does what it says it will do, we will still see pain in the short term.  The Press Release was quite muted though it did state warn us to expect  depressed total GDP growth of 3½ percent in 2015 because of the severe energy crisis and the immediate effects of fiscal consolidation

Promise of Benefits Government Can Be Happy About

If all goes well, if the politicians behave in the coming election year, if the public sector and labour support Government’s efforts to cut the size of its wage bill, if the energy crisis is relieved, if we implement tax policies that drive private enterprise, if transparency becomes the hallmark of Government spending, and sound monetary policy-making happens, then:

·         growth could return over the medium term on account of an improved macroeconomic environment, and cost-effective solutions to address the energy crisis

·         the external current account deficit will decline to 7 percent of GDP in 2015 and with it, inflation should decelerate substantially, we should see a stabilised debt ratio to GDP; and

·         the fiscal deficit projected could decline from 9½ percent of GDP in 2014 to 7½ percent in 2015 and about 3½ percent in 2017, including the repayments of all arrears outstanding at end-2014

Trickle-down Economics on Mute

The Release proclaimed a stamp of confidence in parting.  Smart-suited and bespectacled, it said,  

“The ambitious economic reform program is supported by Ghana’s international partners. The authorities have made significant progress in firming up financing assurances from their main bilateral donors and other international financial organisations.”

Nothing though about what this will do to household incomes, and livelihoods or opportunities for employments or the possibility for businesses to do well without the stifling embrace of regulations and the public sector.

There may well be a light at the of the tunnel maybe. 

Question.  Is it a candle light or the bright sunshine of success?  Tick, tock!