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Ghana’s IMF Dance: Praise, Pain, and Peril

The Ghanaian government resisted seeking assistance from the International Monetary Fund (IMF) for several months, holding out until its economic crisis reached a critical point. However, in early July 2022, it reluctantly embraced the IMF program and has since pursued it with unwavering enthusiasm, akin to a newfound convert. The latest IMF assessment, formalized in May 2023, heaped praise on Ghana’s efforts.

As Ghana’s finance ministry gears up to present its first budget since the lauded IMF report, it prompts a critical examination of the optimistic narrative painted by the government and the IMF.

Undoubtedly, Ghana’s participation in the IMF’s Extended Credit Facility (ECF) program has stemmed the economic crisis’s severe impact. Inflation has dropped from a peak of 54% to 38%, and currency depreciation has slowed from over 55% in October 2022 to about 22% today.

Yet, the relentless push of the IMF program, orchestrated by the government and notably the finance minister, has occurred without garnering national consensus. Civil society groups, the political opposition, and even dissenting voices within the ruling party have been disregarded, and the ECF program marches forward.

Despite these seemingly positive outcomes, closer scrutiny reveals a recovery that is, at best, sluggish and, by some measures, illusory. Key economic indicators, such as inbound trade levels and container volumes at the main port, paint a less optimistic picture. Import data for the first four months of 2023 indicates a potential drop in value by over 6% compared to 2016 figures. The central bank’s Real Composite Index of Economic Activity (CIEA) shows persistent negative growth in 2023, with non-performing loans escalating to roughly 21%.

State-owned enterprises, presenting as some of the weakest economic performers, pose a significant risk, with potential liabilities of $1.4 billion unaccounted for in the ongoing debt salvage operation. Public-private partnerships and projects like the Ghana Card scheme have become financial burdens rather than the intended self-sustaining initiatives.

The recovery’s fragility is exacerbated by laxity in certain aspects of the ECF program, particularly in contrast to the touted success of the fiscal consolidation plan. While fiscal measures have been emphasized, monetary conditions, crucial for a robust recovery, have seen broad money supply in Ghana increase by approximately 50%.

Concerns voiced last year about the IMF program’s ability to address structural issues seem to have found validation six months into its implementation. Ghana’s financial predicament led it to reluctantly seek IMF assistance in 2022, necessitating debt restructuring and a complex process that concluded only recently, securing board approval in May 2023.

The government’s strategy of transferring the burden to the private sector, rather than addressing spending habits head-on, prolonged the debt restructuring process until October 2023. Despite claims of fiscal consolidation, public sector wage growth continues, government operations costs remain untouched, and pet projects, including a billion-dollar cathedral, persist.

Surprisingly, the IMF’s first review of the ECF program lauded Ghana’s performance, raising questions about this apparent paradox. The strategy of frontloading domestic debt restructuring and freezing payments on overseas financial obligations, including Eurobonds, contributed to a temporary reduction in government spending, meeting the IMF program’s fiscal deficit target. However, this strategy risks suppressed economic activity and masks the true impact on inflation and the exchange rate.

In crafting a narrative of success, the IMF subtly altered the review criteria, focusing on short-term stabilizing measures. A comparison with previous IMF programs reveals the omission of critical indicators in the 2023 review, such as public wage bill management, domestic arrears management, and broad money dynamics – precisely the areas where the government faces challenges.

Structural benchmarks and targets were conspicuously absent from the 2023 review, diverging from the 2015 program, which emphasized public spending efficiency, eliminating tax exemptions, and financial management reform.

The IMF’s calculated adjustment of the review criteria, coupled with loose interpretations in press statements, raises concerns about the program’s true impact. The praise for Ghana’s social protection initiatives, such as the LEAP program, contrasts sharply with the auditor general’s criticism, exposing discrepancies in reported achievements.

The two key sectors highlighted for attention in the IMF program, energy and cocoa, have seen considerable deterioration. KPMG’s analysis reveals outcomes in the energy sector worse than initially assumed, with potential cumulative accounting shortfalls of around $8.275 billion by the end of 2023. The cocoa sector, marked by inefficiencies and financial woes, struggles to secure syndication loans.

As Ghana anticipates a second tranche of $600 million from the ECF, conditional on debt restructuring with Paris Club creditors and China, disagreements over the eligible debt restructuring period present challenges. While Ghana and the IMF seek maximum coverage for debt relief, potential conflicts with major export credit facilities and regional development finance banks loom.

The government, backed by the IMF, may celebrate its strategic maneuvers, but the repercussions on export credit agencies and development finance institutions within intricate financial networks could impede future financing for crucial capital projects.

While restructuring old debts may initially create fiscal space for new projects ahead of elections, the subsequent alienation of influential current creditors could undermine these efforts. Reports of Afreximbank stalling on railway investments suggest that the scorecard-gaming, though seemingly accelerating Ghana’s return to international creditworthiness, conflicts with the burden-shifting and faux-austerity strategies, all in tension with Ghana’s true national interest in a durable, reform-backed recovery.

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