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Ghana: Ghana IMF and private support help cope with financing needs

2017/05/31

Ghana

IMF and private support help cope with financing needs



Country Rating B2

Strengths

  • Established track record of good governance, with a functioning democratic system and peaceful transfer of power among political parties.
  • Natural resource base (cocoa, gold, forestry etc.) now supplemented by discovery of commercially-exploitable oil reserves – output from 2011.
  • Strong GDP growth in recent years, even with a downturn in 2014-15.
  • Market-oriented policy framework
  • Positive relations with International Financial Institutions (IFIs).

Weaknesses

  • While some safeguards are established, the ability and capacity to manage oil wealth is yet to be tested fully.
  • Continuing twin deficits (fiscal and current account) require careful management.
  • Frontier markets, like Ghana, are not immune to sell-off pressures in emerging economies. There is therefore periodic risk of currency depreciation, FX reserve depletion and capital flight.
  • Although per capita incomes have improved, poverty remains pervasive in some rural areas.
  • Regional instability and uncertainties, including in Burkina Faso, Nigeria and Mali.

 

Economic Overview

 

Commodity driven

Annual average GDP increase was above +5.5% in 2000-10. Albeit being a relatively good expansion rate of expansion it is just about the pace required for a country like Ghana to make positive advances in socio-economic development.


Gold, cocoa and forestry industries and associated exports are the key sectors. Since 2011, at the same time as oil output came on stream at the Jubilee oilfield, GDP has been boosted by the energy sector, with a +14% expansion that year. The drive weakened in 2012 and 2013 but annual GDP increase remained above +7% in both years. Since again, increase has decreased, due to weaker commodity prices.

 

IMF backing decreased liquidity risks…

Beginning in 2014, weakness in oil, gold and cocoa prices, coupled with before fiscal over-spending (which in itself had increase and inflationary repercussions) resulted in a reduced capacity to finance the country’s twin deficits.

The authorities turned to the IMF for financial assistance. A three-year Extended Credit Facility (ECF) was granted in April 2015. The financial support package of approximately USD940mn was agreed on the condition that Ghana implements reforms aimed at limiting its fiscal and current account deficits. The fund’s support has restored some investor confidence and helped sovereign bond issuances.

 

…but the rebalancing was not there

Contrary to expectations, the fiscal deficit deteriorated in 2016, to -9% of GDP (-3.8% of GDP was initially planned). The previous government increased public spending and suffered from poor tax collection. As a result, public deficit is larger than before thought and stood at 74% of GDP at the end of 2016, up from the expected 66%. Perceptions that public finances were in good shape helped to fasten some market financing, given that Ghana was backed by IMF support.

An Extension of this program beyond April 2018 will be difficult since acceptance by the Fund would require some efforts to improve public finance. Twin deficits and low import cover (about 3 months) mean depreciation pressures on the Cedi. The local currency depreciated by -58% since end-13 (of which -15% from November-16 to date). This implies that inflation should remain above 10%. Some fiscal efforts are presently likely. As a result, increase should recover only gradually to +5% in 2018. If needed, the government should later turn to the IMF.

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