Why Ghana returned to the IMF

Hundreds of people went to the streets of Accra, the capital of Ghana, last week to protest the economic downturn. A few days later, the government, one of West Africa’s most prosperous countries, announced that it would begin formal talks with the International Monetary Fund (IMF) for assistance.
Despite repeated pledges from Treasury Minister Ken Ofori Atta to never seek the help of the IMF, it was a decision that many analysts had long considered inevitable. Why did the country reverse its course, and what can the IMF demand in return?

Why now?
Inflation reached a 18-year high of 27.6% in May, ending the year of price acceleration. Growth slowed to 3.3% in the first quarter, and the value of the cedi currency fell 23.5% against the dollar from the beginning of the year.
In a statement outlining plans to approach the fund, the government blamed the pain on a combination of recent external forces, including Covid-19, the Ukraine crisis, and the economic downturn in the United States and China.
Treasury Minister Ken Ofori Atta told lawmakers last month that pandemic-related spending had reached 18.19 billion cedi ($ 2.26 billion) as of May 2022. He said.
Imported goods prices rose higher than domestic products in May for the second straight month, with 20% of Ghana’s imports of grain from Russia repeating the largest price increases. Oil prices have almost doubled year-on-year.
Authorities were still unsure about seeking the IMF’s help just two weeks ago, but found their hands tied up after lawmakers stagnated a $ 1 billion loan.

Debt and deficit
Authorities hope that the IMF program will close Ghana’s nearly $ 1 billion balance of payments deficit. This was the result of a global factor outflow of capital in May by central bank governor Ernest Addison.
However, experts say that finance is likely to be the root of Ghana’s problems, as Ghana continues to use large amounts of lending to fill the double-digit budget deficit.
“Our biggest problem is that about 60% of our spending is continuously spent on paying public sector workers or paying interest,” Ghana-based. William Duncan, founder of Spear Capital & Advisory, said. “This was a cycle of the last three governments.”
Ghana’s debt stock has more than doubled since 2015, steadily rising from 54.2% of GDP that year to 76.6% by the end of 2021, according to government data.
The Treasury’s plan to amortize debt is honestly related to the IMF, where the country regains access to international capital markets and rolls over existing debt after a recent credit rating downgrade has chilled lenders’ interest. Said it would be useful to do.
Many are questioning the sustainability of that strategy. Interest payments have been the government’s largest annual expense since 2019 and the second largest expense for the fifth consecutive year prior to that, Treasury figures show.
Ghana’s eurobonds have rebounded on news that the government is seeking help from the IMF, but all yields, except for the issue of maturity this year, are still above 10%, making the country too high for new debt. It is believed that the issue has been abandoned.

Program proposal
When Ghana finally sought the IMF’s help in 2015, Ghana received $ 918 million through an extended credit line arrangement. This is equivalent to 180% of the quota.
This time, Ghana has proposed its own “enhanced domestic program” to the IMF. This will last for at least 3 years.
It claims that there are no reductions in major government programs, such as a pledge to build hospitals and factories in each of the 216 districts of the country and a free secondary school system.
Debt repayment costs in 2021 were just under 48% of government revenue, but the Treasury’s proposal does not require debt restructuring.
Experts believe that such conditions can be complicated.
“The program will support creditors’ trust and mitigate rising government borrowing costs, but the conditions for fiscal consolidation may turn out to be difficult to meet,” said an analyst at Moody’s Investors Services. Stated. — Reuters