IMF Executive Board Concludes Article
IV Consultation with GhanaPublic Information Notice (PIN) No. 09/86
July 17, 2009
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On July 15, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ghana.1
Ghana’s economic growth rose to a two-decade high of 7.3 percent in 2008. This reflected expansionary fiscal policies combined with an upswing in private sector activity based on strong credit expansion, buoyant remittances, and strong agricultural yields.
Inflation rose on account of external shocks and strong domestic demand. After falling briefly to single-digits in 2006, inflation rose through 2007–08, reflecting global food and fuel price shocks, strong domestic demand, and the pass through from currency depreciation. In January-May 2009, inflation stabilized in the 20 percent range.
The fiscal deficit surged to 14.5 percent of GDP in 2008, reflecting rapid public spending growth, with capital spending, energy subsidies, and wage and salaries each rising by more than 1 percentage point of GDP. The 2008 fiscal deficit drew on exceptional foreign financing amounting to 7.3 percent of GDP, comprising resources from the late-2007 Eurobond issue and proceeds from the sale of Ghana Telecom. In addition, the central bank provided financing equivalent to more than 3 percent of GDP.
Monetary policy was tightened in response to rising inflation. The Bank of Ghana increased its benchmark lending rate by 6 percentage points between October 2007 and February 2009, and market conditions tightened by more, as reflected in interbank and treasury bill rates. The policy rate was left unchanged in May 2009 on an assessment that inflationary pressures were easing. Notwithstanding interest rate increases, the prime rate has been lower than annual inflation since early-2008, while real interbank rates have been only slightly positive. The banking sector has continued to register strong asset growth, with private sector credit up 56 percent in the year to April 2009. This expansion continues to reflect local deposit mobilization, with broad money up 28 percent on the same basis.
Ghana’s overall financial system remains stable. The regulatory and supervisory framework is strong, backed by a modern payment and settlement infrastructure. Financial Soundness Indicators (FSIs) point to a banking system that is liquid and with capital above statutory levels. However, some recent deterioration is evident: non-performing assets are high and rising (9.6 percent in March 2009); profitability is declining; and a few banks are financially strained. The Bank of Ghana has required banks to raise their minimum capital to GHȼ 60 million (about $40 million) to allow them to play a larger role in the rapidly growing economy. The non-banking sector (insurance, pensions and capital markets) has continued to perform well.
Ghana’s external current account deficit widened to 19 percent of GDP in 2008, up from 12 percent of GDP a year earlier. This largely reflected a 33 percent increase in non-oil imports values, driven by strong domestic demand. Financing was provided through an increased external capital account surplus, buoyed by Ghana Telecom privatization proceeds (5½ percent of GDP), and a draw-down of gross international reserves from $2.8 billion to $2.0 billion. Reflecting the latter, gross reserve cover declined from 2.7 to 2.2 months of projected import cover. In the first quarter of 2009, exports have remained buoyant, but private remittances fell by 18 percent from a year earlier.
Exchange rate flexibility has increased since mid-2008. Reflecting Ghana’s macroeconomic imbalances, the exchange rate depreciated about 50 percent against the dollar during 2008 and the first half of 2009. Much of this adjustment was offset, however, by Ghana’s high inflation rate and the appreciation of the dollar in the context of the global financial crisis. Accordingly, the real effective exchange rate in April 2009 was just 8 percent more depreciated than in 2007. Over the recent period, illiquidity in the foreign currency market has been associated with a decline in interbank trading and a widening of spreads.
Executive Board Assessment
Executive Directors noted that after a decade of gains in real income and poverty reduction, Ghana’s macroeconomic situation had weakened owing to exogenous shocks and highly expansionary fiscal policies, in particular in the run-up to the elections, that contributed to higher inflation and large external imbalances. While Ghana’s terms of trade are projected to strengthen in 2009, supporting incomes and growth, Directors recognized the uncertain environment and the downside risks. Starting in 2011, oil production is expected to bolster growth and fiscal revenues, creating new challenges for macroeconomic management.
Directors supported the authorities’ efforts to restore macroeconomic stability by seeking to achieve fiscal sustainability. They endorsed as appropriately ambitious the deficit target of 9.4 percent of GDP for 2009, welcoming the combination of expenditure restraint and revenue enhancing measures. Noting that Ghana remains at moderate risk of debt distress, Directors emphasized that further fiscal consolidation will be critical over the medium-term. A number of Directors stressed the importance of pursuing prudent debt management, especially as regards nonconcessional borrowing. Reforming mandatory and inflexible budgetary outlays would create space for more productive and priority development spending. Directors also supported the maintenance of Ghana’s broad social safety net program that should protect vulnerable groups. They were encouraged that the authorities stand ready to take additional measures to achieve their deficit targets.
Directors observed that expected oil revenues would create new fiscal space but on a relatively modest scale and for a fairly short period. They emphasized, therefore, that the authorities should not be complacent about the fiscal outlook and new revenues should be used wisely. The authorities’ intention to extend Ghana’s participation in the Extractive Industries Transparency Initiative to the oil sector was welcomed. Directors believed that high priority should be given to strengthening public financial management, enhancing the efficiency of public spending, and strengthening domestic revenue mobilization.
Directors noted that inflation in 2008 had substantially exceeded the authorities’ target, largely due to highly expansionary fiscal policies which were not fully offset by monetary tightening. With a tighter fiscal stance, it would be an opportune time for monetary policy to reduce inflation. Therefore, in light of the negative real interest rates and the need to increase credibility of the inflation targeting framework, Directors supported a further tightening in the monetary stance. They concurred with the authorities’ renewed emphasis on communications and transparency to enhance the inflation-targeting framework.
Directors welcomed the authorities’ intention to maintain a flexible exchange rate regime consistent with their inflation-targeting framework. They also welcomed the authorities’ plans to use a possible SDR allocation to rebuild foreign exchange reserves. Directors noted the staff’s assessment that the recent depreciation had partly corrected the earlier overvaluation.
Directors observed that Ghana’s financial system has so far been generally insulated from the global crisis. They recognized, however, that strains had emerged after several years of rapid banking expansion, including a deterioration in loan portfolios. While noting progress made in supervisory capacity, Directors pointed to the need to further strengthen supervision, including cross-border coordination, and to reinforce risk management and corporate governance. Directors welcomed the authorities’ request for a Financial Sector Assessment Program update.
Directors encouraged the authorities to enhance the quality and timeliness of data reporting to the Fund. They welcomed the authorities’ plans to improve estimates of national accounts statistics following recent IMF technical assistance.