What the IMF Is Doing for its African Members Such As GhanaOpening Address by John Lipsky, First Deputy Managing Director, International Monetary Fund
At the Meeting with the Parliament Ghana
February 17, 2010
As Prepared for Delivery
Mr. Speaker, Honorable Members of the Legislature, and Guests:
Thank you for allowing me the privilege of speaking before you today. It is a great pleasure to be here in Accra. I have already had useful meetings with the economic team and with leaders of the financial sector, and I look forward to meeting President Atta-Mills and Vice-President Mahama. As this is my first visit to Ghana, it has been an excellent learning experience for me.
As you know, Africa was far from the epicenter of the global financial crisis, and bore no responsibility for it. Despite that, Ghana and other countries in the region were hit by the aftershocks. Falling global demand reduced prices for many commodity exporters and resulted in slumping sales for many nontraditional exports. The turmoil in advanced economy financial markets also produced a 2008 “sudden stop” in capital flows to emerging market and developing countries. Africans abroad had less income to send home. And as growth in Africa slowed, so did tax revenues in many countries.
Reflecting these developments, the global recession has created very real costs for Sub-Saharan Africa. After averaging more than 6 percent growth since 2002, last year African countries averaged just 1 percent growth. Thus, per capita income fell by 1 percent—the first decline in African living standards in 10 years. The IMF is keeping this in mind as we work with Ghana and its neighbors to speed the process of recovery. Restoring strong and sustainable growth is the necessary path for achieving our goals of improving the lives of all of all the region’s citizens.
Support from the IMF
As the global financial crisis erupted, we looked urgently at how the IMF could help Africa weather the emerging global recession. From similar crises in the past, the IMF has learned several lessons. We work hard to understand the unique circumstances of each country and to help our members best confront global developments.
Among our first responses to the financial crisis was to ensure that low-income countries had rapid access to IMF financing —thereby helping to avoid a contractionary economic impact that would only make the downturn more severe. Last year, new IMF lending to sub-Saharan Africa was up almost five-fold from the year before, reaching US$5 billion. Interest rates on these operations for the most part are extremely low—through 2011, for instance, the interest rate for loans to low-income countries has been set at zero, and subsequently at just a quarter of 1 percent.
And IMF loans are tailored closely to member country needs, so that we can disburse low-cost funds quickly when a country has temporary, urgent needs, or we can set up arrangements for disbursement over several years when this is appropriate. Our approach to how countries manage public borrowing today provides much more flexibility in countries with strong macroeconomic and public debt performance and with well-developed debt management institutions.
Ghana has benefited considerably from the new policies: One of the largest IMF operations in Africa in 2009 was the $600 million three-year arrangement with Ghana. Countries from Cameroon to Tanzania similarly benefited from IMF support.
The conditions on our financial arrangements also have also been made more flexible. The goal is to focus IMF conditionality on reforms that are critical to economic success while ensuring that countries have the opportunity to follow policy approaches that are appropriate for their circumstances. We want to work with our members to explore a variety of options for economic reforms that will generate real progress.
To relieve concerns about whether countries would be able to ride out the global financial crisis, IMF members approved a general allocation of Special Drawing Rights, or SDRs. As you may know, SDRs are an international reserve asset, much like foreign currency holdings. The new allocation pumped some $250 billion into the world economy, spread across our 186 members. Ghana’s share was $450 million. This boosted its gross international reserves by about 25 percent. An adequate reserve cushion is extremely important to maintain confidence in a country’s ability to meet its external financial obligations.
Low-cost loans and SDRs are not the only services the Fund offers to its members. In the long term, perhaps even more useful is the policy perspective we can provide to our members by drawing on our experience with countries around the world. Given the global recession, we have encouraged countries that started with a strong budget position to allow some temporary easing of fiscal policies to provide a cushion for growth and jobs. That is why on average sub-Saharan African countries have gone from a fiscal surplus of about 1 percent of GDP in 2008 to a projected deficit of nearly 5 percent in 2009. We are, of course, also thinking ahead with member governments on how they can most efficiently get back to a solid, sustainable budget position once the storm has passed.
In our discussions with the authorities in member countries, monetary and exchange rate policies also are on the agenda. Since the recent global food and fuel crisis waned, inflationary pressures have been reduced throughout the continent, such that about two-thirds of the countries in the region have been able to lower nominal interest rates, supporting renewed growth.
Looking forward in Africa
The good news is that, through international cooperation among advanced economies on decisive anti-crisis measures, the global economy is stabilizing. Renewed growth is evident in many advanced economies. In time, this will also become increasingly clear in Africa.
Looking back over the past 18 months or so, we are encouraged that many African countries, including Ghana, have come through the financial crisis not only better than they did in the past but also better than many other countries throughout the world. In considerable part, this is because of the earlier strengthening of monetary and budget policies, as well as structural reform in many countries. One result, for example, is that African central banks started the crisis with stronger international reserve positions than in the past, providing a cushion against balance of payments shocks. Debt relief from the IMF and many others also has helped, because it freed up resources that could be used to improve the business environment, invest in infrastructure, and support the poor.
But with a legacy from the global recession of sluggish growth and higher poverty, it will be critical for African countries to raise their growth performance further, to help accelerate job creation and boost incomes. This will require additional progress in improving macroeconomic management and the business climate.
To help with that task, the Fund offers members extensive technical assistance. For instance, in 2009 alone, Fund staff provided Ghana with technical expertise on a broad range of issues, such as public financial management, revenue administration, natural resource taxation, ways to manage natural resources, regulation of the financial sector, and economic statistics. Some of the technical assistance was provided by headquarters staff and some from the regional technical assistance centers, which take a field-based regional approach. I am pleased to report that we will be adding two more centers this year in Africa, one of which will be based here in Accra.
In helping foster a return to balanced global growth, we also want African countries to have a clear voice in international financial institutions. We are working to reform our own governance in part so that our members in Africa and other countries have a larger say in what the IMF does. In particular, we are working to ensure that the world’s fastest-growing countries have an adequate voice in Fund governance. At the same time, we want to ensure that the voice of low-income countries will be protected, with the aggregate quotas of sub-Saharan African members even rising slightly.
But let’s now look directly at Ghana and the IMF.
Ghana and the IMF
As you are probably all too well aware, Ghana accumulated massive fiscal imbalances in 2008, which meant that in 2009 as the world crisis widened, the country had no room to boost demand through fiscal stimulus. With inflation surging, public debt snowballing, and the cedi depreciating rapidly, clearly something had to be done. Ghana turned to the IMF for financial support. The three-year economic program that was agreed centered on fiscal adjustment and on reforms to budget management to prepare Ghana for the transition to oil producer status.
The first progress assessment by a Fund mission, in October 2009, was broadly positive. Management of spending has been tightened, helping to reduce the deficit. That, and tighter monetary conditions, have helped to stabilize the exchange rate so the cedi is no longer depreciating. That helps keep inflation down, which is good not just for the government but for every Ghanaian—especially the poor and those on fixed incomes. In addition, several critical fiscal reforms have been launched, including measures on revenue administration, tax policy, and financial management.
Not everything is rosy, of course. The deficit is still far too high, and public debt is still rising. Large-scale government borrowing is keeping interest rates high, which means more out-of-pocket costs for repayment. And government bills are not being paid on time, so Ghanaian businesses are again facing arrears.
As you in Parliament have recognized clearly, the deficit must be pruned, both this year and next. This is important for Ghana to stabilize its debt and bring it down to a manageable size. Equally important, however, sound public finances are needed so that future oil revenues can underpin expanded public investments. Investment spending at current levels simply cannot deliver the quality of infrastructure—from power to roads—that is needed to boost economic growth. While oil resources can help finance these investments, this will require a disciplined non-oil budget. Unless Ghana can mobilize more revenue and better contain recurrent spending, a fiscal deficit of the magnitude that Ghana has been recording recently would absorb all of Ghana’s future oil revenues, leaving nothing for increasing capital spending or addressing social priorities such as health care, education and support for the poorest members of society.
The Challenge for Policymakers
Legislators and other policymakers are thus faced with a major communications challenge: explaining to Ghanaians that unless the country’s fiscal affairs are managed carefully, even austerely, oil revenues will not be able to make a real difference to growth, job creation, and living standards.
You are now faced with the problem of weighing the short-term costs of fiscal adjustment against the long-term gains that can come from oil-financed investments. It is no surprise that natural resource wealth has been used most productively in countries that have been able to manage economic policies with an eye to the longer term—here Botswana, Chile, and Norway come to mind.
Ladies and gentlemen of Parliament, your challenge, then, is to ensure Ghana’s future by pursuing a rich and active debate on the merits of sound budgeting and the best ways to use Ghana’s prospective oil gains wisely. That is likely to be the central economic policy challenge for Ghana for some time to come. The IMF looks forward to a close and productive dialogue with you as Parliament and the administration together plan to ensure a healthy and prosperous Ghana for your children and grandchildren.
With these comments, I now invite your questions and opinions. We have a little over a half hour this morning for further discussion. I look forward to it.
Thank you very much.