IMF Lending Case Study: Ghana
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Background and macroeconomic problems
- Ghana was described as a success story in sub-Saharan Africa, having cut the poverty rate from 53 percent in 1991 to 21 percent in 2012.
- By 2015, Ghana faced:
- widening current account and budget deficits,
- rampant inflation,
- a depreciating currency,
- credit drying up as interest rates rose,
- accumulation of bad loans in the banking system.
- The root cause was identified as out-of-control government spending, largely to pay salaries of an overgrown civil service.
The IMF-supported program (early 2015)
- The IMF provided a $918 million loan to help stabilize the economy.
- IMF advisors and the Ghanaian government developed a three-part program:
- Restore debt sustainability:
- The government limited hiring and wage increases.
- Subsidies for utilities and petroleum products were eliminated.
- Revenue measures included cracking down on tax evasion and rationalizing exemptions.
- New revenue sources included a tax on luxury cars and increased taxes on high earners.
- The Public Financial Management Act called for improved accounting standards, procedures, and technology.
- Strengthen monetary policy:
- The authorities agreed to gradually end central bank financing of the budget deficit.
- The inflation-targeting regime was to be fortified.
- Clean up the banking system:
- An asset quality review revealed significant under-capitalization.
- Some banks were recapitalized.
- The Bank of Ghana used enhanced authority to wind down insolvent lenders.
- The central bank developed regulations to ensure sound underwriting and credit evaluation standards.
- Insolvent microfinance institutions’ depositors were paid back.
Outcomes and key statistics
- Trade and budget deficits narrowed.
- Economic growth:
- Growth was 2.2 percent in 2015.
- Growth was poised to rise to 8.8 percent in 2019.
- Inflation:
- Inflation was almost 19 percent (earlier period).
- Inflation was projected to fall to 8 percent.
- Fiscal and social impacts:
- Cuts to wasteful spending made room for social services, including free secondary education.
- For Ghana’s 28 million people, outcomes were described as higher incomes, better job opportunities, and more purchasing power.
- Remaining vulnerabilities:
- Ghana remained largely reliant on foreign financing, exposing it to swings in investor sentiment.
- Maintaining fiscal discipline was identified as an ongoing challenge.
References