Claims processing center in Accra, Ghana, where sharp contractions in industrial, service sectors helped slow growth in 2014 (photo: Ron Ennis/KRT/Newscom)
WEST AFRICA
The financing package extends over three years under the IMF’s Extended Credit Facility, backing a plan that was agreed by an IMF staff team in February.
The reform program seeks to boost growth and help cut poverty by restoring macroeconomic stability through tighter fiscal discipline, strengthened public finances, and slowing inflation. The reform measures are expected to dampen non-oil growth initially in 2015 ahead of a projected growth rebound in subsequent years.
The government’s program projects an economic growth pickup to start in 2016, driven by expected large increases in Ghana’s hydrocarbon production. The West African country started oil production from offshore wells in 2010.
Lower inflation and interest rates, combined with a more stable exchange rate, would help support private sector activity. Increased oil exports and lower oil imports on the back of domestic gas production would help improve the current account and support reserves over the medium term.
Ghana is one of Africa’s frontier emerging markets, having entered the global capital market for the first time in September 2007. Its past wealth lay in gold and cocoa―commodities that have remained in high demand, and which have helped the country weather the recent global recession.
Imbalances, power shortages
Ghana’s economic growth rate topped 9 percent in 2011, but three difficult years followed that were characterized by slowing activity, accelerating inflation, and rising debt levels and financial vulnerabilities. The country’s economic prospects were put at risk by the emergence of large fiscal and external imbalances, as well as by electricity shortages.
Growth decelerated markedly in 2014, to an estimated 4.2 percent, driven by a sharp contraction in the industrial and service sectors. This was due to the negative impact of the currency depreciation on input costs, declining domestic demand, and increasing power outages.
Inflationary pressures rose on the back of a large depreciation of the cedi and the financing of the fiscal deficit by the Bank of Ghana. Despite several hikes in policy interest rates in 2014, which brought them to 21 percent, headline inflation reached 17 percent at end-2014, well above the 8 +/- 2 percent official target range.
The main pillars of the reform program are
• A sizeable and frontloaded fiscal adjustment to restore debt sustainability, focusing on containing expenditures through wage restraint and limited net hiring, as well as on measures to mobilize additional revenues;
• Structural reforms to strengthen public finances and fiscal discipline by improving budget transparency, cleaning up and controlling the payroll, right-sizing the civil service, and improving revenue collection;
• Restoring the effectiveness of the inflation targeting framework to help bring inflation back into single digit territory; and
• Preserving financial sector stability.
Social spending safeguarded
To alleviate the potential adverse impact of the strong fiscal adjustment on the most vulnerable in society, the government is committed to use part of the resulting fiscal space to safeguard social and other priority spending under the program, including expanding the targeted social safety nets.
Social programs will be expanded to restore real incomes of the poor, which were dented by three years of high inflation, and to mitigate the adverse impact of the fiscal consolidation.
On the fiscal side, the reform program seeks to expand revenue collection and restrain the wage bill and other primary expenditures, while making space for priority spending and for clearing all domestic arrears.
