Ghana: Staff Concluding Statement of the 2017 Article IV Consultation Mission and Discussions for the Fourth Review under the Extended Credit Facility
IMF News, April 13, 2017
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- Published: April 13, 2017
Key messages
- The authorities’ initial steps are promising, but more is needed. Resolving Ghana’s longstanding challenges demands ambitious and sustained reforms across key policy areas, going beyond central government’s operation to focus on the broader public sector.
- Immediate priority: ensure fiscal discipline, by targeting a budget deficit sufficient to place public debt on a clearly declining path.
- More transparency and accountability—especially in the energy sector—will help reduce the drain on public resources, tackle inefficiencies, and send a credible signal about the government’s commitment to lasting change.
- The financial system is overall adequately capitalized, though addressing weaknesses in some banks and microfinance institutions is necessary to improve the availability and affordability of credit to the private sector.
Mission context and outlook
- Mission dates: IMF mission visited Accra during April 3-13, 2017 to conduct the Article IV consultation and discussions on the fourth review under the Extended Credit Facility.
- Political and policy context:
- New administration with a strong electoral mandate presents scope for adjustment and reforms to restore macroeconomic stability.
- The recently assembled economic team has brought new confidence.
- 2017 budget limits earmarking and seeks to control exemptions and tax evasion; Ministry of Finance (MoF) pursuing public financial management (PFM) improvements.
- Market response and indicators:
- Exchange rate recovered in recent weeks after a rapid depreciation through end-February.
- Latest auction of government bonds saw a record level of issuance amid high foreign investor participation.
- Government plans to add $700 million to its net reserves in 2017, the largest increase since 2011.
- Macro outlook and risks:
- Overall GDP growth is expected at about 6 percent in 2017, reflecting a strong increase in oil production and contractionary impact of the budgeted fiscal adjustment.
- Inflation is on a declining trend and projected to fall to the upper bound of the Bank of Ghana (BoG)’s target by year-end.
- Significant challenges: 2016 budget deficit of 8.7 percent of GDP (more than 3 percent of GDP above target), further undermining debt sustainability and increasing reliance on foreign investors.
- Significant unpaid commitments incurred in 2016 (now being audited) and weaknesses in SOEs in the utility sector could create additional spending needs.
- While overall financial system adequately capitalized, weaknesses in some banks and microfinance institutions could hamper credit growth and create contingent liabilities.
Implementing a credible fiscal strategy — findings and priorities
- Fiscal deterioration drivers:
- Repeated fiscal slippages—especially in election years—have been the largest driver of the debt increase.
- Revenue shortfalls have played a key role in recent years.
- Persistent shortcomings identified:
- Lack of transparency and accountability: large quasi-fiscal activities and extra budgetary spending; absence of formal mechanisms to strengthen budget credibility.
- Budget rigidities: extensive revenue earmarking for statutory funds, high wage bills and interest payments exceed revenue.
- Revenue erosion: pervasive exemptions and lack of compliance.
- Arrears accumulation: recurring problem undermining spending plan management.
- Government measures taken:
- Audit of unpaid bills as of end-2016 is under way.
- Efforts to limit earmarking codified in recently enacted legislation.
- Removal of some 50,000 persons from the payroll via biometric registration enforcement.
- MoF initiatives to address abuses of tax exemptions and strengthen PFM.
- 2017 budget and fiscal targets:
- 2017 budget targets a significant fiscal correction through strong revenue mobilization and strict expenditure prioritization.
- Authorities committed to further adjustment if needed to attain the 2017 budget deficit target of 6.5 percent of GDP.
- Mission view: revenue targets are optimistic; key objective is a budget deficit sufficient to reverse unfavorable debt dynamics, which might require additional adjustment.
- PFM reforms needed:
- Integrate all spending agencies under the Ghana Integrated Financial Management Information System (GIFMIS).
- Streamline budget processes to account for increasing automation.
- Ensure better oversight of payroll across agencies.
- Reconcile and rationalize bank accounts via swift implementation of the Treasury Single Account (TSA).
- Strengthen monitoring and control of cash balances to improve cash management and reduce borrowing.
- MoF to strengthen capacity in Treasury and Risk Management and create a special department to enforce the Public Finance Management Act.
- PFM Act (approved in 2016) includes preparation of a Fiscal Strategy Document and a Fiscal Risk Statement to support multi-year fiscal anchoring.
SOE utility sector risks
- Sector debt and risks:
- Energy sector debt estimated at $2.4 billion (over 6 percent of GDP) at end-2016.
- Continued accumulation of losses and untimely payments risk adding to the debt stock and requiring additional government support.
- Recommended actions:
- MoF efforts to monitor SOEs systematically should lead to concrete measures to ensure SOEs’ financial viability.
- Ongoing financial audit of SOEs should be concluded without delay.
Debt management and financing strategy
- 2017 gross financing needs remain sizable and equivalent to 13 percent of GDP.
- Exposure to foreign investors is about a quarter of total debt.
- Mission support for government’s medium-term debt management strategy:
- Rely primarily on domestic currency financing.
- Lengthen maturities and pre-finance annual borrowing needs to avoid temporary cash shortfalls.
- Planned liability management operations over time to reduce refinancing risk.
Strengthening monetary and exchange rate policies
- BoG accomplishments and remaining challenges:
- Reforms to monetary operations have aligned the monetary policy rate (MPR) and interbank rate, strengthening monetary transmission.
- Inflation has frequently exceeded BoG’s target, primarily reflecting fiscal slippages.
- Continued adherence to zero financing to the government is key to anchoring the inflation-targeting (IT) framework’s credibility; mission suggests this practice should be codified in legislation.
- Recent policy moves:
- BoG recently lowered the MPR by 200 basis points as disinflationary signs grew stronger.
- Mission view: BoG should proceed cautiously, avoid large unexpected changes, and carefully manage market expectations given potential upside risks to inflation.
- Foreign exchange policy recommendations:
- Develop a coherent and transparent FX policy; FX intervention should smooth volatility rather than support the cedi’s level.
- Continue efforts to develop and deepen the FX market (noting prior removal of surrender requirements for gold and cocoa export proceeds and introduction of FX auctions).
- Authorities view FX auctions as problematic (last auction canceled); mission view: FX auctions, if properly implemented, will increase transparency and price discovery.
Preserving confidence in the financial sector
- BoG actions taken:
- Conducted an Asset Quality Review (AQR) and began implementing a Roadmap for Financial Stability to address provisioning and capital shortfalls.
- Tightened provision of emergency liquidity assistance (ELA) to banks and plans to reduce risk concentration by enforcing large exposure limits.
- New Banks and Specialized Deposit-Taking Institution (SDI) Act (came into force in early 2017) provides enhanced supervisory and resolution powers.
- Required decisive actions:
- Banks with capital shortfalls per the AQR should prepare credible, time-bound recapitalization plans for BoG approval, in line with the Banks and SDI Act timetable; further actions based on plan reviews.
- Enforce ELA guidelines strictly, including collateral requirements and repayment plans.
- Align large exposures with regulatory limits.
- Address emerging problems in microfinance institutions (MFI): BoG should formulate a master plan for strengthening the MFI sector and its supervision and quantify restructuring costs to establish public sector backstops if needed.
- Risks of inaction:
- Failure to act would adversely impact credit and the real economy, financial deepening, and lead to quasi-fiscal costs to the BoG; it would create moral hazard and undermine banks’ discipline.
Implementation, communication, and next steps
- Credibility rests on decisive actions and cross-institutional collaboration.
- Priority actions include reconciliation of data to increase transparency and strengthen policy formulation.
- Trade-offs will emerge and pace of implementation should be tailored to available fiscal space; effective communication is essential to manage expectations and strengthen ownership.
- Mission looks forward to continuing program discussions in Washington DC.
- Mission meetings included: Vice President Mahamudu Bawumia, Senior Minister Yaw Osafo-Maafo, Minister of Finance Ken Ofori-Atta, Governor Ernest Addison, members of Parliament, other public officials, representatives of the private sector and development partners.
Ghana: Staff Concluding Statement of the 2017 Article IV Consultation Mission and Discussions for the Fourth Review under the Extended Credit Facility (April 13, 2017).