Decision time: Gov’t, IMF bailout talks start tomorrow

Government last week successfully achieved two major milestones to inject significant capital into the economy ahead of a crunch meeting with the International Monetary Fund (IMF) tomorrow.

A team from the IMF is scheduled to begin the anticipated bailout talks with government on Tuesday following the oversubscription of Ghana’s third Eurobond auction and the Cocobod syndicated loan, which bring a combined value of almost US$3billion into the economy.

Professor Kwesi Botchway, Chairman of the National Development Planning Commission, has been nominated by President John Mahama to lead government’s discussion, which follows a period that many analysts and economists have described as the best week over the last decade.

On Thursday, government’s attempt to raise US$1billion from the international capital market was oversubscribed with orders of up to US$3billion while Cocobod signed a US$1.7billion trade finance deal — which was oversubscribed by 15 percent — with a consortium of domestic and international banks for the purchase of cocoa in the 2014/2015 crop season.

The Eurobond, due in January 2026, was sold at a coupon rate of 8.125 percent — which was lower than analysts had expected given the fiscal difficulties faced by the economy — which is expected to boost the country’s position as it engages officials of the IMF this week.

The timing of the bond is the subject of intense interest, given the imminent IMF talks.

The Finance Minister Seth Tekper, at the end of pricing in New York, expressed his satisfaction with the bond issue and the processes that led to its success, saying: “Investors saw fundamental long-term value in the Ghanaian economy. We have always emphasised that the mid-term prospects for Ghana were bright, and with the coming on board of the IMF we hope to come out of our short-term challenges pretty soon”.

Mr. Terkper further explained that US$750-million of the Eurobond money will be used for capital expenditures, refinancing and counterpart funding requirements; while an additional amount of about US$250million will provide seed capital for the Ghana Infrastructure Investment Fund that is scheduled for launch in January 2015.

“We want to assure our investors that we are committed to the IMF programme and we appreciate their vote of confidence in our economic management measures,” he added.

Analysts have predicted the cedi, which has since the beginning of the year received a serious thumping against the US dollar, to gain value on the back of the imminent IMF budgetary support and inflow of the Eurobond money.

According to figures from the forex market, the cedi over the past week gained about 6% against the US dollar and its value is expected to further surge as the IMF discussions with government will help the country’s economic programme and accelerate Ghana’s journey to restore economic stability.

The Bretton-Woods institution has already expressed its willingness to help Ghana to get out of its current economic quagmire following a formal request sent to the IMF by government in August.

The imminent IMF assistance programme will be two years after the country completed its last stabilisation programme with the Bretton-Woods lender.

According to Mr. Tekper, government opted to seek IMF assistance in a bid to stem the slide of the cedi, dampening hopes for the government’s own “home-grown” solutions.

For the first eight months of year, the cedi depreciated against the US dollar by about 40%, pushing the country to a point where it needed the IMF’s help to stabilise the currency, boost confidence in government’s policies and accelerate the journey to restore economic stability.

The IMF has a history of delivering such benefits — but always at very great cost. It is this cost that must now be negotiated following the President’s directive for his advisors “to open discussions with the IMF and other development partners in support of our programme for stabilisation and growth”.

The IMF has already given an inkling of what it would do to heal the economy if it were making the decisions. In its May country report, it proposed a “menu of additional short-term adjustment measures” after saying that “in light of Ghana’s significant fiscal and external balances, government [should] target a larger and more frontloaded fiscal consolidation”.

Essentially, the Fund called for higher taxes and spending cuts to reduce the budget deficit more quickly. Its recommendations include higher ad valorem tax or VAT on fuel; hikes in excise taxes; higher taxes on real-estate; a freeze on new tax exemptions; and more robust assessment of large taxpayers to generate more revenues from them.

On the expenditure side, it proposed streamlining allowances to reduce the wage bill; workforce reduction in overstaffed areas of the public sector; and a decrease or elimination of oil-revenue transfers to the Ghana National Petroleum Corporation (GNPC).

The Fund also implied that the development budget would have to be slashed when it asked for “prioritisation of capital spending combined with reduction in transfers to statutory funds to lowest permissible level”.

These extra measures, according to the Fund, will contain government borrowing and cause the budget deficit to contract to 8.5 percent of GDP in 2014, 6.3 percent in 2015, and a more sustainable 4.5 percent of GDP in 2016.

One would naturally expect some economic growth to be sacrificed if such measures were taken. However, the Fund’s analysis seems to contradict this expectation. Rather than slowing down economic growth, the IMFs projection is that GDP will rise relatively faster if adjustment occurs more quickly.

It argues its case thus: “In the short-run, growth will be subject to two offsetting factors, with the contractionary impact of fiscal consolidation assumed to be fully neutralised by the positive impact of lower interest rates and contained depreciation. In the medium-term, the positive impact is expected to dominate — resulting in higher growth and significantly lower debt and debt-service ratios”.

It is easier to accept the Fund’s medium-term prognosis than its claim that short-term stabilisation of the kind it proposes will be growth-neutral. This issue is likely to be a subject of debate between government and the Fund when they start discussions on the programme.

Mr. Terkper has said government will tailor the programme to the country’s middle-income aspirations and that it will seek concessions from the Fund during negotiations. Such remarks hint at the government’s desire to secure sufficient economic growth that supports job-creation and adequate public investment even as it pursues stabilisation.

It is certainly good to assume this balanced position. The reality, however, is that both sides will eventually make concessions to agree on a programme.

The IMF gave further advice in May on medium-term fiscal policies, including calling for a legislative revision to streamline tax exemptions such as those granted to free-zones companies. It also asked government to bring back to the table the controversial windfall profit tax for the mining industry.

Its medium-term expenditure proposals include a programme for public sector retrenchment and multi-year wage agreements; cutting off subvented agencies from the public payroll; legislative changes to relax transfer rules for statutory funds; and acceleration of financial management reforms.

At the moment the question on most people’s minds is whether a Fund bailout will improve the economic situation from now on. The simple answer is that it is not a given. The reason is that in the short-term the Fund’s prescriptions will cause some pain and provoke political-economy repercussions whose impact cannot be fully assessed now.

With the country’s presidential and parliamentary elections billed for December 2016, it will be interesting to see how the government will manoeuvre its way into the hearts of the electorate when the IMF’s economic recovery plan starts to bite — and also holds government’s overspending habit during election years in check.

This will be especially interesting amidst government’s plans to bridge the deficit gap to 8.8 percent and down further in subsequent years as a splurge of spending in 2012 — when the country went to the polls — boosted the deficit to 11.8 percent of GDP from 4 percent in 2011, and government has been under pressure to narrow the gap that most analysts have blamed for the persistent high interest rates in the Treasury and money markets.

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