Explainer-Why Ghana has returned to the IMF

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ACCRA (Reuters) – Hundreds took to the streets of Ghana’s capital Accra final week to protest over its deteriorating financial system. Days later, the authorities of one among West Africa’s most affluent nations introduced it might start formal talks with the International Monetary Fund (IMF) for help.

It was a call many analysts lengthy thought inevitable, regardless of repeated pledges from finance minister Ken Ofori-Atta to by no means once more search IMF help. Why did the nation reverse course, and what might the IMF demand in return?

WHY NOW?

Inflation hit an 18-year excessive of 27.6% in May, capping off a yr of accelerating costs. Growth slowed to 3.3% in the first quarter, and the worth of the cedi forex has declined 23.5% in opposition to the greenback since the yr started.[L1N2YG1CH]

In an announcement outlining its plan for approaching the Fund, the authorities blamed its woes on a mixture of current exterior forces, together with COVID-19, the Ukraine disaster, and American and Chinese financial slumps.

Finance minister Ken Ofori-Atta informed lawmakers final month that pandemic-related expenditure amounted to 18.19 billion cedis ($2.26 billion) as of May 2022. The nation acquired $1.23 billion in COVID-19 reduction funding from the IMF and World Bank over that interval, he stated.

Prices of imported items rose greater than domestically produced ones for the second month in a row in May, with cereals — 20% of which Ghana imports from Russia — having repeatedly seen a few of the largest value hikes. Petroleum costs have almost doubled year-on-year.

Authorities had been nonetheless not sure about looking for IMF help solely two weeks in the past, however discovered their palms tied after lawmakers stalled a $1 billion mortgage, and an unpopular digital funds tax meant to generate revenues, underperformed, Eurasia Group Africa head Amaka Anku stated in a observe.

DEBT AND DEFICIT

Authorities hope an IMF programme would relieve Ghana’s almost $1 billion balance-of-payments deficit, which central financial institution governor Ernest Addison stated in May outcomes from a capital exodus brought on by world components.

But consultants say the root of Ghana’s drawback is probably going fiscal, because it makes use of repeatedly larger loans to plug its double-digit fiscal deficit.

“Our largest drawback is that round 60% of our expenditure repeatedly goes in the direction of paying public sector employees or curiosity funds,” stated William Duncan, founding father of the Ghana-based Spear Capital & Advisory. “It’s been a cycle via the final three governments.”

Ghana’s debt inventory has greater than doubled since 2015, steadily climbing from 54.2% of GDP that yr to 76.6% at the finish of 2021, in accordance to authorities knowledge.

The finance ministry’s plan for amortizing that debt rests squarely with the IMF, which it stated would assist the nation regain entry to worldwide capital markets and roll over current debt after current credit standing downgrades cooled lender curiosity.

Many have questioned the sustainability of that technique. Interest funds have been the authorities’s largest annual expense since 2019 and had been its second largest expense for 5 straight years prior to that, finance ministry figures present.

While Ghana’s Eurobonds rallied on the information the authorities would search IMF assist, yields for all however the difficulty maturing this yr nonetheless stay above 10%, the stage seen as chopping a rustic off from issuing new debt because it turns into too costly.

PROGRAMME PROPOSAL

When Ghana final sought IMF help in 2015, it acquired $918 million via an Extended Credit Facility Arrangement, equal to 180% of its quota.

This time, Ghana has proposed it is personal “Enhanced Domestic Programme” to the IMF, which might final a minimal of three years.

It insists there be no cuts to the administration’s flagship programmes, equivalent to marketing campaign pledges to construct hospitals and factories in every of the nation’s 216 districts and a free secondary faculty scheme.

And although debt servicing value just below 48% of presidency income in 2021, the finance ministry’s proposal does not require debt restructuring.

Experts assume such situations could show difficult.

“A program would help collectors’ confidence, tempering the rise in authorities’s borrowing prices, however equally include conditionality on fiscal consolidation that would show difficult to meet,” stated Aiste Makareviciute at Moody’s.

(Reporting by Cooper Inveen and Rachel Savage; Additional reporting by Karin Strohecker and Christian Akorlie; Editing by Bate Felix, Alexandra Hudson)



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