The Ghanaian government resisted going to the IMF for months until its economic crisis degenerated to the point of imminent catastrophe. But in early July 2022 it did, and has since then pursued the program with the enthusiasm and zeal of a Pentecostal convert, writes Bright Simons.
It has also begun reaping early rewards. In its latest assessment of the program, which formally commenced in May 2023, the IMF was fulsome in praise, at least in IMF-speak.
This week, Ghana’s finance ministry will present his first budget since that glowing IMF report. The occasion is the right time to ask critical questions about the rosy picture being painted by the government and the IMF.
There is no doubting the fact that Ghana’s IMF ECF program has stanched the acute blood-flow from the economic crisis. Inflation has fallen from 54% at the height of the crisis to 38% today. Currency depreciation has slowed from an annualised rate of more than 55% as at October 2022 to about 22% today.
The shrewd way the IMF and the government are going about gaming the marking scheme for the government’s performance in the ECF program, notwithstanding, the strategy of deflecting all pain elsewhere may well backfire at some point.
No one can dispute the sheer tenacity and relative skill with which the government, and in particular the finance minister, has managed to ram the IMF program through without the barest hint of a national consensus. Civil society groups, the political opposition, and even dissenters in the ruling party have all been roundly ignored, and yet the ECF program powers on.
Sluggish, illusory recovery
Certain tactical choices by the government, supported by the IMF, have made this possible, postponing broad domestic austerity in particular. Given the tag-teaming on the approach, it is not surprising that the IMF will seek to shore up the government’s image.
The facts on the ground remain stubborn, however. They betray the much-touted recovery as sluggish at best, and even illusory by some measures.
For example, a major indicator in any import-dependent economy is the inbound trade level. Central bank data for the first four months of 2023 suggests that imports of goods are lagging 2016 figures, with a possible fall in value by more than 6% relative to the 2016 figures. (Exports do not illuminate macroeconomic trends well in Ghana’s case because they are dominated by commodities whose pricing align with global, rather than local, cycles.) The country’s main port has seen container volumes drop by more than 20% on a yearly basis.
Compared to 2022, when the central bank’s Real Composite Index of Economic Activity (CIEA) showed positive growth every month until the last few months of the year, the CIEA in 2023 has recorded, albeit with a tapering trend, persistent negative growth since January of this year. Non-performing loans have risen from an average of ~14% in the last quarter of 2022, when the IMF program was essentially finalised, to roughly 21% today, putting ~$1.1bn of banking assets at risk. Not surprising when all the principal interest rates in the economy have crossed the 30% line, levels last seen two and half decades ago.
Some of the worst performing borrowers in the economy are however state-owned enterprises, whose poor management has exposed the government to $1.4bn of potential liabilities not accounted for in the country’s ongoing debt salvage operation. A raft of so-called “public-private partnerships” (PPPs) sold as “commercially self-sustainable” because the private sector was meant to underwrite commercial risk have become a quasi-fiscal albatross around the neck of the state. The vaunted Ghana Card scheme (a civil identification project) is one such mess, with unbudgeted state liabilities since 2019 hitting $70m by the close of 2022.
Chaotic and rockier process
The shakiness of the recovery owes much to the laxity in certain aspects of the ongoing ECF program. Much has been made of the success of the fiscal consolidation plan. But the praise is hardly critical. A great fiscal consolidation strategy must be closely complemented with tightening monetary conditions, at least in the medium-term. Yet, compared to 2022, over the period for which data is available, broad money supply in Ghana has increased by roughly 50%.
As empirical studies on dollarised economies, like Ghana’s, has shown, effective broad money supply expansion is one of the trends best correlated with persistent inflationary pressures, sustaining punishing cost of living pressures in the country.
Last year, this author wrote that the IMF program may well fail to tackle structural issues. Six months in, with the first phase over, how much of this fear has been vindicated? Quite a lot, actually.
Whilst Ghana was forced by harsh circumstances to grudgingly turn to the IMF in July 2022, it was warmly embraced by an organisation in search of star pupils. But the country’s finances were in such a sorry state that to get IMF Board approval of the agreement, Ghana had to undergo debt restructuring. The government did everything to pass on all the pain to the private sector whilst preserving most of its political flexibility.
The result was a chaotic and rockier process that only recently concluded. Still, it was enough to secure the coveted board approval by May 2023.
The government’s strategy of shifting most of the pain in the ECF program to the private sector, instead of more frontally grappling with the need to rein in its spending, dragged out the debt restructuring process well into October 2023.
Bloated wage bill
Government data, furthermore, shows that, notwithstanding the supposed fiscal consolidation effort, public sector wage growth continues, with the government on course to spend ~12% more than budgeted for 2023.
Government operations costs have also seen no cuts whatsoever. The president continues to retain and pay over 100 ministers despite a recommendation by a committee of eminent experts tasked to review Ghana’s constitution pegging the ideal number at 25.
Pet projects of the ruling party like a sprawling cathedral estimated to top $1bn by some critics, when all costs are considered, have still not been terminated.
Yet, in the first review of the ECF program, the IMF has been fulsome in praise of Ghana’s performance under the program. How to explain this paradox? Simple really: sleight of hand.
Frontloading the domestic debt restructuring and freezing payments on servicing overseas financial obligations, particularly Eurobonds, which also naturally led to a decline in foreign-financed CAPEX, allowed government spending to come down just enough to have the desired effect on the fiscal deficit and thus to meet the IMF program’s target.
Furthermore, when a government no longer services its obligations, including to corporate holders of domestic debt, the effect is suppressed economic activity, and a cooling of inflation and the exchange rate.
Complementing the above strategy was a clever decision by the IMF to narrow down the review criteria to those areas highly responsive to these short-term stabilisation measures. A close examination of the list of targets the IMF chose to focus on in its review (see the detailed tables here) would show that merely by freezing government obligations to the private sector, the bulk of the targets in the “first review” were bound to be met.
Altering the marking scheme
Drawing partly on work done by Accra-based IFS on Ghana’s previous IMF ECF program (2015 to 2019), this author has contrasted the 2023 scorecard, used to rate the current government, with the review criteria of the 2015 program. It was intriguing to see that certain vital targets found in the 2015 marking scheme were not present in the 2023 one, despite the current fiscal situation being far more challenging. An easy analogy would be to say that the sicker the patient, the more indicators the physician needs to monitor.
Some of the key scoring indicators removed from the recent review include public wage bill management, domestic arrears management, and broad money dynamics. As if by magic, those are also the very areas the government is struggling with.
Even more fascinatingly, in the 2023 review, the IMF chose not to touch on the structural benchmarks and targets at all in its glowing press release. In the 2015 program, on the other hand, structural targets — such as blocking waste in public spending, eliminating crooked tax exemptions, and public financial management reform — were important criteria in the review process and the source of some of the relatively harsher verdicts delivered by the IMF then.
It is clear to even the casual observer that the IMF has very shrewdly decided this time around to alter the marking scheme in order to prop up the government’s goal of manufacturing momentum, at all cost, and to avoid the situation where the program’s outputs will fail to match up to its own standards at such an early stage. Public confidence is being prioritised over real results.
In fact, unlike in 2015 when the first few months of the ECF program saw the government being subjected to diagnostic reviews, this time around, the plan is to complete the first governance diagnostic in 2024, nearly a year after formal commencement of the program.
Beyond fiddling with the marking scheme, the IMF’s press statements after the review sometimes also played loose with the evidence. For instance, in the area of social protection, Ghana’s LEAP program, designed to support the most vulnerable in society, came up for much praise. Yet, Ghana’s own auditor general has been trenchant in his criticism, lamenting how, for instance, a cost threshold that should not have crossed 10% escalated past 22%.
Just as well that no structural reform issues were tackled. The two main sectors highlighted for special attention in this latest IMF bailout program – energy and cocoa – have degenerated considerably since the program started.
According to analysis by KPMG, the energy sector faces worse outcomes than initially assumed in the areas of distribution-level power sale collections, technical losses, OPEX failures, and generation-level losses. Combined, these woes could lead to cumulative accounting shortfalls of roughly $8.275bn by the end of 2023 against a 2019 baseline.
Massive waste and inefficiencies
According to Ghana’s ministry of energy, collection losses in energy sector sales for 2023 have worsened by a mind boggling 20 times compared to 2017 figures. The country’s state-owned gas producers continue to lose 80% of recoverable value on each unit of gas sold to a private generator called Genser.
The main distribution utility, and the primary source of cash for the entire energy system, ECG, has wasted tens of millions of dollars on metering solutions that still leave more than a quarter of bills uncollected. Worst of all, none of these solutions were competitively procured. In fact, ECG is working assiduously to be exempted from all public sector procurement constraints so that it can continue dishing out sweetheart contracts to favourite fuel and metre contractors.
In the cocoa sector, debt restructuring has not been able to redeem the state-owned marketing monopoly, Cocobod. For the first time in 30 years, it has struggled to close the annual syndication loan well ahead of the main buying season. Coming after the government announced a major increase in the price at which it buys cocoa from farmers before it was clear where the money would come from, the whole affair has a feel of the macabre.
None of Cocobod’s worsening financial conditions are inexplicable. Massive waste and inefficiencies have in recent years become hallmarks of how it does business. Data from Ghana’s Auditor General shows that Cocobod can save ~65% of its CAPEX on large-scale infrastructure, like the vaunted cocoa roads, simply by using competitive procurement methods. But it won’t.
None of these governance defects have been tackled with any seriousness so far as part of the IMF program.
The shrewd way the IMF and the government are going about gaming the marking scheme for the government’s performance in the ECF program, notwithstanding, the strategy of deflecting all pain elsewhere may well backfire at some point.
Ghana is due for an inflow of a second tranche of $600m from the ECF. However, per the agreement with the IMF, the release is conditional on the country’s Paris Club creditors and China issuing a letter of Intent or a draft MOU confirming that agreement has been reached in principle to restructure the country’s bilateral debts.
Unfortunately, some confusion has broken out among countries who want the coverage period of the debts eligible for restructuring to end in 2020, on one hand, and those who insist that it must stretch to the end of 2022, on the other hand. Ghana and the IMF, of course, want the maximum coverage possible in order to extract the deepest possible debt-relief.
The end-2022 cut-off date would however ensnare some major export credit facilities advanced by some European countries. It will also impact regional development finance banks like Afreximbank, who advanced a large loan to Ghana within the proposed debt relief period under very opaque circumstances. Afreximbank must have been shaken by this development given its less than perfect international credit rating (BBB, compared to, say, the Islamic Development Bank’s AAA).
The Ghanaian government, with the backing of the IMF, may pat itself on the back for its shrewd burden-shifting and scorecard-gaming, but the export credit agencies and DFIs taking the hit are part of deep financial networks. The government may find that it gets much harder raising finance to sustain vital capital projects.
Even though freeing up fiscal capacity by restructuring old debts might appear, on first sight, as a clever way of creating room to borrow afresh for vote-attracting projects ahead of next year’s ultracompetitive general elections, the flipside is the alienation of influential current creditors with the incentive to undermine. Already, Afreximbank is reportedly stalling on fundraising work for planned railway investments.
If the point of the scorecard-gaming is to speed up Ghana’s return to international creditworthiness, then it is clearly in conflict with the burden-shifting, faux-austerity, strategy. And both strategies are, undoubtedly, in tension with Ghana’s true national interest of a durable, reform-backed, recovery.
Bright Simons is the founder of mPedigree in Ghana.
Article first appeared in The Africa Report.
Photo by AMISOM via Iwaria.
