A team from the International Monetary Fund (IMF) visited Ghana after President Nana Addo Dankwa Akufo-Addo called the Managing Director, Kristalina Georgieva, on July 1, seeking an extended credit facility for the country.
It is the 18th time Ghana is going to the IMF for support.
The Carlo Sdralevich-led team arrived in Ghana on Tuesday, July 5 and started engagements the following day.
They met Vice President Dr. Mahamudu Bawumia, staff of the Ministry of Finance, and the sector minister, Ken Ofori-Atta.
The team also met with the Parliament’s Finance Committee, civil society organisations, and development partners, including UNICEF and the World Bank.
Speaking for the first time about this development, the Vice President gave four reasons why Ghana opted for IMF support. He categorised his reasons into two internal and two external causes.
Dr. Bawumia while speaking at the Accra Business School, Baatsona, Thursday, July 14, said, the internal causes include the energy sector ‘take or pay’ agreement and the banking sector clean-up.
He, then, attributed the external causes to COVID-19 and the Ukraine invasion by Russia.
This was affirmed some 24-hours prior by Carlo Sdralevich, leader of the IMF negotiation team, in his initial assessment of the Ghanaian economy.
Sdralevich said, “Ghana is facing a challenging economic and social situation amid an increasingly difficult global environment. The fiscal and debt situation has severely worsened following the COVID-19 pandemic. At the same time, investors’ concerns have triggered credit rating downgrades, capital outflows, loss of external market access, and rising domestic borrowing costs.
“In addition, the global economic shock caused by the war in Ukraine is hitting Ghana at a time when the country is still recovering from the Covid-19 pandemic shock and with limited room for manoeuvre. These adverse developments have contributed to slowing economic growth, accumulation of unpaid bills, a large exchange rate depreciation, and a surge in inflation.
Sdralevich expressed commitment “to support Ghana at this difficult time, consistent with the IMF’s policies”.
Why Ghana turned to IMF for support
Dr Mahamudu Bawumia, who is the Economic Management Team explained:
“Before I conclude, I would like to use this opportunity to make some comments on an issue on the minds of many Ghanaians: the decision by government to opt for an IMF program to stabilize the economy in the midst of global crises (the COVID-19 pandemic and the Russia Ukraine War).
“A crisis which has visited untold hardships on Ghanaians with rising prices of virtually everything from fuel to bread, tomatoes, building materials and so on. In the midst of this global crisis, Ghana’s fiscal and debt sustainability has worsened.
“I should note again that Ghana has been hit by a quadruple whammy in the last few years: Energy Sector Excess Capacity Payments, Banking Sector Clean-Up, COVID-19, and the Russia- Ukraine war.
“If you take out the fiscal impact of this quadruple whammy, Ghana will not be going to the IMF for support because our fiscal, debt and balance of payments outlook would be sustainable.
“Of the four factors, two (COVID-19 and the Russia Ukraine war) were external and the other two (the banking sector clean up and the excess capacity payments) were the result of policies of the previous government.
“Today, all over the world, fuel prices are rising in virtually every country, food prices are rising, inflation is at a high for many years, currencies are falling in value, fiscal deficits are increasing, debt levels are increasing, etc. This tells us that what we are dealing with is a global phenomenon.
“Let me give you an analogy to make my point. If you ask a carpenter to roof your house and suddenly the roof collapses without any wind or rainfall, will you not blame the carpenter who did the roofing. But if a carpenter roofs your house and the roof collapses because of a tornado and a storm which has also blown away the roofs, windows and walls of many houses, will you blame the carpenter?
“Some commentators and analysts have argued that COVID-19 expenditures alone could not be the reason for the large increase in the fiscal deficit and the debt stock.
“In fact, they are right. COVID-19 expenditures alone were not the reason for the large increase in Ghana’s debt stock by the end of 2021.
“In fact, as I stated in my April 7th lecture, in addition to COVID-19, there were two major items of expenditure that are critical to understanding the evolution of the fiscal deficit and the debt stock: the Banking Sector Clean up (GH¢25 billion) and the Energy Sector Excess Capacity payments (GH¢ 7 billion).”
Dr Bawumia noted that the excess capacity payments of GH¢17 billion relate to a legacy of take or pay contracts that saddled our economy with annual excess capacity charges of close to $1 billion. These were basically contracted to supply energy to Ghana way in excess of our requirements, but we were obligated to pay for the power whether we use it or not.
He said that the excess capacity payments include GH¢7 billion of payments for gas resulting from the previous government signing an offtake agreement for a fixed quantity of gas with ENI Sankofa on a take or pay basis which was way in excess of what was needed at the time. Not keeping up with the excess capacity payments would have meant throwing the country back into a new bout of dumsor.
“We were also confronted with a banking crisis as a result of the mismanagement of the banking sector. Ghana’s banking system was on the verge of collapse and not dealing decisively with it would have meant disaster for the economy with millions of people losing their savings.”
The Vice President added that direct COVID-19 expenditure amounted to GH¢12.0 billion, made up of GH¢8.1 billion in 2020 and GH¢3.9billion in 2021.
He said the data shows that the three items of expenditure cumulatively amounted to GH¢54.0 billion (the equivalent of some $7.0 billion), which was borrowed.
The Ministry of Finance estimates that the interest payment on this borrowing for the three items amounts to GH¢8.5 billion annually. This is some 23% of Ghana’s annual interest payments of GH¢37 billion.
To put the expenditure on these three items in perspective, it is important to juxtapose it against the total expenditure (releases) on some of the governments key flagship projects, including Free SHS, one district one factory, planting for food and jobs, Development Authorities, Ghanacard, Zongo Development Fund, NABCO, and teacher and nursing trainee allowances.
The data shows that the expenditure on these key flagship programs over the five-year period between 2017 and 2021 amounted to GH¢15.62 billion compared to the GH¢54.0 billion expenditure on the three exceptional items.
The expenditure on the three exceptional items amounted to more than three times the expenditure on the flagship programs over five years, he added.
As part of measures in planning to stabilise the economy in future, Vice President Bawumia said the government has started implementing a policy that gives the Bank of Ghana (BoG) the right to purchase any amount of gold mining in Ghana.
“Ultimately, once we accumulate enough gold, future borrowing and our currency can be backed by gold. This will stabilise the cedi long term,” Dr Bawumia stated.
The Vice-President said the first right of refusal given the BoG to purchase gold mined in the country was backed by law to deepen the gold purchase programme the BoG started to build up the country’s reserves.
He was explaining the reasons that forced the country into talks with the International Monetary Fund (IMF) and measures outlined to transform the economy to make it resilient to withstand shocks.
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