The IMF Resident Representative in Ghana, Dr. Leandro Medina, discusses recent key developments in the Ghanaian economy and provides details on the next steps regarding the country’s fund-supported programme.

What is your assessment of the economic performance under the programme so far?

The Ghanaian authorities’ economic reform programme that is supported by the IMF has three key objectives: restoring macroeconomic stability, ensuring debt sustainability, and laying the foundation for higher and more inclusive growth. Good progress is being made on all these fronts.

Regarding macroeconomic policies and developments, the authorities have been taking bold steps over the past year. They have put in place an ambitious budget to advance fiscal consolidation and place public finances on a sound footing. The 2023 Mid-Year Budget Review (MYBR), presented to Parliament in July, gave an overview of the good progress being made on that front. On the monetary side, the Bank of Ghana (BoG) has appropriately tightened the monetary policy stance and eliminated monetary financing of the budget.

These steps have already had a significant impact on inflation, bringing it down from a record high of 54 percent in December to close to 40 percent in recent months. It increased again recently, due mainly to the effect of price increase of food and imported products, but perseverance in the conduct of monetary policy should ensure inflation remains on a declining trend going forward. The authorities have also designed a solid plan to ensure financial sector stability.

We also see other signs of macroeconomic stabilisation. Despite a complex global economic environment, international reserves have increased, and the exchange rate has been less volatile.

As regards debt sustainability, the second key objective of the programme, the government’s comprehensive debt restructuring strategy is critical. Good progress is being made on that front as well. The domestic debt exchange has largely and successfully been concluded: the debt exchange completed in February was a key milestone; and the government is now in the process of completing the full restructuring exercise by tackling some remaining debt – e.g., US dollar-denominated debt and cocoa bills. On the external side, following assurances provided by official bilateral creditors, the government is now seeking to reach agreement with its creditors on the exact terms of the restructuring. The authorities are also engaging their external commercial creditors to seek their support.

The government’s programme also aims at durably anchoring macroeconomic stability, boosting growth and distributing its dividends more equitably across the Ghanaian population. Structural reforms to strengthen domestic resource mobilisation and public financial management and make the business environment more conducive to private sector development are key. These are all areas where the authorities are making progress, engaging closely with our technical experts as well as other development partners. Ensuring adequate social protection is also a paramount aspect of the IMF-supported programme.

It is very important, especially in the context of an economic crisis and of bold reforms, to make sure that the vulnerable, who are usually hit the hardest in difficult times, be protected. The authorities are working hard to ensure that effective social protection programmes are expanded. This year, benefits under the existing targeted cash transfer programme, the Living Empowerment Against Poverty (LEAP), were doubled. Allocations toward the school feeding programme were also boosted. And the programme set some quantitative objectives to ensure these objectives are achieved. More will be done in the coming months.

What are the next steps regarding IMF engagement with the authorities?

The next step will be the first review of the programme. An IMF mission is expected to visit Accra in September to formally assess performance with respect to the quantitative and structural objectives set out under the programme. Based on a positive assessment and agreement with the authorities on the way forward, IMF staff will present the first review for the IMF’s Executive Board approval later in autumn. This would trigger a second disbursement of about US$600million, for a total of US$1.2billion in 2023.

How concerned are you about rising T-bill rates? Will Ghana need to restructure its debt again in the near future?

For some time now, Ghana has had T-bill rates – which are the rates at which the government finances itself – lower than the monetary policy rate and significantly lower than inflation. A related question is not so much whether rates are too high, but rather whether they are too low, such that the Ministry of Finance might not be able to raise sufficient financing. From the perspective of debt sustainability, it is the real rates (meaning nominal interest rates minus inflation) that matter.

If inflation is 40 percent and T-bill rates are only 30 percent, then real rates are negative, and the government is rolling over its debt quite cheaply. As long as the overall economy and government revenue are growing – at least as – quickly as inflation, then the debt burden with such T-bill rates is actually falling.

Now it’s true that the domestic debt exchange reduced coupon rates to lower levels with the goal of restoring debt sustainability. But those were coupons on longer maturity instruments that Ghana would have had to pay even once inflation came down. In other words, Ghana restructured multi-year bonds and is now mostly issuing shorter-term bills where interest rates reset frequently on rollover, such that there would be no reason to restructure them.

While the IMF did not design the debt exchange, we understand it as part of a larger debt restructuring which, when combined with a strong fiscal effort, should balance government accounts going forward. By completing the debt restructuring and implementing planned fiscal reforms, Ghana can restore debt sustainability and bolster investor confidence.

There has been some controversy related to the BoG financing of the budget in the recent past, as well as the effects on the BoG balance sheet of the domestic debt exchange. What is the IMF’s view on these issues?

I believe the Ghanian authorities and the IMF team alike agree that avoiding monetary financing of the budget should be a priority. In fact, the authorities, under the IMF-supported programme, have decided to eliminate such financing; and they intend to strengthen the BoG Act to tighten the conditions under which such financing is allowed.

That said, looking at 2022, we need to remember that the economy faced unprecedented challenges. The large budget deficit could not be financed anymore as the government had lost access to both international and domestic capital markets. Under these circumstances, the choice was between BoG providing crucial financing to enable the government to meet its obligations or a very disruptive and possibly much more abrupt crisis.

Regarding the effects of the domestic debt restructuring on the BoG balance sheet, I think it is important to remember that this restructuring is a key element of the authorities’ plan to restore macroeconomic stability and public debt sustainability. And BoG participated in the restructuring to share some of the burden the domestic debt exchange places on government debt holders, along with banks, other financial institutions, pension funds and individuals.

Indeed, this contributed to reducing its net equity to a negative value, but crucially, we conducted analysis that indicated that this situation does not hinder the BoG from effectively executing its policy mandates, including the vital task of guiding inflation back to its 8-percent target in a gradual manner. Fundamentally, the BoG’s net equity is expected to improve over time, ultimately resulting in a return to positive territory.

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