By Kofi Bentil, Bright B. Simons & Franklin Cudjoe 26 April 2009

It is true that the World Bank seems eager to lend money to Ghana. In recent statements, the Bank has highlighted that $1 billion is available in undisbursed current project funds, and that a further 3-year funding allocation of $1.35 billion is pending, of which something in the region of $300 million could be frontloaded, i.e. disbursed immediately. There is little indication that Ghana has been branded a “recalcitrant pupil”, as has been the case in the relationship between the Bretton Woodies and some of their former darlings on the continent.

Yet still, a deep sense of anxiety persists in development circles in this country. There is a sense that policy makers are sitting on tenterhooks, and a misty pall of gloom seems cast across the donor-government negotiation horizon. Why is this so?

At the end of the last consultative meeting between Ghana and her development partners last year, held at the plush La Palm Royal Beach Hotel, sufficient evidence of a misalignment between Government of Ghana policy and donor preferences emerged to shed some light on the matter.

As if to set the scene for the abovementioned meeting, the annual consultation between Ghana and the IMF, customary under Article IV of the IMF treaty, which took place in April 2008, prior to the consultative meeting mentioned above, no agreement was reached on a Policy Support Instrument (PSI) for Ghana. Apparently, the PSI indicates to other donor agencies and commercial market players with sovereign relations that a country’s policy positions are in alignment with that of the IMF, and by extension other key donors. Observers are eagerly anticipating the report of the 2009 round of Article IV consultations, which should be released sometime in June or July.

These facts notwithstanding, it can be argued that Ghana has over the past few years generally steered its economy towards convergence with IMF’s standpoints, despite not having had an IMF program since it “completed” the last one in late 2006. The Bank of Ghana’s interest rate hikes, for instance, could easily have been plucked out of the recommendations of the Fund’s 2008 staff assessment of the Ghanaian economy.

Yet, serious differences remain, which is what, in the circumstances, matters most. Below, we list the principal sticking points.

1. Wage Bill

Despite persistent assurances by the Ghanaian authorities that they are committed to reducing the wage bill, the IMF seems sceptical that this can be achieved given the current trend in budget design and execution. They will prefer to see an explicit freeze in recruitments into non-critical sectors (i.e. outside Health and Education) and, while they probably welcome recent efforts to halt expansion of the security services, they remain unconvinced that sufficient policy measures have been introduced to check unbudgeted wage rises and unregulated hiring within subvented organisations (such as parastatals, universities, public corporations, etc.) We note the continued pile-up of wage arrears in certain sections of the public sector and attribute the situation to the strains of policy adjustment. It is not clear how organised labour view the recruitment issue, though it can be assumed that they will oppose any suggestion of further retrenchment exercises in the Civil Service.

2. Further liberalisation of the Utility sector

Indications that Government of Ghana is committed to the withdrawal of subsidies in the public energy sector must be welcome news to the Bretton Woodies, but it is likely to fall far short of their demands that the automatic tariff adjustment system, now in place for petroleum, also be extended to water and electricity. This is likely to change the Public Utilities Regulatory Commission’s (PURC) attitude in significant respects. Readers may be aware that the PURC has rarely agreed to full cost-recovery demands by the utilities ever since it was granted policy autonomy by the government. A full tariff-adjustment policy will reduce its discretionary powers to prevent the utility companies from passing on production and distribution costs to consumers, though its power to insist on corresponding gains in efficiency will be undiminished.

And oil pricing policy isn’t out of the cross-hairs yet: the Bretton Woodies continue to demand full liberalisation of the oil import sector as part of measures to boost the foreign reserve position (apparently the Bank of Ghana has been giving too much foreign currency to importers of crude oil and refined products), even while, at the same time, they continue to berate the Bank for its foreign currency surrender requirements for other, especially mining, sectors.

Another vexing issue is the seeming halt in the liberalisation of the energy and water sectors, which of course is directly related to tariff liberalisation. Facilitating full cost-recovery should also facilitate privatisation in the two sectors, taking the process of deregulation beyond the current technical consultancy arrangements in place (involving such companies as AVRL, All Terra etc.)

3. Stabilising the Ghana Cedi.

Dr. Duffuor’s theory about the cause of the depreciation of the Ghana Cedi is unlikely to reduce pressure from the Bretton Woodies for Government of Ghana to continue with monetary tightening and to return to the pre-2007 fiscal restraint framework. The IMF, in particular, is likely to view Dr. Duffuor’s perspectives on the cause of the cedi’s continuing fall as both arcane and novel, given the Fund’s epistemology about the primary dynamics of the external position.

Here is what Dr. Duffuor’s theory, deconstructed, appears to be saying. Government of Ghana took two decisions that in 2007 began to undermine the Cedi. It redominated the national currency in a way that overvalued it, and it opened the country’s capital markets to overseas investors. By overvaluing the currency, imports “appeared” cheaper, and importers enjoyed windfalls and were motivated to import more. This worsened the terms of trade. Nominal inflation begun to rise, offsetting a rise in the policy interest rate, but because the currency was artificially overvalued, corrective measures were delayed until it was too late, thus resulting in the belated but sharp correction we are experiencing now. Meanwhile since the Sovereign bond was denominated in dollars, and investor perception of an overvalued Cedi suggested continued sharp falls, holders of the bond begun to sense an increased likelihood of government default, and they thus begun to unload their holdings, leading to the near 40% or so drop in price. Because they unloaded them unto the local market (i.e. local investors see a value in the dollar-denominated bond as an inflation hedge), another adverse impact on the dollar reserves begun to materialise, further deepening the vicious cycle of inflation and depreciation. This is what we can glean from press reports of Dr. Duffuor’s analysis. We hope there is more; because if Dr. Duffuor relies on this chain of analysis, the more impetuous Bretton Woods analysts will have a field day dispensing empirical counter-evidence. For instance Dr. Duffuor mentions the subsequent sharp growth in M2+ (the measure of broad money supply, inclusive of foreign currency deposits) as one of the buttressing empirical factors. But it would be easy to point to another macro-critical indicator: the currency/M2+ ratio, which appears to have experienced only stable growth, suggesting that no disproportionate impact on “inflationary liquidity” was evident.

More crucially, the IMF, in particular, appears enamoured of Behavioural Real Equilibrium Exchange Rate (BEER) analysis, which tries to employ a broader set of factors to determine whether the nominal exchange rate in a country is diverging from the “real” rate. The BEER analysis over the period to which Mr. Duffuor refers in fact suggests that the Ghana Cedi was actually very close to the historical real rate. The empirical evidence can be deduced from, among others, the fact that Ghana’s exports were competitive over the period (directly contradicting the “overvaluation” argument) and that export market share duly expanded. At any rate, the Bank of Ghana’s redenomination guidelines explicitly required that the Ghana Cedi floats at the natural rate alongside the Cedi and the Dollar. Then there are micro-economic factors such as increased capital investment in the oil sector etc., which are ignored in Dr. Duffuor’s model.

In sum, the Bretton Woodies are likely to insist, as they have done many times before, that reining in the current account deficit is the sure path to managing the exchange rate, and that the best way to do that is to reduce demand pressures from government side through an adjustment of fiscal policy.

4. Further interest rate hikes

If the inflation rate continues to remain above 20%, the policy rate (Bank of Ghana prime rate) will continue to be negative, and the Bretton Woodies hate that. While the IMF, the technical czars of the donor system, are fans of fiscal emphasis, they nonetheless like monetary policy to follow in step, which means they would prefer the prime rate to notch up a bit, even though they won’t press as hard as they will on fiscal indicators.

5. Public debt

It would seem - given the circumstances - that this should be the most vexatious matter on the table for discussion. Considering the current rate of growth of the public debt, Ghana might qualify for HIPC again if she applied (that is, if HIPC wasn’t a one-off arrangement but was instead a recurrent facility). The current Public Debt to GDP ratio is about 50% (simply put: the debt owed by the government is equal to half the value of the total national economic output). Taken as a percentage of exports or revenues, the debt level is creeping closer and closer to unsustainable.

And now Government of Ghana asking for more debt.

Total donor disbursements for this year, in the best case scenario, were expected to total about $2 billion. Government budgeted for about $2.4 billion, and now it would seem they had rather have about $3.2 billion; expect the Bretton Woodies to throw their weight about a bit as a result. The IMF, which gave only $500,000 to Ghana last year, mainly for capacity building, has expressed unease about further expansion of the debt stock without structural reform, making it easier for them to feign moral dissonance about lending more to the country, even on highly concessional terms.

With the country’s current public debt level already significantly above what in the view of the Fund suits a low-income country, and the Fund’s staffers convinced that a so-called “debt sustainability assessment” simulation carried out recently advises a public debt burden of about 45% for the country, Ghana’s intent to add nearly 25% of the current level to the stock will definitely ignite some sparks.

6. Governance

The IMF and IDA believe that the “Alternative Dispute Resolution” –type mechanism used to penalise those public servants found guilty of embezzlement and other malfeasances by the Public Accounts Committee (PAC) last year was unacceptable, and that those found to have breached public standards should be prosecuted. A stance that seems eerily close to that of the CJA (Coalition for Joint Action).

Government of Ghana has also been asked to give more public financial management oversight functions to parliament (the only recommendation the authors of this report unreservedly supports). This should prevent some of the crazy budget overruns witnessed in recent years, since spending beyond parliamentary appropriation will have to be re-authorized by Parliament, after the passage of the budget bill for the year.

7. The Oil Factor

The Bretton Woods institution may actually hold an even dimmer view of Ghana’s macroeconomic prospects than they did a couple of months ago (when most of the concerns outlined in this report were raised) because at the time of the last consultative meeting, a number of erroneous impressions were held by most of the participants. At the time prospects for oil income seemed more imminent and brighter than at present, and probably moderated a significant proportion of the Fund’s scepticism about the country’s public debt sustainability. The view is certainly grimmer today.

The initial joint IMF - Ministry of Finance analysis of oil proceeds grossly overestimated medium-term oil prices and Government of Ghana entitlements. Despite accounting for the linear depreciation of capital investments by the exploration companies (i.e. their field development costs will be treated as annual operating costs, and therefore deductible before taxes, over five years), the analysis still arrived at an inexplicable sum of $750 million as government take for the first year. No wonder the analysis failed to make explicit the numerical assumptions used to arrive at those juicy projections. But the $200 million annual production costs cited means that even at an abysmally low $10 per barrel production cost (the US Energy Information Administration mentions nearly $30 as the typical deepwater production cost profile for West Africa), this will imply a production volume of 20 million barrels a year. To obtain the $2.2 billion quoted in the analysis as the gross receipts from oil in 2011 will mean spot prices of $110, which is far from conservative, even without considering other technical factors as grading etc. Even in the rosiest of forecasts, a third of this figure for 2011 would in our view be overenthusiastic.

We suspect that those errors have been corrected, hence the increase in concern about the public debt level, though we also note that the Executive Director for Ghana appeared less concerned about the public debt than the IMF staffers who conducted the Article IV consultations.

Conclusions

There is a lot of evidence to suggest that the policy direction of Government of Ghana and the positions of the Bretton Woods institutions have continued to diverge since late 2007, and that the divergence is intensifying. This divergence could lead to tensions as negotiations over expanded assistance pick up in earnest over the next few weeks. It will be surprising though if any such tension degenerated to a full blown aid crisis, or if the proposed new marriage with the IMF was scuttled.

What is clear though is that without a considerable ramping of Government of Ghana’s negotiation capacity, country ownership of economic management policy will have to be sacrificed for a bowl of pottage.

The Authors are affiliated with IMANI: Center for Policy & Education