The ongoing discussions about the next steps after ending the current Extended Credit Facility (ECF) programme with the International Monetary Fund (IMF) is very important.
Last year, I was privy to informal discussions at high levels on the matter—within the context of the impending Fourth Review of the ECF Programme and Article IV Consultations in 2017.
As with even advanced states such as Greece, Ireland and Portugal, discussions involving relations with the fund are never easy, as I am sure President Akufo-Addo and his Cabinet did in arriving at the decision to exit.
My long-standing view is to seriously consider the IMF’s alternative Policy Support Instrument (PSI), not exit completely in April or end 2018.
The fund says PSI “offers low-income countries that do not want — or need—Fund’s financial assistance, a flexible tool that enables them to secure advice and support without a borrowing arrangement.”
The key words are financial assistance and, with good policies, the oil/gas era may make this unnecessary.
The IMF notes further: “This non-financial [PSI] instrument is a valuable complement to the lending facilities under the Poverty Reduction Growth Facility (PRGF). The PSI helps countries design effective economic programmes that deliver clear signals to donors, multilateral development banks and markets of the fund’s endorsement of the strength of a member’s policies”.
‘Home-grown’ policy territory again?
The extreme salivating position is for Ghana to ‘go it alone’ without an IMF programme and, by implication, other multilateral economic policy cover—notably, no complementary World Bank and African Development Bank (AfDB) support. We are reminded of the launch of the “Home Grown” Policy initiative in 2013 and why we changed course to the current IMF programme.
- Ghana had exited an IMF programme before the 2012 elections (as in 2008) and so the government thought it was time Ghana owned up to various slippages that had become manifest, typically as election cycles.
- There was adjustment fatigue, giving rise to public weariness with many past unsustainable IMF programmes—about 16 since Ghana joined the IMF in 1957—the memorable one being ERP/SAP in the early 1980s Washington Consensus era.
The primary reason in opting for an IMF programme by mid-2014 was the fund’s reluctance to even have background discussions for an alternative PSI programme.
This was surprising and seemed harsh since other African countries such as Rwanda, Senegal, Nigeria, Tanzania, Mozambique, Cape Verde and Uganda already had this IMF arrangement.
For example, Uganda is currently on the eighth review of a second Fund PSI arrangement.
The fund’s programme was also inevitable, given dwindling AfDB, World Bank and other multilateral support, which led to a freeze of budget funding from them and bilateral donors; and deteriorating signals to capital markets.
At the time, Ghana had re-entered the markets to raise funds to resolve its refinancing needs, especially to deal with roll-over risks associated with maturing Treasury Bills and Ghana’s first 2007 sovereign bond.
We note that the AfDB and World Bank also insisted on an IMF programme after providing technical assistance to prepare the 2013 ‘Home Grown’ Policy.
There is a useful lesson in international economic relations. In formulating programmes and policies, developing states do not deal with the IMF in isolation. In fact, a Greece watch shows that even the EU does not ignore the IMF in some cases.
It begs the question why a conversation now should revert to the PSI option. Among others, ownership matters: Senegal, Tanzania, Uganda, and Rwanda seem to have more successful PSI Programmes—and relations with the IMF—than Ghana’s ECF, which also had the ‘Home Grown’ Policy as basis for the negotiations.
Why consider PSI
In addition to ‘adjustment fatigue’ and ‘ownership’ noted above, the factors that favour a PSI arrangement for Ghana include:
- Ghana cannot escape IMF scrutiny: As member-state and under IMF Article IV Consultations, Ghana is obliged to justify its policies and open its books to the IMF. Soon, the IMF Board will discuss the outcome of the recent Consultations, which the NDC Government agreed to take place in early 2017.
The Board will issue a report on the health and direction of economic policies and performance. This is done for ALL Fund member-states: developed, emerging and developing.
- Signals to development partners (DPs) and markets: Ghana now has very active domestic and foreign market participants. Our interactions with them show that, in particular, non-residents who participate in our external and local bonds look up to the IMF to endorse our policies and performance. Hence, from budget and market perspectives, IMF Board decisions remain key to any unfettered or fettered decision to ‘go it alone.’
- Clarity of policy choices: The IMF is known for programmes with conditions or conditionalities that countries often deem ‘harsh.’ We may not escape these completely since they come subtly under a ‘Home Grown” PSI and Article IV consultations, if we want DPs, multilateral banks, and markets to ‘trust’ us. On the other hand, we can be pragmatic about a PSI programme and take full advantage of the expertise that the IMF, World Bank and others typically bring to bear on the PSI option.
- Prospects for the economy still bright: Private entities are leading growth in the services and construction sectors. Despite falls in commodity prices, especially crude oil since 2015, prospects for the economy remain positive. This is mainly due to additional SANKOFA and TEN crude oil and gas; repairs to Jubilee FPSO; gas-to-power programme; down- and mid-stream petrochemical; and synergy with agriculture (e.g. fertiliser). Here again, in particular, foreign investors look to IMF and the World Bank for positive signals.
- Continuing need for fiscal discipline: We have many electoral promises that could expand expenditures, even as Ghana cedes grounds on vital tax policy and administration issues. These will certainly roll on into another election year, when Ghana will be under scrutiny for election overruns. While early, there seems to be no evidence, after six months, that tax compliance and expenditure cuts alone can fill the fiscal space. The trajectory seems to point to missed deficit targets and more borrowing (in absence of HIPC space).
- Convergence of policy thinking: Thankfully, we seem to agree on the inevitability of ‘smart borrowing’ and debt management (e.g., Sinking Fund, Buy-Back, refinancing, escrow/self-financing etc.); stop cutting back on substantive tax measures (ESLA/17.5 per cent VAT rates remain); and good PFM measures such as GIFMIS (next is shift to semi-accrual accounting). Given this emerging consensus and notwithstanding political claims and counter-claims, Ghana can formulate national policies to drive discussions with the Fund and other multilateral agencies on a PSI Programme.
To reiterate, all negotiations, reviews and consultations with the IMF are difficult.
In Ghana’s case, faced with Jubilee FPSO breakdown and fall in crude oil price in 2015—even Cabinet and Parliament voluntarily reviewed the 2015 and 2016 Budgets—we were confronted with Fund embargoes under the ECF Programne. These include budget space for core 2016 Election expenses; guarantees and loans for investments in oil and gas projects; and opposition to the World Bank Partial Risk Guarantee (PRG)—the anchor for ongoing TEN/SANKOFA private and public investments (including expansion of the Atuabo plant/pipelines).
Earlier vetoes include bridge-financing (8.5 per cent) on better terms than the 10.75 per cent for the 2015 sovereign bond and insistence on zero-financing by Bank of Ghana in an economy that lacks a deep capital market.
Ghana is at a policy crossroads but with bright prospects for the economy from past policies and investments.
However, we have long-standing policy slippages and fast-changing global environment to contend with.
Hopefully, the mid-Year Review will offer clear policy options for the nation to move forward.
A mid-road or transitional step, such as an IMF PSI, appears best until we are on firm grounds. Despite past difficulties—and current frustrations with ‘creating fiscal space’ to fulfil electoral promises —the IMF has been right on many occasions.
These are some reasons why Ghana must exercise extreme caution in disengaging completely from the IMF.
By: Seth E. Terkper
Former Finance Minister
Published on 24 July 2017 | 3:45 pm at Source