The world’s fastest growing economy in 2019? It’s Ghana, with projected growth of 8.8% this year, according to the IMF. The factors driving the expansion include a pick-up in commodity prices, oil and prudent government policies.
Earlier in March, the World Bank forecast Ghana would grow by 7.4% in 2019 “driven by the industry sector, especially oil, gas and mining”. Both these institutions are more optimistic than Ghana’s government, which is targeting 7% growth.
Ghana’s macroeconomic performance has been making strides under the IMF’s extended credit facility (ECF) arrangement. Having recently finished the programme after four years, the end-of-term report for Ghana would be a qualified positive, in our view.
We think the successful exit could not have come soon enough. Macro indicators are now stronger than they were when Ghana entered the programme, and the fiscal position is better, with a lower overall fiscal deficit and a primary surplus. Inflation is lower, the current account deficit is lower, and the banking system is stronger.
Yet it has been a bumpy ride. Not all macro indicators have improved to the extent we would have liked. First, the public debt burden (historically one of our main concerns during the IMF programme) is still higher than it was before the IMF programme started, and has been somewhat sticky, despite the strong fiscal adjustment. Interpreting the trends in public debt/GDP is, however, complicated by the recent GDP revisions and banking sector bailout costs. We estimate public debt was 58% of GDP in 2018 under the new GDP measure, compared with 71% on the old one, and investors may worry that the fiscal space created by a lower debt/GDP ratio will be used to take on new debt.
Second, under-performance of fiscal revenues has been a recurring theme over recent years, and domestic revenue mobilisation will be a key challenge for the government going forward. Third, interest costs are high. We estimate that interest is c30% of government revenue and over 5% of GDP. Fourth, international reserves are still fairly low on standard liquidity metrics, with net international reserves at just two months of imports of goods and services at end-December.
The question for investors is what happens next? On the one hand, after four years, it is only right that Ghana graduates from the IMF and has the opportunity to stand on its own two feet. There is (currently) no obvious balance of payments needs that require continuing IMF financial assistance. On the other, investors may be concerned that Ghana is not quite ready to go it alone, given its track record over the past decade, and that it might benefit from the external discipline and oversight of continuing IMF engagement until macro (and mainly fiscal) orthodoxy is more fully enshrined and institutionalised over a political cycle. Ghana faces a presidential election in December 2020.
We think Ghana is unlikely to seek a successor IMF programme at this stage and, with the IMF gone, investors will want to see that fiscal discipline is being maintained. An opinion echoed by Abebe Aemro Selassie, Director of the IMF African Department, who recently said, “We’ve seen a significant improvement, you know, in narrowing of the macroeconomic imbalances that were confronting the Ghanaian economy. I think staying on this course will be what is important. Making sure that fiscal deficits remain manageable.”
There may be grounds for thinking that it will be, given the government’s fiscal intent and efforts to institutionalise fiscal performance, but this is at an early stage and untested. For the time being, we have to hope Ghana does not mess it up.
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