By Cooper Invin and Rachel Savage
ACCRA (Reuters) – Hundreds of people took to the streets of Accra, Ghana’s capital, last week to protest its deteriorating economy. A few days later, the government of one of the richest countries in West Africa announced that it would begin formal talks with the International Monetary Fund (IMF) for support.
It was a decision that many analysts have long considered inevitable, despite Finance Minister O’Farre-Attar’s repeated promises that he would never seek IMF assistance again. Why did the country go the other way and what could the IMF demand in return?
Inflation peaked at an 18-year high of 27.6% in May, closing a year of accelerated prices. Growth slowed to 3.3% in the first quarter, and the value of the CD currency fell 23.5% against the dollar since the beginning of the year.[L1N2YG1CH]
Political cartoons on world leaders
In a statement outlining plans to move to the fund, the government blamed its plight on a combination of recent external forces, including COVID-19, the Ukraine crisis and the American and Chinese economic recession.
Finance Minister Ken Ofri-Atta told lawmakers last month that epidemic-related spending amounted to 18.19 billion sedis ($ 2.26 billion) as of May 2022. The country has received 23 1.23 billion in COVID-19 relief funds from the IMF and the World Bank during that period, he said.
Prices of imported goods rose more than domestically produced for the second month in a row in May, including cereals – of which Ghana imported from Russia – and saw a 20% increase in prices. Petroleum prices have almost doubled in a year.
Amaka Anku, head of Eurasia Group Africa, said in a note that authorities were still unsure whether to seek IMF assistance just two weeks ago, but lawmakers had their hands tied after generating 1 billion in debt and generating an unpopular electronic payment tax revenue. Chief Amaka Anku said in a note.
Authorities expect an IMF program to release Ghana’s nearly $ 1 billion balance-of-payment deficit, which Central Bank Governor Ernest Addison said in May was due to capital outflows for global reasons.
But experts say the root of Ghana’s problem is probably the treasury, as it continues to use more debt to plug its double-digit revenue deficit.
William Duncan, founder of Ghana-based Spear Capital & Advisory, said: “Our biggest problem is that about 60% of our spending is constantly on paying public sector workers or paying interest.” “It’s been a cycle through the last three governments.”
Ghana’s debt stock has more than doubled since 2015, steadily rising from 54.2% of that year’s GDP to 76.6% by the end of 2021, according to official data.
The finance ministry’s plan to repay the loan is increasingly dependent on the IMF, which has said it will help the country regain access to international capital markets and roll over existing debt after the recent credit rating downgrade has cooled lender interest.
Many have questioned the sustainability of that strategy. Payment of interest is the largest annual expenditure of the government since 2019 and it was the second largest expenditure for the previous five years, the Ministry of Finance figures show.
Although Ghana’s Eurobonds have rallied on the news that the government will seek IMF help, yields for all but the problem of maturity this year is still above 10%, a level seen as excluding a country from issuing new loans because it is too expensive. Became.
When Ghana last sought IMF assistance in 2015, it received $ 918 million through an enhanced credit facility, equivalent to 180% of its quota.
This time, Ghana has proposed its own “developed domestic program” to the IMF, which will last a minimum of three years.
It emphasizes that there will be no cuts in the administration’s flagship programs, such as the campaign pledge to build hospitals and factories in 216 districts of the country and a free secondary school project.
And although loan services have been spent just under 48% of government revenue in 2021, the finance ministry’s proposal does not require debt restructuring.
Experts believe that such a situation could prove complicated.
“A program that will support the confidence of lenders will tame the rise in government borrowing costs, but will also come with the condition of financial consolidation that can prove challenging to meet,” says Aiste Makareviciute of Moody’s.
(Reporting by Cooper Invin and Rachel Savage; Additional reporting by Karin Strohecker and Christian Ackerley; Editing by Bet Felix, Alexandra Hudson)
Copyright 2022 Thomson Reuters.