Govt’s hand strengthened in IMF talks

THE Government of Ghana has begun negotiations with the International Monetary Fund [IMF] holding a much stronger hand than it could have hoped for even a couple of weeks ago. The successful flotation of a US$1 billion Eurobond issue last week coupled with the conclusion of a US$1.9 billion syndicated loan to finance cocoa purchases for export has given government a large cache of new foreign exchange inflows that has eased its forex crunch and served to bridge a significant portion of its budget financing gap for 2014.

The effect of all this shows vividly in the improving fortunes of the cedi, which actually appreciated by about 6% over the past fortnight, a complete reversal of the nearly 40% depreciation it suffered during the first eight months of this year.

Indeed both new inflows indicate that international investors still have more confidence in Ghana’s economic prospects than earlier thought. The latest Eurobond issue was sold at a coupon rate of 8.125% which is considerably lower than the 9% that most pundits had predicted would be the lowest possible rate that Ghana could get. Indeed the rate obtained is only marginally higher than the 8% ceiling that government had set originally. The failure to get that rate earlier this year was the reason why government postponed the issue from the originally scheduled date of April.

Government now intends to use US$750 million out of the Eurobond proceeds for financing some of the capital expenditures planned in this year’s budget, refinancing of the most expensive proportions of the domestic debt, and counterpart financing requirements for donor funded programmes and projects such as the recently signed second Millennium Challenge Account compact and the on-going components of the Chinese Development Bank loan projects. The other US$250 million will be used as seed capital for the Ghana Infrastructural Investment Fund that is scheduled to commence operation in January next year.

Interestingly, government has declined to take up the option of seeking an extra US$500 million even though it had Parliamentary approval to do so. That money was to have been used to refinance part of Ghana’s first Eurobonds, issued in 2007and due for redemption in 2017. However, government has opted to address this matter at a later date.

The cocoa loan syndication is in two parts: US$1.7 billion is for immediate use while the other US$200 million is for financing purchases during the next minor crop season.

Government’s negotiating position with the IMF has got another boost from the fact that it has almost kept to its revised fiscal deficit target for the first half of 2014, proving its critics predictions wrong in this regard. During the first half of the year, government incurred a fiscal deficit of 4.2% of Gross Domestic Product [GDP] only marginally higher than the 4.1% targeted. Government officials are now optimistic that the deficit for the whole year can be kept to only a little over 9%. This would be higher than the 8.8% targeted but significantly lower than the over 10% forecast by credit ratings agencies such as Fitch and the IMF itself.

With Government’s financial situation improving, the cedi’s depreciation being stemmed and international investors showing that they still have confidence in Ghana’s medium term prospects, some politicians within the government, keeping an eye on the 2016 elections are suggesting that there is no longer a pressing need for an IMF programme that would force them to curb populist public spending to please voters ahead of the next general elections. They argue that the policy credibility that was needed from the IMF has already been obtained and actually used, both to get the Eurobond financing at a lower interest rate than otherwise would have obtained, and also to stem the cedi’s depreciation.

They further reason that with Ghana already at the public debt threshold of 60% of GDP set by the World Bank and the IMF itself, the Fund will not be willing to provide much new financing anyway.

However, Business Finder understands that government is not buying their argument even though it has been sorely tempted. Government’s economic managers are acutely aware of how fickle the international investment community can be and abandoning the IMF because of the new, still fragile improved situation could easily scare them away again. In particular, government wants to court the goodwill of the foreign investors who still hold about 30% of Ghana’s cedi denominated domestic debt. Their refusal to roll over maturing debt during the first five months of the year was largely responsible for the cedi’s depreciation in the first place as well as government’s short-term financing crisis that forced the Bank of Ghana to lend it more than it was supposed to for the whole year, a move that attracted scathing criticism both at home and abroad.

But even as government goes ahead with its negotiations with the IMF it hopes to play on its improved hand. Indeed the choice of Professor Kwesi Botchwey as the leader of government’s negotiating team, rather than Finance Minister Seth Terkper is believed to be because the former is more politically astute than the latter, whose skills are restricted to technical savvy. Therefore Professor Botchway is better equipped to negotiate on both economic needs and political exigencies ahead of the next elections, balancing one against the other in order to get a deal for the government that still allows it some room for election motivated spending in 2016, if an IMF programme is still running by that time. Alternatively, the strategy would be to negotiate a two year programme rather than a three year one, so it would terminate just before the elections and thus allow government to open the spending taps again just before the polls.

However government chooses to play it, Ghanaians will have to brace up for tighter tax administration, the removal of any lingering subsidies and a tight cap on the public wage bill. At the end of it all, however, if history is anything to go by, the economy will be in better shape than it is now.