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Opinions of Sunday, 10 August 2014

Columnist: Al-Hajj

IMF bailout & NPP hypocrisy

…What you need to know

The opposition New Patriotic Party (NPP) under President Kufuor ruled this country for the first six years of their administration by adopting the most rigid neo-liberal policies that had never happened in the post-colonial economic history of this country, making the nation almost inevitably dependent on Western-backed financial institutions especially in times of fiscal crisis and runaway exchange rate depreciation.
Not only did they embrace the ignominious and dishonorable Highly Indebted Poor Country (HIPC) initiative from the Bretton Wood institutions but also went into a three year program with the International Monetary Fund (IMF) called the Poverty Reduction and Growth Facility (PRGF) but now have the effrontery to question a wise decision by President Mahama to salvage the economy and restore confidence and credibility to the economic policies that are being implemented.
The main objective of the Kufuor-led NPP government in going for these double programs with the Western-backed institutions was not only to integrate the Ghanaian economy to the Western neo-liberal economies (though from the position of weakness) but also to seek the critical financial support to correct what they termed the slippages under President Rawlings NDC government.
After eight good years, the NPP left one of the most deteriorated macro-economy in history much worse than what they are criticizing today. For instance, inflations when they were leaving power stood at 18.1 per cent as against 15 per cent presently. Budget deficit was about 14.5 per cent of GDP compare to 10.1 per cent of GDP presently. They left arrear across all sector of the economy of over GHS4bn that was about 10 per cent of GDP then, compared to some GHS200m that was left by the Rawlings administration that they bitterly criticized.
While one will concede that both the HIPC initiative and the 3-year PRGF program with the Fund and the Bank under the NPP government yielded some positive results, the economy could not stand on its feet after the end of the program. The NPP packaged clever lies for the Ghanaian public that they were weaning the nation from the Fund and the Bank when in 2006 they were retreating from the programs and had also reached HIPC completion point and reaped its benefits.
The real intention of the NPP for getting out of the program with the Fund in 2006 was to herald an unprecedented period of fiscal indiscipline with the intention of spending excessively to win the elections of 2008. Consequently, they entered into the international capital market and borrowed USD750m in the nation’s maiden sovereign bond that had a maturity period of 10 years and a coupon rate of about 8 per cent.
Proceeds of the Eurobond went into fictitious and unproductive ventures getting to the run up of the 2008 elections and up today no NPP government economic management team member could pinpoint to anybody what the money was used for and what its returns are.
It must be noted that under both the HIPC initiative and the PRGF they were implementing, the Bretton Wood institutions would never have allowed them to go into this spending binge.
For the first six years of the NPP, their HIPC program and the PRGF yielded over USD4 billion in debt relief. Again, no NPP economic management team member could pinpoint to anybody what the USD4bn was used for. The public debt as result of these reliefs went down drastically. For instance, the external debt which was the subject of discussion under the HIPC initiative went down from about USD6bn to about USD2bn in 2006 when the nation reached a completion point of the HIPC initiative.
However, by the time the NPP left power in 2008, the external debt had ballooned to over USD4bn again, which set the stage for a dramatic return towards macroeconomic deterioration, which together with arrears of over GHS4bn became a major headache to the incoming Atta Mills government.
While growth in 2008 was an impressive 8.4 per cent, all the other macro indicators showed serious deterioration. Confidence in the economy was at its lowest ebb and the currency saw a spectacular depreciation forcing the Mills-led government to adopt the same PRGF from the IMF to restore confidence in the economy and ensure macro-economic stability.
By the middle of 2009, exactly five months after the take- over of the Mills administration, there was a dramatic macroeconomic turnaround unprecedented in the history of this country.
The rise in inflation rate was halted, the tide of exchange rate depreciation was also stemmed, and credible fiscal consolidation policies restored investors’ appetite for the nation’s debt, leading to massive reduction in interest rates on government’s instruments.
Within the first term of the NDC government, the country experienced one of its longest sustained single digit inflation rate and spectacular currency stability. Single digit inflation which started in June 2010 continued up to the end of the NDC government’s first term in December 2012.
The NPP, with their hypocritical posture, said the low rate of inflation and the unprecedented currency stability between 2009 to 2012 did not reflect in the pocket of the ordinary people and so Ghanaians should disregard it.
Also, within the same period, the economy grew by higher numbers, 8 per cent in 2010, 15 per cent in 2011 and 8.8 per cent in 2012. This remarkable performance by far cannot be compared to any period under the eight years of NPP reign, even when there was huge debt relief from the international donor community as a result of the HIPC initiative.
Ghana suddenly became one of the emerging economic powers in the continent that drew the attention of the international community with many bilateral and multilateral agencies ready to do business with the West Africa’s promising nation.
However, as it has been the case with the country’s mono-crop economy since the inception of the Fourth Republican constitution, the economy faced severe fiscal stress after the 2012 elections. Public sector wage increases and other factors weaken some fundamentals of the economy.
Despite this, President Mahama and his economic management team persevered and utilized the strong foundation that was created in the last four years to ensure stable macro environment in the entire 2013.
The unjustified election petition that was lodged at the Supreme Court by leading members of the NPP, challenging the mandate of the President also dented the fortunes of the economy which had just come out of severe beatings from the election of 2012. What finally broke the camel’s back were the dramatic shortfalls in the prices of the nation’s export commodities of cocoa and gold and some problems with the volume of crude oil produced by the Jubilee oil field. According to data from the Bank of Ghana, the country lost US$1.3 billion from cocoa and gold alone in the fiscal year 2013. This adversely affected the foreign exchange market and heralded one of the most severe currency crises in recent history. The exchange rate depreciation was further aggravated by the weakening fiscal position that resulted in the loss of over GHS3bn in domestic revenue in 2013 fiscal year. The donor community also turned a blind eye to the plight of the country and its struggling economy.
Donor support in both 2013 and 2014 has remarkably dwindled to record low forcing emergency remedial measures.
The continuation of this exchange rate depreciation affected the price of almost everything in the country leading to severe economic hardship in the country and stress on some businesses.
President Mahama, in just his short period in office had faced protests upon protests from almost all the sections of the Ghanaian society. From the professional bodies, to the trade unions to the opposition political elements and even the local business community.
The central theme in all of these protests across the country is the general economic hardship that has gripped the nation.
In the beginning of the 2014 fiscal year, the government came out swiftly with two emergency remedial responses from the Bank of Ghana and the Ministry of Finance to combat the challenges of the currency and the general macro-environment. The Bank of Ghana monetary and administrative measures came into force in the first quarter of the year. The object of the measures is to curtail the phenomenon of dollarization of the economy and give strength and primacy to the local currency within the local economy, thereby stabilizing the currency.
However, the measures did not yield any significant benefit as the Cedi continues to depreciate further.
On the fiscal side, government went to the Parliament and announced what is now known as the homegrown economic policies. These are nothing but fiscal stabilization measures that are to ensure sound and successful fiscal consolidation of the economy leading to the reduction of the yawning budget deficit.
While the main objective of the home-grown policies was to reduce the huge fiscal deficits of both 2012 and 2013 without direct and deep involvement of multilateral institution like the IMF, the Bretton Wood institutions and some members of government think the direct involvement of the IMF will provide both financial and technical support for the economy. Again, other members of international finance and business community will be comfortable dealing with the country having the guarantee that their investment will not likely face any risk. The issue then became one of credibility to the homegrown policies.
With the mere announcement over the weekend of the intention to begin discussions with the Fund for a potential 3-year economic stabilization program with the Fund, jitters within the investor community is going to reduce drastically and the currency is likely going to stabilize within the shortest possible time.

As a leader, President Mahama took the interest of the nation in choosing the path that will bring immediate relief to the suffering Ghanaians who have to endure hardship as a result of the depreciating currency and almost daily increases in the prices of basic commodities in the market.
Criticisms coming from the NPP over the President’s intention to seek IMF bailout amount to apprehension over the potential improvement of the macro-environment that would bring relief to the citizenry, thereby undermining their chances of winning the next elections, something they hitherto think is a fait accompli.