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Opinions of Wednesday, 15 April 2020

Columnist: Prof. John Gatsi

Prof. John Gatsi writes: $1bn IMF COVID-19 loan disbursement; true picture of Ghana’s economy

The announcement by the IMF Executive Board that US$1Billion loan under the RCF has been approved for Ghana is good news. However, this does not take away the fiscal growth debt management and international reserve realities for Ghana.

The IMF as an international financial institution has provided for countries to access Rapid Credit Facility (RCF) in emergency situations, normally occasioned by developments that are beyond the strategic anticipation of countries. This could be in the form of natural disasters, health pandemic, among others, which compromises a stable balance of payment and fiscal developments for economies.

As classified by the IMF, the loan comes under RCF, which is why about a month after the application by the Government of Ghana (GoG), the loan disbursement has been rapidly approved so that the loan will start hitting the account of GoG in tranches timeously. This rapid disbursement does not happen because of extraordinary efforts by countries accessing the facility but the exigencies of the times.

It further means even though the RCF is not a program-based facility, progress report on the utilization of the earlier disbursement should be seen to address Coronavirus related issues, the balance of payments and fiscal management issues.

As discussed in an earlier article, the main feature of the RCF is its “zero interest rate with a grace period covering about 5.5years for 10-year maturity loan. This defines the concessionary nature of the RCF as against most of the recent market-based loans (commercial loans) with greater burdens of repayment”.

It was also stated in the earlier article on the RCF that this loan does not attract program-based reviews and evaluation by the IMF, but Ghana must prove how the facility addresses underlying balance of payment issues, financial support to vulnerable families, stimulus packages to micro and small scale businesses in a manner that deals with poverty reduction and immediate health care needs at the time.

This loan has displayed some important fiscal management issues that make the prudent utilization of the RCF by GoG comparable to the canonical demands of the Ten Biblical Commandments.

Overall, the fiscal deficit deteriorated from -7% of GDP in 2018 to -7.5% in 2019 and is projected to further decline to -9.5% in 2020 based on government data submitted to the IMF inclusive of financial and energy sector costs.

The primary balance which is a critical domestic anchor for debt sustainability also deteriorated from -1.1 in 2018 to -1.8 in 2019 and expected to close the year 2020 with -4.1.

The debt to GDP ratio has also deteriorated by 4.2% (59% to 63.2% from 2018 to 2019) and projected to worsen to about 69% in 2020, excluding ESLA bonds.

There will be about a 6.5% reduction in GDP per capita for Ghanaians between 2019 and 2020. This compromises the share of Ghanaians in the national cake.

While the expectation for recession is a possibility for fragile economies in Sub-Saharan Africa, if the Coronavirus pandemic is contained early enough, Ghana may not slip into a recession but will experience a sharp reduction in economic growth from 6.1% in 2019 to 1.5% in 2020.

This is why the judicious application of all the funds being generated from the WorkdBank, IMF, the Stabilization Fund and the COVID-19 Trust Fund is required with greater transparency and accountability. We must apply the funds to avoid delay in resuming normal economic activities. We must avoid a food crisis in post Coronavirus era.

In 2020, oil GDP is cut to about -2.1% with ever-dwindling donor support expected to be about $514Million in 2020 against $826Million in 2019. GoG must deal with this crisis to hold the confidence of foreign investors to apply the break of investment withdrawals or dis-investing.

The IMF indicated a balance of payments as one of the areas that the $1Billion disbursement will address. The gross international reserve which is a protection for domestic currency performance and confidence of foreign investors is not in good shape. On average, between 2018 and 2020 the gross international reserve covers about 2.9 months of imports in which 2.7 months of imports is expected in 2020. This means between 2018 to the first quarter of 2020 there is no record of the reserve performing better than what is presented to IMF.

The net international reserve, which in practice is the critical measure, averages 2.2months of imports from 2018 to 2020 with an expectation of 2.1 months of imports in 2020.

While Parliament did a good job by providing fast track approval to government to borrow from the IMF, the reality is that there is recorded deterioration in the key fundamentals before the Coronavirus.

Government should make good use of the flow of funds. This is important as the chances that government may bundle more areas that will create further problems is high.

The criteria for individuals and businesses to benefit from the Coronavirus Alleviation Program should be made more transparent and well-targeted.

A matrix of primary balance, lower revenue prospect, critically low expected growth rate, heightened expenditures and deteriorating debt to GDP ratio as well as the weak international reserve position makes 2020 and 2021 very difficult years for the Ghanaian economy.

In the midst of the Ebola crisis, energy sector crisis and collapse of crude oil prices spanning from 2013 to 2016 with the right decisions and investments of available funds, Ghana’s economy did emerge stronger.

Though one is not compelled to compare the Ebola period with Coronavirus pandemic, the two periods remain times of massive shocks that require similar determination and commitment to rewrite new financial and fiscal notes about the Ghanaian economy.

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