WHY IS GHANA GOING TO THE IMF

Ghana's president, Nana Addo Dankwa Akufo-Addo, has authorised Finance Minister Ken Ofori-Atta to begin formal discussions with the International Monetary Fund (IMF) to help the country's economy. According to a statement issued by the country's information ministry, the order follows a phone conversation between President Akufo-Addo and IMF Managing Director Kristalina Georgieva, according to Graphic.com.

"The cabinet indicated its support for the decision at a meeting on June 30th, 2022," the statement said on Friday, July 1. "The engagement with the IMF will seek to provide balance of payment support as part of a broader effort to accelerate Ghana's recovery from the COVID-19 pandemic and, more recently, the Russia-Ukraine crisis."

According to people familiar with the plan, Ghana has postponed this week's mid-term budget review until initial meetings with the International Monetary Fund for an economic programme are completed. Finance Minister Ken Ofori-Atta was scheduled to provide an update on the West African country's revenue and expenditure targets for the first half. According to the people who declined to be identified because they are not authorised to speak to the media, the mid-year budget will be tabled later this month.

Last week, hundreds took to the streets of Ghana's capital, Accra, to protest the country's deteriorating economy. Days later, the government of one of West Africa's most prosperous countries announced that formal talks with the International Monetary Fund (IMF) for assistance would begin. It was a difficult decision to make.

WHY THE IMF?

In May, inflation hit an 18-year high of 27.6 percent, capping off a year of price increases.In the first quarter, growth slowed to 3.3 percent, and the cedi currency has lost 23.5 percent of its value against the dollar since the year began.

External and total debt are at a high risk of default. Higher projected deficits and debt service over the medium term, as well as broader debt coverage, have pushed the debt path up in comparison to the previous administration. External debt service continues to consume a third of government revenues and remains well above thresholds for the majority of the forecast period. The current values of the external and public debt-to-GDP ratios exceed their respective baseline thresholds.

 

The government blamed its woes on a combination of recent external forces, including COVID-19, the Ukraine crisis, and American and Chinese economic slumps, in a statement outlining its plan to approach the Fund. Last month, Finance Minister Ken Ofori-Atta told lawmakers that pandemic-related spending would total 18.19 billion cedis ($2.26 billion) by May 2022. During that time, the country received $1.23 billion in COVID-19 relief funding from the IMF and World Bank, he said.

Prices of imported goods rose more than those of domestically produced goods for the second month in a row in May, with cereals—20% of which Ghana imports from Russia—seeking some of the steepest price increases. Year on year, petroleum prices have nearly doubled.

Ghana's authorities hope that an IMF programme will alleviate the country's nearly $1 billion balance-of-payments deficit, which was caused by a capital exodus caused by global factors, according to central bank governor Ernest Addison in May. However, experts believe that the root of Ghana's problem is likely fiscal, as the country uses ever-increasing loans to plug its double-digit fiscal deficit.

"Our biggest problem is that around 60% of our expenditure is constantly going towards paying public sector workers or interest payments," William Duncan, founder of Ghana-based Spear Capital & Advisory, explained. "There has been a cycle over the last three governments."