IMF Concludes Article IV Consultation Mission to Ghana

ACCRA, Ghana - A mission from the International Monetary Fund (IMF), led by Christina Daseking, visited Accra during April 2-12, 2013, to conduct discussions for the 2013 Article IV consultations. The mission met with President Mahama, Vice-President Amissah-Arthur, Finance Minister Terkper, Bank of Ghana Governor Wampah, other senior officials, members of parliament, and representatives of the private sector, think tanks, trade unions, and civil society.

At the end of the mission, Ms. Daseking issued the following statement:

"Economic growth continued at a robust pace of 8 percent in 2012 amid rising fiscal and external imbalances. A growing public sector wage bill, costly energy subsidies, and higher interest cost, pushed the fiscal deficit to about 12 percent of GDP. The external current account deficit also widened to 12 percent of GDP, while unadjusted fuel and energy prices and a tightening of monetary policy helped keep inflation in single digits.

"The growth momentum has continued into 2013, with rising inflation pressures. While activity in the non-oil sector is dampened by energy disruptions and high interest rates, increased oil production should keep overall economic growth close to 8 percent. A weaker outlook for cocoa and gold exports will leave the current account deficit around 12 percent of GDP. The mission projects a reduction in the fiscal deficit to 10 percent of GDP this year, about 1 percent higher than the budget projections, assuming a delayed adjustment in utility tariffs.

"Despite Ghana's strong economic potential, short-term stability risks have risen. Ghana's strong democratic institutions and favorable prospects for oil and gas continue to attract significant foreign direct investment (FDI). Yet, low external buffers and a rising domestic debt ratio expose the economy to risks, such as weaker terms of trade, reduced capital inflows, or unanticipated spending needs. Energy sector problems could curtail growth, while excessive government domestic borrowing is raising the cost of credit to the private sector. Both factors have been identified as key growth constraints in Ghana. The mission's still positive assessment of the economy is contingent on the authorities' resolve to confront these challenges decisively.

"The mission strongly supports the government's ambitious transformation agenda, centered on economic diversification, shared growth and job creation, and macroeconomic stability. Rebuilding buffers to safeguard stability is now the immediate priority. This requires lower budget deficits to contain external pressures and keep debt sustainable. In due course, this will also allow for a reduction in interest rates. Going forward, successful economic transformation will require a realignment of spending, away from wages and subsidies toward infrastructure investment.

"A ballooning wage bill, if untamed, will bring debt to levels that could endanger the government's transformation agenda. The wage bill in 2012 rose by 47 percent, with much of the factors explaining the increase not yet quantified. In addition, deferred wage payments from the single spine salary reform were twice the level included in the supplementary budget. The mission urged the government to gain control over the wage bill. It recommended a thorough audit of the 2012 payroll and welcomes that the government has already started this process.

"The government's deficit target of 6 percent of GDP by 2015 will keep public debt high and buffers low. The mission recommended an additional fiscal adjustment of 3 percent of GDP by 2015, using a combination of revenue and expenditure measures. This would lessen the public debt burden and raise official reserves toward the authorities' target of more than 4 months of imports'up from 2.8 months currently. This target is consistent with the mission's own analysis of optimal reserves, which suggests that a cover of 4.2 months of imports would provide a reasonable cushion against plausible shocks.

"The mission shared the Bank of Ghana's views on keeping a tight monetary policy stance, for the time being. Both actual inflation and inflation expectations have risen recently, with upside risks from the sharp increase in government borrowing. To strengthen the signaling role of the policy rate within the inflation-targeting framework, the mission recommended narrowing the gap with current market rates. Successful fiscal consolidation will allow an easing of interest rates in due course, provided inflation expectations decline to levels consistent with the achievement of the target.

"On its return to Washington D.C., the team will prepare a staff report that is tentatively scheduled to be discussed by the IMF's Executive Board in mid-June."