IMF Programme Is Credit Positive For Ghana, But Meeting Fiscal Targets Will Be Challenging

Ghana’s talks with the IMF over a financial support package has been tagged by Rating Agency as credit positive for the West African country. According to Moody “the move follows rampant inflation (27.6% in May) and significant currency depreciation, which has sparked protests in a few major cities. An IMF programme will act as a fiscal policy anchor that will help strengthen creditor confidence and temper the current rise in the government’s borrowing costs. Government spreads on US dollar debt have already narrowed marginally following the announcement (see Exhibit 1). It could also help to attract larger and cheaper sources of borrowing, primarily from the official sector.

“Since the beginning of the year, interest rates on the government’s domestic debt issuance, which is its predominant source of funding, have risen steadily alongside monetary tightening (see our FAQ for further details). Elevated debt costs are Ghana’s primary fiscal challenge. Interest payments consumed almost half of government revenue last year, greatly constraining its scope of policy intervention. However, it will take time for the government to build a meaningful track record of meeting IMF fiscal targets that would lead to a sustainable reduction in its borrowing costs. Moreover, some of these targets are likely to be difficult to achieve because they need to be strong enough to improve the IMF’s own Debt Sustainability Analysis (DSA), which in July 2021 had already classified Ghana at high risk of debt distress when macroeconomic conditions were more favourable than they are now.

“At the same time, social opposition to the government’s fiscal-consolidation strategy has already been mounting amid fast-rising living costs and the introduction of a new tax (the e-levy). These social tensions most recently manifested themselves in mass demonstrations in Accra in June, which turned violent. Given the social pressures the government is facing and our expectation that interest payments will remain elevated throughout the year, we continue to forecast a fiscal deficit of about 10%-11% of GDP, which is similar to what the government posted in 2021. By comparison, the government’s November 2021 budget continues to target a 4 percentage point (pp) reduction in its fiscal deficit1 to 7.4% of GDP from 11.4% in 2021 and by a further 1.9 pp in 2023 to 5.5%”.