News Release

Office of NPP Communications Directorate

September 16, 2014

THE STATE OF THE GHANAIAN ECONOMY AND THE IMPLICATIONS OF AN IMF PROGRAM - WHAT TO EXPECT…SEPTEMBER 16, 2014

After several months of being in denial about the economic challenges the nation has been facing, the government of Ghana has finally taken a decision to invite the IMF to begin negotiations on a possible stabilisation program for Ghana. A mission from the IMF has arrived in Ghana this week to begin the negotiations.

While some people believe that an IMF program may bring with it further hardships through possible cuts in government spending, elimination of consumer subsidies, downsizing of public sector employment, etc, others believe a program with the Fund might bring benefits such as balance of payments support, as well as unlocking other bilateral donor support needed to stabilize the cedi and the economy as a whole. In the opinion of the President the government’s engagement with the IMF will bring about “policy credibility” to his so-called “home grown policies”.

It is important to state, at the outset, that whatever program that is agreed upon with the IMF will depend critically on the current state of the economy. So what is the state of the Ghanaian economy? Ladies and gentlemen of the media, the interface today seeks to inform Ghanaians about the state of the economy, especially the fiscal situation as of June 30, 2014. Before we get into a discussion of the current state of the economy, we would like to remind you of some of the events that have taken place since February 2014.

Ladies and gentlemen, you would recall that in February this year, an IMF mission visited Ghana and in a press release dated February 26, presented its preliminary findings on what they thought ought to be done. As a follow up to this mission, the staff report presented to the IMF Board intimated that while they welcome measures already taken and announced in the budget, additional savings are required to address short-term vulnerabilities, contain public debt levels and reduce interest rates. Specific measures were proposed for the government’s consideration.

On the revenue side the measures included:

1. Introduction or increase in selective tax rates (e.g. higher ad-valorem or VAT on fuel;
2. Higher excise tax on specific products;
3. Higher tax rate on real estate along with stepped up registration and valuation efforts;
4. Immediate freeze on new tax exemptions;
5. Better identification and targeted auditing of large tax payers;
6. Legislative revisions to streamline exemptions permanently and strictly constrain the power to grant exemptions;
7. Thorough review of tax regime for free zones to reduce exemptions and;
8. Reconsideration of a windfall profit tax on mining.
On the expenditure side the staff proposals included:
1. Reduction in wage costs through streamlining allowances (starting at higher income levels);
2. Non-replacement of departing public sector employees in overstaffed areas;
3. Further prioritization of capital spending combined with reduction in transfers to statutory funds to lowest permissible levels;
4. Reduction or elimination of transfers to GNPC;
5. Multi-year wage agreements consistent with fiscal consolidation plans;
6. Specific programs to reduce the public workforce while improving the skill mix;
7. Streamlining of sub-vented agencies with time bound targets for removing them from the public payroll through closure or commercialization; and
8. Full integration of spending by statutory funds in the overall investment program combined with a review of possible legislative change to replace rigid transfers.

In addition to these fiscal proposals the Fund staff suggested to the BoG to immediately review the new proposals on foreign exchange regulations since, in their view, those regulations alone could not deal with the fundamental pressures on the foreign exchange market. Indeed, the NPP Minority in Parliament had earlier made it clear to the Bank that persisting with those outdated regulations was akin to fighting a 21st Century war with 19th Century arms and ammunitions.

So how did our government respond to these proposals put forward by the IMF team? To put it aptly, the government literally dismissed these suggestions.

First, the President in his State of the Nation address responded by saying that “our economic fundamentals remain sound and the mid-term prospects are bright”. Secondly, the Minister of Finance in his now infamous April 1 statement to Parliament presented the so-called “home grown” policy response to fiscal consolidation, which was essentially a repeat of measures announced in the budget statements of 2013 and 2014. It was made to appear that the IMF did not know of these measures before making their proposals in February 2014. To add insult to injury, subsequently, the government sent a document dated April 14 to the IMF for their information. Of course this document was not accorded any merit or consideration by the Fund. Third, on the monetary and exchange front, the BoG appeared to be pursuing a contractionary policy by raising the policy rate by 200bp. However, this was completely neutralized by the fact that the Bank during the same period single-handedly financed government deficits. Furthermore, it took the Governor and Central Bank a long time to reverse the outmoded regulations on foreign exchange, leading to further depreciation of the cedi exchange rate.

It is important now to interrogate the President’s bold and assertive declaration that the fundamentals (of the economy) remain sound and the mid-term prospects are sound. Noteworthily, he buttressed his point with statistics on economic growth. If one were to assume rather errorneously, as the President did, that economic growth rate alone make up the economic fundamentals, then it becomes relevant to yield to facts to enable one properly judge the President’s characterization of the current state of the economy. The GDP growth rate which was inherited by Kufuor was 3.7%. In 2001 the GDP grew at 4.2%. in 2002, it grew at 4.5% rising to 5.2% in 2003 and to 5.6% in 2004. It rose to 5.9% in 2005; 6.4% in 2006; 6.3% in 2007 and to 7.3% in 2008 which later became 8.4% after the rebasing of the economy. This steady growth happened without the benefit of crude oil exports. This is how a really sound economic growth aggregate looks like.

However, if one is to consider the full set of economic aggregates that constitute what is properly called economic fundamentals then the facts cannot be distorted. The cedi depreciated by 17.6% in the first quarter alone this year compared with a depreciation of 1.1% in the first quarter last year. As at the end of August 2014 the cedi had depreciated by some 40% since December 31, 2013. The second worst performing currency in the world this year!! In the 8-year administration under President Kufuor the cedi, from GH¢0.72 - GH¢1.1 to $1, depreciated by 53%. Less than 6 years into the NDC administration, the cedi has depreciated by 245.5% and still counting. Interest rates now hover around 30%; our gross international reserves in months of imports have dwindled to 2.2 months of imports and the net reserves is for just 7 days; our trade deficit is now well over $4Billion; the fiscal deficit was 10.8% in 2013 or about GH¢12billion. This was against the target of 9.0%. The fiscal deficit was 11.8% of GDP in 2012 against the target of 6.7%; our current account deficit in 2013 was 12.8% of GDP or $5.7billion (i.e. GH¢17billion):, it was $4.9billion in 2012. This is the first time in a very long time that we have had a double digit current account deficit and budget deficit two years in a row; public debt stock is now GH¢58billion up from GH¢51.6billion in December 2013. This does not include the entire $3billion CDB facility or even the $1billion Euro bond. This means that today every Ghanaian owes GH¢2,150. We are borrowing at a rate of GH¢2billion every month. The public debt has risen from GH¢9.56 to GH¢58billion, an increase of over 510% in 5½ years. The debt to GDP ratio is about 58% today. The Mills – Mahama administration inherited a total public debt of $8billion, the equivalent then of GH¢9.5billion at the beginning of 2009. That figure represented 33% of GDP. Within 5½ years this debt has escalated to GH¢58billion which is more than 4½ times, or indeed 510% increase in debt stock over 5½ years. Inflation for August meanwhile was 15.9%. It has been on the upward swing since January. Inflation is no longer in single digit and the nation has been spared the cacophony associated with it instead of concentrating on relevant matters.

TRADE AND INDUSTRY

In 2011 the nation’s trade deficit was $3.1billion; it escalated to $4.2billion in 2012 and in 2013 it hit $4.1billion. The worsening balance of trade position contributed to the massive current account deficit of $5.8billion in 2013.

MANUFACTURING

Manufacturing in Ghana is not doing well. The share of manufacturing to the industrial sector continues to slump. It declined from 17% in 2011 to 5.0% in 2012, and to 2.5% in 2013. Manufacturing is wobbling because of the crises in the energy sector. Power supply had been epileptic and the cost has been very high. Industry does not have access to long term credit; excessive government borrowing has squeezed industry out of short term credit; industry is almost suffocating because of huge taxes; water supply to industry is erratic and expensive. High production cost has rendered Ghanaian manufacturing industry uncompetitive. In the face of withering industry and an atrophic agriculture, employment cannot be generated and hence, unemployment figures are soaring. That is the state of our economy.

In 2013 the economic growth in countries in the West African Monetary Zone (WAMZ), most of which are non-oil producing, averaged 6.7%. The countries in that group are the Gambia, Guinea, Sierra Leone, Liberia and Nigeria. Ghana’s non-oil sector grew at 5.8% less than the average, and these others, apart from Nigeria do not have oil to provide any cushioning to them.

Of the 10 Primary and Secondary criteria of economic growth established for countries in the WAMZ, Ghana placed last in that league as Ghana was the only country that attained only 3 of the criteria in the course of 2013. Even then, by December 2013 we had slipped on “exchange rate stability” and “real interest rate” and, hence, at the close of 2013, we met only one of the 10 criteria. That criterion is that Central Bank (BOG) financing of the country’s deficit for 2013 was less than 10% of the previous year’s tax revenue. That represented the worst performance by Ghana in 20 years.
Ladies and gentlemen this is the real state of the economy!! Now, instead of owning up this, President John Dramani Mahama only keeps restating to Ghanaians that the country has caught the bug of “the 2007 world financial crisis” and “the recent tapering policy announced by the US Federal reserve”. When the GDP growth rate hit 14.4% in 2011 both the then Finance Minister and the then President came to Parliament and took credit for what they called “prudent economic management” which had resulted in “unprecedented GDP growth rate”. At the time no reference was made to world financial crisis. And if one may ask, did the recent tapering policy of the US Federal Reserve affect only Ghana’s economy? The policy did not have any effect on the other countries in the WAMZ the GDP growth in which registered 6.7%? Sierra Leone which has just emerged from war registered a growth rate in excess of 12%. Clearly, there is something wrong with our economic management and it is time to take a real hard look!

Ladies and Gentlemen, clearly, because government failed to adequately and quickly respond to the unfolding economic crisis, the state of the economy has gotten worse by any stretch of imagination. Presented below is a summary of the dire economic situation as of June 30, 2014.

On the revenue side, the Ministry of Finance reports of substantial shortfalls in revenue generation among all revenue types with the exception of corporate taxes on oil. Specifically, taxes on income and property which were projected at GHc 4, 217 million fell short by GHc 271.4 million. As a result of a general decline in economic activities, the total shortfall in personal and corporate taxes, including fiscal stabilization levy was as much as GHc 404 million. This shortfall was partially mitigated by an increase in projected corporate tax on oil of over GHc 119 million. While taxes on international trade were broadly on target, Communications Service Tax and VAT fell short of the projected rates by GHc 54.5 million and GHc 61.6 million respectively. In short, domestic revenue recorded a substantial shortfall of over GHc 790 million, of which GHc 410 million was from non-tax revenues. Grants did not fare any better. Of the projected amount of GHc 536.4 million, only GHc 340 million was received- a shortfall of about GHc 196.4 million. In summary as of June 30, 2014, government had recorded a shortfall in revenue mobilization amounting to GHc 989.8 million – an abysmal performance.

The story on the expenditure side is quite intriguing. On the face of the data available, the actual expenditure recorded at the end of June 30, 2014 is GHc 13.53 billion, while the projected amount is GHc 15.43 billion representing a positive variance of GHc 1.87 billion. In simple terms, the government spent GHc 1.87 billion less than it intended. If these represented real savings one should applaud the government. But a closer look at the data shows that this represents an accumulation of new arrears ostensibly due to a deliberate policy not to pay what is owed, especially statutory payments.

The data reveal that three expenditure categories, wages, pensions and petroleum subsidies recorded over payments of GHc 39.3 million, GHc 23.7 million and GHc 17.6 million respectively, totaling GHc 80.6 million. In contrast, seven categories of expenditures, including all statutory payments recorded substantial underpayments amounting to a total of GHc 1.54 billion -almost the equivalent of the total expenditure savings of GHc 1.87 billion reported for the period. The specific amounts are as follows: Interest payments GHc 71.3 million; NHIF GHc 64.2 million; GETFund GHc 329 million; DACF GHc 596.7 million; Social Security Contributions GHc 354.1 million; GNPC GHc 88.7 million and Lifeline Consumers GHc 25.6 million. Of the total underpayments and/or arrears accumulated, a whooping 92.4 % (GHc 1.42 billion) is statutory.

This indeed is the state of our economy with respect to accumulation of new arrears. It is significant to note that with respect to social security contributions, GETFund and DACF, no payment (zero, none) due in 2014 fiscal year had been made by June 30, 2014. This is distressful! No wonder development projects in MMDAs are at a standstill. No wonder that there is an outbreak of cholera in the country at a level not seen in over thirty years. The MMDAs cannot perform sanitation and sanitation-related functions because government has not released funds to them.

When you combine the above information with data dealing with the liquidation of old arrears the picture gets murkier. According to statistics presented by government, it projected to liquidate old arrears (road and non-road) to the tune of GHc 1.086 billion. However, by the end of the period under consideration, actual liquidation amounted to GHc 1.81 billion. The questions that come to mind are these: What was the basis for arriving at that projected amount? Was that a true picture of arrears owed?

A deeper analysis of the data reveals that the payment of road arrears was broadly on target. However, the story on non-road arrears needs further probing. Of the reported amount of GHc 1,651.6 million payment of non-road arrears, GHc 378 million was for wages (leaving a shortfall of GHc 125 million), GHc 60 was for DACF and Ghc 97 million went for GETFund. The obvious question that arises is: which entities received the overpayment of about GHc 1116.6 million? Is it service providers such as school feeding contractors, or BDC’s? Ghanaians, the governed, must first be informed; the IMF will certainly ask for explanations.

A related issue to be gleaned from the fiscal data reported by government, as well as data provided by the government in the revised budget raises questions about the true picture on petroleum subsidies. While the original budget projected a subsidy of GHc 50 million for petroleum subsidies, this amount has been raised to as much as GHc 618 million in the revised budget. What is the basis for the old and new estimates? Ghanaians want to know. Is it because the BDC’s and the government are feuding about what is owed? Or is it due to the BOG’s “Multiple Currency Practice” which engenders serious losses by the OMCs which losses ultimately have to be borne by government? These huge discrepancies raise serious questions about the budget data, and will present difficulties for the government in the upcoming negotiations with the Fund.

On the basis of the actual data reported by government the fiscal deficit is reported to be GHc 4.82 billion for the first half of the year. It is our considered opinion that when proper accounting is done the true deficit will exceed GHc 4.82 billion. Our opinion is confirmed by the revised deficit for the year amounting to 8.8 % of GDP announced by the Minister, which might not be attained.

Clearly, the information provided above points to a deteriorating fiscal position since February 2014. When you juxtapose the fiscal situation with the fact that the monetary and exchange rate positions have also gotten worse you begin to appreciate why the negotiations with the IMF will be tough.

Again, even though the Bank of Ghana raised the monetary policy rate by 200 basis points, this has been completely neutralized by the fact that it financed the government deficit by over GHc 3.3 billion for the first half of the year. This represents about 70% of the deficit. It is thus not surprising that interest rates are reported to have reached a five-year high. Inflation rates have also remained in double digits. Inflation rate for August is recorded as 15.9%.

On the foreign exchange front, depending on whether you use BoG’s reported interbank rates now being quoted around GHc 3.13 to the dollar (after remaining curiously unchanged at GH¢3.03 to the dollar between June and first week of September 2014) or the actual transaction rates displayed on the notice boards of Banks, the cedi depreciation is between 25% and 40 %. If you add the problem of debt overhang to these other problems then you begin to appreciate the seriousness of Ghana’s economic problems.

For instance, as a result of accumulated stock of debt, which is estimated to be about GHc 58 billion as of March 2014, debt service alone for 2014 is projected for the year to be about GHc 8 billion. To further illustrate the extent of the debt overhang, you will recall that in the revised budget, the Minister requested for a supplementary appropriation of GHc 3.2 billion. This is exactly the additional amount required to pay for amortization and interest on our debt stock mainly due to the vastly depreciated cedi. If the cedi depreciation gets any worse for any reason, this supplementary amount will not be sufficient for the purposes for which it is intended.
Certainly, on the basis of the government’s reported economic data, one can conclude that the economy is in severe crisis. It is in this context of deteriorating economic fundamentals that negotiations with the IMF will take place. Under these circumstances, one can only conclude that our negotiators are severely handicapped. Remember that, in February, the IMF team had made certain proposals when the economic situation was not as dire. We cannot imagine that the new proposals from the Fund will be less stringent than the earlier ones.

Furthermore, it needs to be understood that while the negotiations will initially focus on expenditure rationalization and revenue mobilization measures, there will be discussions on sectoral issues which will affect expenditures, or revenues or both. Our analysis here is not intended to be exhaustive but will focus on three main areas which in our opinion will be critical to the negotiations. The areas are:

A) The Millennium Challenge Compact 2 or MCC-2;
B) Loans in the Pipeline; and
C) The Automatic Adjustment Formula in the Petroleum Sector.

Millennium Challenge Compact 2 (MCC-2)

Ghana has recently signed a grant agreement with the Millennium Challenge Corporation (MCC) in which the government expects to receive an amount of US$ 498.2 million from the US government. In return, the government must fulfill certain conditions, some of which will directly have an impact on a possible program with the IMF. Without going into all the details of the MCC, we want to just focus on three of the conditions.

First, in order to access the grant, the government must demonstrate substantial compliance with the Electricity Distribution Utility Payment Action Plan. What does this mean? It simply means the government must put forward a credible plan to pay all the old arrears owed by government agencies to ECG and NEDCo prior to the coming into force of the compact. Information available suggests that this debt ranges between US$ 300 to US$ 500 million. In addition, the government is required to not be more than 60 days late in the payment of new arrears. This will involve additional expenditures on the part of government, which will certainly be factored into the IMF program that will run pari-passu for at least 3 years of the Compact timeline of five years. An IMF program will factor in the expected inflows from the Compact, as well as the projected expenditures. Hence, the team will likely engage the government in the robustness of the plan to assure consistency.

Second, one more conditionality in the MCC-2 requires government to be in substantial compliance with the tariff plan. This means that PURC must strictly adhere to the proposed quarterly adjustment in electricity tariffs to ensure the financial viability of ECG and NEDCo. Furthermore, the government must fully budget for subsidies for lifeline consumers, if it is the government’s intention to do so. Again, the IMF will need to assure itself of the robustness of such a plan to assure credibility and consistency.

Last but not least, as part of the commitment to assure the financial viability of ECG and NEDCo, the government may have to provide additional capital infusion to these two companies. This will be aside of the initial injection of US$ 37.4 million required as government’s contribution to the compact. Again, the IMF will need to assure itself that the government is capable of doing that. Given these considerations, one need not guess how it will impact the impending negotiations.

LOANS IN THE PIPELINE

Earlier, we intimated that the country’s current debt stock is creating serious problems for debt sustainability. As part of its mandate, the IMF is to ensure that member countries do not engage in practices that may endanger the country’s own financial system, as well as the global financial infrastructure. Currently, we can list at least three loans in the pipeline which in our opinion the Fund will be interested in engaging the government on. These are the US$ 3 billion Chinese loan, which appears to have run into a road block; The VTB Capital Loan of US$ 300 million, which is quite expensive, and may likely also run into difficulties because of EU and US sanctions imposed on VTB Bank; and the US$ 1.0 billion Euro-bond issue. We simply do not see how an IMF program can be concluded without clarity on these three pipeline loans, in the least. On the Eurobond issue we are not surprised that government issued only US$ 1 billion. It is our considered judgement that the impending negotiations with the IMF certainly influenced the outcome, At a yield of 8.125 % it is certainly expensive when compared with that obtained by Ivory Coast recently (5.37 %). Here it is significant to mention that Cocobod also secured US$ 300 million less than what had been approved by Parliament, Combined together the BOG will receive US $ 800 million less than had been anticipated to shore up the cedi. How is this shortfall going to be filled? Or could this be an indication of the quantum of BOP support that the government expects to request from the IMF?. We will soon find out

PETROLEUM SUBSIDIES

Although the government has announced its commitment to an automatic petroleum adjustment formula to eliminate subsidies in the sector, the evidence available suggests otherwise. For example even though the 2014 budget proposed a subsidy of GHc 50 million on petroleum products, the revised budget figure of GHc 618 million creates uncertainty as to what the actual policy is. Furthermore, recent disagreements between government and the BDC on the actual amount owed compounds the problem. Clearly, the current policy is inefficient because it is not well-targeted, and also because it creates serious fiscal imbalances. If the government insists on automatic adjustment, the IMF will hold the government to it. On the contrary, if it insists on subsidizing, the IMF will ask that it be fully budgeted for to avoid fiscal dislocations.

Fellow Ghanaians, within this short span of time, we have attempted to provide you with what the state of the Ghanaian economy is, in the context of the proposed negotiations with the IMF. On the basis of data provided by the Ministry of Finance itself, it is our considered opinion that the economic fundamentals have gotten worse since February 2014. Had government listened to good advice we would not have found ourselves in this predicament. The unfortunate thing is that all of us Ghanaians will have to pay a higher price for what government failed to do, for reasons best known to them. Why did it take the President five good months to see the writing on the wall?

We have also shown that aside from the basic issues relating to revenue generation and expenditure rationalization measures (including public sector employment downsizing), which will form the core of the negotiations, at least three important issues to contend with will be conditionalities of MCC-2, Loans in the Pipeline, and the Automatic Adjustment Formula in the Petroleum sector as we engage the Fund.
We wish to remind both the Government and the IMF that any program that is agreed upon will have to receive Parliamentary approval as required by the constitution. The last program which lasted from 2009 to 2012 did not receive an explicit approval by Parliament. When the program is brought to Parliament we will be ready to thoroughly examine all relevant issues. In the meantime we wish to say good luck to the government’s negotiating led by Dr, Kwasi Botchwey.

On our part, fellow Ghanaians, we would request government to negotiate an IMF program that would not inflict further hardships on Ghanaians, who have already suffered enough from the incompetence and mismanagement of this NDC government over the past six long years. Whatever agreement is reached with IMF should protect jobs, reduce the high cost of living, reduce the cost of doing business, and support the transformation of Ghana’s economy.

Thank you for your attention.