High deficits exposing Ghana to risks – IMF

• Posted on May 14, 2014May 14, 2014
• by Nana Kwesi Coomson
• Comment

The Executive Board of the International Monetary Fund (IMF) has warned that Ghana’s high fiscal and current account deficits poses significant risk to the growth of the economy.

The IMF announced this after concluding their Article IV consultation with Ghana.

The Executive Directors commended Ghana’s strong growth and declining poverty over the past two decades.

They also supported the government’s transformation agenda, focused on economic diversification, social inclusion, and macroeconomic stability.

The Directors of the IMF, however, expressed concerns about Ghana’s high fiscal and current account deficits indicating they pose significant risks to the country.

The IMF mentioned that this situation makes Ghana vulnerable to worsening external conditions and will create pressure on interest rates and the exchange rate.

They also emphasized that macroeconomic stability will need to be restored to preserve a positive medium-term outlook.

According to them, achieving the 2014 fiscal deficit target will be challenging, in light of high interest rates, a depreciating currency, and a possible growth slowdown; therefore, they urged the authorities to take additional short-term measures to reduce the fiscal and external imbalances.

They encouraged the government to translate its policy commitments quickly into specific and time-bound action plans to achieve significant and durable consolidation.

In light of current imbalances, the Directors recommended a more ambitious medium-term consolidation path to stabilize public debt and debt service at sustainable levels.

While the risk of debt distress remains moderate, they expressed concerns about the high debt service-to-revenue ratio.

A stronger medium-term adjustment could set off a virtuous cycle of lower fiscal deficits and falling interest rates, creating space for social and infrastructure spending and crowding-in of private sector activity.

The Bank of Ghana in February increased the policy rate from 16 percent to 18 percent.

The Directors of IMF welcomed the increment. The board suggested that further tightening may be needed, in combination with fiscal consolidation, to steer inflation back into the target range of a single digit.

Government’s public debt level as the end of last year was about GHC 55billion.

The directors of the fund have stressed that the Bank of Ghana would have to limit its net credit to the government,

On February 4, the central bank introduced a set of new of foreign exchange rules to salvage the Cedi which had been declining against major foreign currencies. It has up to date depreciated about 20 percent.

The Directors of IMF emphasized that the new foreign exchange regulations will not be effective unless the underlying macroeconomic imbalances are resolved.

In particular, they were concerned that the measures could have unintended adverse effects.

They, therefore, welcomed the Bank of Ghana’s decision to review the measures with the objective of mitigating any adverse implications and removing the associated exchange restrictions.

-Citifmonline