On 12 June 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Ghana.1 Background Economic growth continued at a robust pace of 8 percent in 2012 amid rising fiscal and external imbalances. Fiscal pressures came to the fore in a mounting public sector wage bill and costly energy subsidies that pushed the deficit close to 12 percent of GDP. The fiscal expansion led to a significant deterioration in the public debt ratio and contributed to a widening deficit in the external current account, with the latter also reflecting sizeable foreign direct investment (FDI).
The policy mix deteriorated in the course of 2012. While fiscal policy became increasingly expansionary, the Bank of Ghana tightened monetary policy in the second quarter of the year to arrest a rapid depreciation of the cedi. The currency subsequently stabilized, with recent depreciations in line with inflation differentials, but at the cost of high real interest rates. Consumer price inflation stayed in the single digits in 2012, helped in part by low food and repressed domestic fuel prices. With rising core inflation (excluding food and energy) and recent increases in fuel prices, inflation has moved back above 10 percent.
The growth momentum continues into 2013, with increased oil production projected to keep overall GDP growth close to 8 percent. Non-oil growth is likely to decelerate, however, as a result of energy disruptions and high real interest rates. Survey-based inflation expectations remain elevated at above 10 percent. The current account deficit is projected to stay high at 12 percent of GDP, despite a moderation in import growth, reflecting a weaker outlook for cocoa and gold exports. Staff projects a small reduction in the fiscal deficit to 10 percent of GDP this year, about 1 percent of GDP higher than the authorities' budget projections, mainly reflecting higher cost of energy subsidies.
While Ghana benefits from strong democratic institutions and favorable prospects for oil and gas, a reduction in macroeconomic imbalances over the medium-term is contingent on strengthened policies. Non-oil growth is projected to stabilize at a still robust level of 5-6 percent, and inflation should gradually decline as policies are rebalanced. A planned reduction in the fiscal deficit to about 6 percent of GDP is feasible by 2015, if measures are implemented as envisaged. This, together with increased oil and gas production from new fields, would reduce the current account deficit to about 7½ percent of GDP by 2018, financed in large part by strong FDI.
Executive Board Assessment
Executive Directors commended the great strides Ghana has made in reducing poverty and reaching lower middle income status. With favorable prospects for oil and gas production and a supportive business environment, Directors saw strong potential for sustained and inclusive growth, provided current macroeconomic vulnerabilities are addressed decisively.
Directors were concerned about the reemergence of a large fiscal deficit in 2012, widening external imbalances, and rising domestic debt, which expose the economy to risks from weaker terms of trade or reduced capital inflows. In addition, high domestic interest rates, due to excessive government borrowing, could curtail Ghana's growth momentum.
Directors underscored the need for decisive action to rebuild fiscal and external buffers and reduce public debt, and in particular, stressed the importance of regaining control over the public wage bill. They welcomed the decision to remove fuel subsidies and called for similar action to adjust electricity prices, as a crucial step to tackle Ghana's energy supply problems. Improving revenue mobilization, including implementation of envisaged tax policy measures, is also a priority. The mid-term policy review would be an opportunity to identify additional measures to secure the fiscal targets.
Directors saw a need for more ambitious fiscal consolidation over the medium term to ensure sustainable debt dynamics, allow the buildup of official reserves, and lower the current account deficit. Realigning public spending from subsidies and wages to investment would also support future growth. Given the growing reliance on nonconcessional financing, Directors welcomed the authorities' efforts to strengthen debt management and investment planning.
Directors supported the maintenance of a tight monetary stance until inflationary pressures subside and fiscal consolidation is firmly established. They recommended containing monetary financing of the fiscal deficit, and saw scope for further improvements in the inflation targeting framework to enhance the effectiveness of monetary policy. This could involve improved forecasting, enhanced communication to the public, and rolling one to two year inflation targets, to better anchor expectations.
Directors noted that the banking system has grown rapidly and is competitive. They recommended higher minimum capital buffers to contain vulnerabilities, including the risk of increasing nonperforming loans. Directors encouraged the authorities to follow through on the 2011 FSAP recommendations by further upgrading financial sector legislation and supervision, and deepening cooperation with regional counterparts. They also stressed the need to address the issues pertaining to the remaining weak banks, and advised the Bank of Ghana to divest its financial stake in the banking sector.
