IMF Life Line - The Issues, The Politics and the Risk Watch

It started as rumor in the mill, when the Senchi Consensus concluded with a communique to address thorny economic issues that had already trickled down to the micro economic level in the form of factory shut downs, lay-offs and declining cost of living. The IMF 3-year Extended Credit Facility program for Ghana has indeed come at a timely juncture in Ghana’s economic journey back to stability. Indeed, since the establishment of multi-party democracy under the fourth republic, it appears the narrative of Ghana’s economic performance has been a pendulum swing between moderate growth, decline and stability. Inconsistent policy arrangements, weak fiscal and monetary coordination and poor external sector performance undergirds this seemingly intractable economic cycle. The current difficult economic conditions gave sufficient flags and early warning triggers that warranted early an early proactive policy turn-around. The signs were written on the wall it seems. According to Bank of Ghana’s Monetary Policy Report Volume 6: No.2/2014, there was clear evidence of a dip in the Business Confidence Index from 92.8 in December 2013 to 82.8 in March 2014. Within same period, the Consumer Confidence Index also recorded a slump from 81.9 in February 2014 to 76.1 in May 2014 due to negative sentiments about household financial situation and current economic situation. That notwithstanding, the political economy maintained a business-as-usual stance and waded through the fog until a realization that Official Development Assistance (ODA), a key budget financing pipe was needed to recover some fiscal space and hopefully regain policy credibility in the process, thereby setting the tone for more donor assistance, hopefully, seeing that the “prodigal partner” is now “behaving well, fiscally. This, in my view, sets the right context to examine the merit of IMF’s 3-year Extended Credit Facility (ECF), which is expected to run till 2017 with a front-loaded fiscal adjustment in the near term. Contrary to popular opinion and suspicion of IMF conditionalities, I am persuaded, with facts that most of the policy recommendations under the 8-priority actions, as delineated by the ECF program, can be categorized as “home grown”. In ensuing paragraphs I hope to supply further and better particulars to validate this claim. Having reviewed the ECF program document, I do however think it appropriate to consider the foremost matter of “why”. Why we are at IMF is really a no-brainer. There are three issues that are without contention: (1) that Ghana’s balance sheet is over-leveraged, leading to high interest cost, absorbing 25% on government revenue in 2013 (2) input/output ratio in government payroll regime has massive efficiency gaps – 57% of revenue went to wages in 2013, and (3) policy credibility. My in seeking to understand “why” therefore goes beyond the immediate policy problems as stated in both the Senchi Communique and IMF 3-year ECF program document. Here is a new question: What are the key policy issues, the reason for which Ghana’s economic growth model is trapped in a cycle of decline, stability and moderate growth? Why are we marking time? Why do we appear to know what the problem is but lack the political courage to address them?

From Senchi to IMF
During the Senchi Consensus, the group responsible for policy deliberation in terms of Macroeconomic Stability identified these issues as being underlying causes of macro instability:

1. Policy Credibility
2. Budget Constraints
3. Deficit Financing.

Under policy credibility, the group made the following interesting observations, inter alia;

1. Budget outcomes have deviated significantly from forecasts and therefore have tended to be perceived as not dependable.
2. Mid-year reviews have sometimes been used to introduce new policies rather than an assessment of policies outlined in the budget.
3. For two consecutive years (2012 and 2013) macroeconomic targets have been missed.
4. There is a general perception that Government tends to explain economic difficulties more by attributing causes to external factors than to domestic policies.
5. This leads to complacency and inappropriate responses. vi. Excessive spending in relation to the political cycle has undermined confidence in the commitment to macroeconomic discipline and stability.
6. Announcement of policy measures (e.g., new tax measures) that are not implemented in accordance with the implementation schedule assumed in the budget.
7. Surprise changes in the foreign exchange market regulations followed by selective revisions that suggest inadequate consultation with stakeholders or assessment of the reaction of the public.
8. Institutional arrangements have been proposed to deal with corruption, but high profile cases remain to be dealt with frontally.

In summary, the group agreed that policy planning lacks depth, execution is haphazard and attributions for poor performance is inaccurate, at best.

Now here is how IMF frames the problem:
“…While the onset of oil production in 2011 was expected to support the development of public infrastructure and alleviate fiscal imbalances, a ballooning wage bill and overruns in current expenditure more than offset higher revenue and led to double digit fiscal deficits. The rapidly rising public debt since 2006 resulted in significantly higher interest payments, further constraining social and development spending. Large fiscal and external imbalances and monetary financing of the budget have led to high inflation, a decline in external buffers, a significant depreciation of the Cedi, and high nominal interest rates, weighing on growth and real incomes of most households.”

Interpretation? Basically the same as Senchi Group 1, but with a little political correctness, as is expected, yet essentially re-echoing Senchi. So what is the point? I have chosen to highlight the issue of policy credibility because I believe that more than budgetary constraints and overseas development assistance, it reflects the idiosyncrasy and stark reality of Ghana’s political economy. Specifically, it raises pertinent issues about executive decision-making, balance of power and effectiveness of institutional controls in addressing risks within our Public Financial Management System (PFMS).

The Politics
The avid contention for political power by the two key traditions, New Patriotic Party and National Democratic Congress, is and has always been a strong influence on rationality in fiscal decisions, particularly during electoral periods. Many critics of the current administration argue that the double-digit fiscal deficits recorded in 2012 was on account of expenditure spike in the last quarter leading to elections. Counter-criticisms of the previous administration on same grounds is also rife in certain quarters. Clearly, the issue of patronage and paternalism as exacerbated by lack of transparency and accountability in public finances, makes fiscal deficit partly structural in nature. Following the Senchi Consensus, public speculation about possible IMF article IV consultation for purpose of fiscal relief, was emphatically rebutted by the executive branch of government. With benefit of hind sight however, it is unmistakable, the logical sequence from Senchi to IMF given the narrow fiscal space and dwindling international budgetary support that had come to characterize Ghana’s economic experience. Even when the announcement to request IMF assistance was made official, the spin was to “seek policy credibility” and not monetary support. In fairness to this administration, similar controversy, albeit of a different nature, characterized the Kufuor administration’s decision to seek HIPC relief, a decision that demonstrated strategic wisdom. So, why do governments, past and present, have a mortal fear of open, transparent and candid communication regarding austere policies? The answer? Power maintenance. To stay in power, one must use whatever means necessary, argues Niccolo Machiavelli, in The Prince, an all-time best seller that has hugely influenced both competitive politics and business strategy. This notwithstanding, it does appear that Ghana’s case is extreme. Machiavelli can explain why propaganda may take precedence of straight talk, but can’t justify why flying millions of dollars to football players in Brazil while statutory payments to National Health Insurance or GETFund remain in arrears. The lack of strong institutional controls to balance executive excesses and breaches also gives cause for concern. Ghana’s political environment, poisoned with partisan political acrimony and institutional capture by the political class, no doubt is the corner stone of this structural rigidity that IMF hopes to unwind with this medium-term reform agenda. It is interesting to note that the ECF program tacitly acknowledges the political vulnerability of the current administration thereby back-loading some of the difficult fiscal adjustments such as public sector labor rationalization.

The Risk Watch
The question of whether or not IMF’s 3-year Extended Credit Facility will help the government to achieve set goals in the second Ghana Shared Growth and Development Agenda (GSGDA II, 2014-17), is important for rebuilding market confidence. Growth estimates set out by the program forecasts a non-oil GDP growth in 2015 as 2.3 %, rising to reach 5.5% by 2017. This is expected to be achieved through rigorous fiscal consolidation including, improvement in revenue collection. Initiatives in the 2015 budget such as Special Petroleum Tax, VAT on fee-based financial services and 5% flat rate on real estate are expected to shore up government revenue. Market sentiments however remain uncertain whether the medium term policy effect will lead to growth considering the impact on financial intermediation and inflation.

The program rightfully points out certain risks to growth outlook that reflects the sentiments of the market:

1. Protracted deficit in energy supply (dumsor) – if it persist could cause further policy slippages.
2. Aggressive front-loaded fiscal adjustments would dampen aggregate demand with a possible pass through effect on Bank’s Non-Performing Asset portfolios, thereby threatening financial stability.
3. International commodity price slumps may throw the fiscal consolidation drive out of gear if oil price, for instance continues to fall.

In pursuance of managing uncertainty, the market identifies additional risks that may not have been captured but all the same a viable consideration.

1. The Non-bank Financial Sector hold significant positions, in their portfolio, personal loans granted to the public sector market. Any right-sizing or “rationalization” therefore, is a critical risk event that demands clarity from policy handlers.
2. The assumption that increased hydrocarbon volumes coupled with suppressed aggregate demand due to fiscal consolidation, will help improve the external current account deficit from 9% in 2014 to 5% in 2017, needs to be examined closely. Ghana’s Marginal Propensity to Import (MPI) formula has other non-price influences such as product quality perception, taste etc. Policy decisions that emphasize the role of price influence (aggregate demand) without commensurate attention towards non-price interventions such as quality bench-marking, inter alia, is bound to miss the target in terms of correcting the fundamentals of trade imbalance.

Outlook
Bullishness would undoubtedly return to the markets after government begin to make clear commitments to structural reforms of public financial management in order to restore fiscal discipline. Meeting further draw-down conditions (milestones) such as stated below may trigger release of further tranches of the $940 million program fund allocation.

1. Submission to Cabinet for approval, of a comprehensive reform strategy in respect of Public Financial Management by August 2015, followed by a draft bill to close gaps in same by December 2015.
2. Ministry of Finance and Bank of Ghana to jointly draft a strategy paper for the adoption of the Treasury Single Account (TSA) by August 2015.

The author is management consultant and founder of Metis Decisions Limited.

www.metisdecisions.com