Shying away from an IMF intervention will do far less to hurt Ghana’s economy and image than an additional US$1.5 billion Eurobond debt
On August 2, Ghana’s Communications Minister, Dr. Edward Omane Boamah, announced that President John Mahama has; “directed that immediate initiatives be taken to open discussions with the International Monetary Fund (IMF) and other Development Partners in support of our programme for stabilisation and growth.”
The announcement may have put to rest the question about whether Ghana will go for an IMF bailout or singularly push through homegrown measures to address a self-inflicted financial crisis and its corollary of economic downturn, but it will certainly intensify an already impassioned debate about the merits and otherwise of each option.
Given that government did not provide an inkling into its terms for negotiations with the Fund, analyses of the issue is bound to follow what is revealed over the next few weeks; but certainly, some conditionalities from the IMF cannot be overlooked.
Central to the homegrown solution is the planned issuance of US$1.5 billion Eurobond in addition to about another US$1.5 billion expected from syndicated loans for the seasonal purchase of the country’s cocoa beans, of which it is the world’s second largest producer and exporter.
Over the immediate term, the Eurobond sovereign debt would inject critically needed foreign exchange into Ghana’s beleaguered economy to help stabilize the free-falling domestic Cedi, which registered a whopping 26.7% cumulative depreciation against the US dollar in the first half of 2014, compared with 3.4% for the same period in 2013.
Over the medium to long-terms, measures to instill fiscal discipline – especially curbing government’s gluttonous spending far beyond budget – coupled with efforts at restructuring the base of the national economy, with emphasis on a combination of value-added exports and import substitution-driven manufacturing are expected to spur a return to the path of high economic growth rates that have been declining in recent times.
In the president’s thinking, an IMF bailout, coupled with donor support will; “support our programme for stabilisation and growth.”
But therein lies the confusion that ignited, and continues to drive, the debate.
One way to resolve the issue is to ask what would happen if Ghana did not issue the Eurobond, as is very likely to be the case if the President’s directive comes to fruition.
Following the trail would be useful.
Finance Minister; Seth Terkper
Ghana’s Ministry of Finance, in late May, named Standard Chartered Plc, Barclays Plc and Deutsche Bank as transaction advisers for the 2014 Eurobond, its third since 2008, signalling that government had decided to return to the bond market having put that plan on hold.
Deputy Finance Minister, Cassiel Ato Forson disclosed that “although the transaction team is expected to start work immediately on the preparatory activities, government will continue to monitor the market for a suitable execution window.”
Though the announcement sparked low intensity speculations about whether government indeed will go ahead with the issuance, given the deteriorating financial and economic challenges confronting Africa’s former economic poster child, the governor of the Central Bank, Dr. Henry Wampah, gave the strongest indications of government’s resolve to go ahead with the debt issuance. He disclosed in early July that “the proceeds from the cocoa syndicated loan and the Eurobond issuance, estimated at almost US$3 billion would provide significant support for the market in the second half of the year.”
The next worry for Ghana’s economy watchers was whether government would face significant opposition to the accumulation of more debt, now that debt is one of the biggest burdens to the national economy.
The Bank of Ghana’s Monetary Policy Committee reports that the country’s total stock of public debt ran up to GH₵58.4 billion, representing 55.4% of GDP, at the end of March 2014 from GH₵52.1 billion at the end of December 2013. The foreign debt component constituted 52.5% of the total.
Compounding the debt problem is an economy that is teetering precariously on a precipice. All the macroeconomic indicators are pointing in the wrong direction. Since the beginning of the year, the Cedi’s steep decline has been occasioned by rising inflation which hit 14.8% in May from 13.5% at the start of the year.
Prices of petroleum products have been adjusted upward three times, cumulatively shooting up by about 16% as a result of the Cedi’s precipitous decline in value.
“The economy, heavy with debt, is definitely a cause for worry but government is so desperate for hard cash it will have to borrow,” says Nana Osei Bonsu, CEO of the Private Enterprises Federation.
“The worry is more about what use the money is put to. Government hasn’t given much information as to how it is going to utilise the proceeds. We’re waiting to see. If it’s going into recurrent expenditure, government employee emoluments, settlement of outstanding debts to contractors and the like, then that would be unacceptable,” he says, adding the private sector expects the proceeds to be invested in productive sectors and projects that can yield healthy returns to support servicing of the loan.
“Our other concern is about the rate at which debt is being contracted. Government, in its desperation, may accept an unrealistic interest rate that will be problematic when it comes to servicing and repayment of the loan. Given the possibility that it may not be in power by that time, government may not be inhibited from being reckless now,” Nana Bonsu adds.
This is one position that opposition politicians are pushing strongly into the debate.
Sub-Saharan African countries, which have been emboldened by impressive economic performance over more than a decade, have resorted to increasingly acquiring foreign debt to finance investments in critical infrastructure projects, especially in transportation and energy, at an average of 5% interest rate.
However, increasing cost of borrowing in recent years reflects not only falling investor demand for sub-Saharan debt but also country-specific risks, including concerns about countries’ rising budget deficits.
Zambia, for instance, undertook the region’s first sovereign debt issuance this year, raising US$1 billion through the sale of 10-year dollar-denominated bonds priced at 8.6%, compared with 5.3% on its maiden bond issuance in 2012.
Ghana currently faces a similar situation, if not worse.
Earlier in the year, when Ghana tested the market for its current US$1.5 billion Eurobond issuance, it was priced at around 9%. Analysts think it was this, more than not attracting enough subscriptions, which led to its postponement.
Compounding the country’s woes, in late June, amidst raucous arguments about new domestic taxes and further northward hikes in utilities tariffs, Moody’s Investors Service downgraded Ghana’s sovereign rating to “B2” from “B1”, citing the world’s second biggest cocoa producer’s rising debt burden and deteriorating debt affordability.
The rating agency says it expects public debt to exceed 65% of GDP by the end of 2015 from 55.7% in 2013, reflecting rising interest expenses relative to government revenues.
Consequently, the country’s creditworthiness was further severely undermined and by extension – as some politicians sought to portray – the credibility of the finance minister, Seth Terkper, and the other managers of the country’s finances.
Expectedly, the retort from the finance ministry was tart, even if tactfully packaged. The ministry said Moody’s negative rating of Ghana’s economy was based on the same short-term challenges that the government had identified and was addressing and which would ensure that the short to medium-term prospects for the country remained bright.
The Ministry said the measures government has announced will add value to the country’s raw material base, diversify the economy and include a strong local content element. And that the measures, after allowing for the necessary lags, will form the basis for stabilising and growing the economy when new opportunities come on stream in the next few years.
Moody’s said a return to a stable outlook on Ghana’s sovereign rating could occur as a result of accelerated and sustained fiscal consolidation; a strengthening of FDI inflows as a source of funding for the country’s large infrastructure investment needs. It could also occur as a result of a substantial bolstering of Ghana’s foreign-exchange and fiscal reserves through an external financial assistance programme, such as an IMF programme.
Of course, given its condition, Ghana could resort to an IMF bailout since that would be supportive of its creditworthiness, which has been severely undermined by the continuing macroeconomic deterioration and the downgraded credit rating.
Pushing that agenda prior to Moody’s downgrading, the IMF’s managing director, Christine Lagarde, at the ‘Africa Rising’ conference in Maputo, Mozambique, warned that Ghana could be overloaded with too much dollar-denominated debt with its intended issuance of the Eurobond, and that the increasing yields on the bonds is indicative of investors seeing the bonds as high risk.
Mr. Terkper’s reaction to Lagarde’s position, at the time, was as adamant as it subsequently was to Moody’s downgrading of the country’s credit rating.
“We are not doing it at 15%. There were times when emerging markets’ interest rates were 12%, or 15%,” Terkper said, arguing that even countries which issued at those peaked interest rates pulled through.
But Terkper’s reaction seemed wily since government had, earlier in the year, dipped a stick in the water, testing for public reaction to an IMF bailout. The media report of a suggestion attributed to Terkper of a possible government resort to the IMF for support, given Ghana’s financial challenges, was met with an instantaneous, virulent backlash from politicians, civil society and a section of the business community. Most Ghanaians have a demeaning view of IMF interventions in the country, having run through several programmes for decades and still lurching at the lower rungs of the development ladder.
While even a mere announcement of an IMF support programme for Ghana has the possible effect of speedily mitigating the continuing depreciation of the Cedi against major currencies, it did not look like the government could muster the political will to take that turn since most Ghanaians will see it as a major failure of the current administration.
To the extent that an IMF programme would tie government’s hands behind its back in accessing funds from the capital market for critical investments and pose a dampener on growth, it would mean a big step backward for many Ghanaians.
Christine Lagarde would obviously gain some bragging rights following President Mahama’s new directive in this twisting-and-turning drama.
She earlier in April had asserted that an IMF programme will not hurt Ghana.
“ ’Structural adjustment’? That was before my time. I have no idea what it is. We do not do that anymore…we have changed the way in which we offer our financial support. It is really on the basis of a partnership,” she explains.
Not many in Ghana are convinced about a real change that will foster economic growth for countries on IMF programmes. For many Ghanaian analysts it is a case of new wine in old wineskin.
Seth Terkper, on the other hand, has been feeding on humble pie as he explains that; “The ultimate objective [of resorting to the IMF] is to stabilize the Cedi in order that domestic prices…will be brought under control and therefore that is a consumer welfare of what is to be done”.
He says a more stabilised Cedi would lead to the situation where investors see a more predictable economy and bring their investments into the economy.
Not many observers are enthused. Afro-China Academic, Dr. Lloyd Amoah says government seeking IMF assistance to fix the economy amounts to going back to “economic ground zero”. He believes that once Ghana succumbs and conforms to the IMF’s policy prescriptions, the final nail will have been driven into the legacy of other leaders who strived to wean the country off its unhealthy dependency on bailouts and donor support, including Nkrumah, Rawlings and Kufour.
But much as more sovereign debt may be a more acceptable way out for most, it comes with a lot of apprehension, especially as many argue that its management under the present administration raises many questions, considering that total debt has ballooned from under GH₵10 billion in 2008 to about GH₵60 billion presently “with nothing to show for it,” as claimed by the political opposition.
The political opposition is, however, approaching the issue much in the same way as the Ghanaian government, only from opposite ends of the same stick. They are attacking the quantum of the debt rather than the specific application of the loans and their outcomes. In this case the opponents seem to have taken a position against foreign debt rather than its potential benefits to the economy if applied in productive projects, while government also always argues about the need to meet a higher public sector wage bill and thus justify the channelling away of investments from the more productive, and critical, but less politically popular projects. To the opposition, the country’s economy is in crisis mode and its current management doesn’t inspire confidence.
Some in the political opposition however seem to recognise that the facts don’t really support the crisis notion.
Investment Consultant, Mr. Kwame Pianim, has urged investors not to be pessimistic about the country’s currently stressed economy, maintaining that the country’s economic prospects are still good.
He argues that the present situation is a blessing in disguise, in that it is engendering more and better involvement in decision-making by enlightened professionals rather than leaving it to the political elite, saying “it will force Ghanaians to open their eyes and then we can get on.”
In line with the general thinking, Pianim singles out unbridled and ill-directed government expenditure as the major factor contributing to the country’s current fiscal malaise and advocates forging out a national alliance for resolving the challenge.
Again, in consonance with government thinking, Pianim calculates that the country’s export products of gold, oil and cocoa plus other ever-improving non-traditional exports including horticulture, tourism and services are strong enough to rake in healthy revenue for the country once the fiscal deficit is brought down to a manageable level.
Perhaps, that position could have been gaining some traction as removal of subsidies on petroleum products, greater scrutiny of public sector wages – including unpopular freeze on salary increments – and other such tough measures by government is indicative of its determination to curtail spending.
Some believe, however, that such measures don’t go far enough since ‘freebies’ to the political elite, which constitute a major drain on the national purse, are not being tackled with the same vigour. And worse, corruption, a national canker that is obviously eating deeper and wider into national life, is perceived as being tackled with even less fervour by the government, not to mention a growing sentiment among Ghanaians that the political elite condone (graft?) and the current administration is a major culprit of that.
Opponents to the increasing borrowing by government on the international capital market say, given government’s demonstrated weaknesses, the potential of this single sovereign debt to trigger an upturn in Ghana’s financial and economic downward spiral is less significant and that the size of the national debt is of prime significance. And it is. If government shies away from issuing this debt, it will not only be a symbol of popular sentiment trumping government intransigence, but a depressing one at that. Government would be left with no option than to accept hook, line and sinker, terms of the IMF for a bailout. Given Ghana’s solid economic base and its potential to bounce back and push its way out of debt, such an occurrence would be a classic case of cutting the nose to spite the face. It would be a symbol of how sentiment has taken the place of analysis.
All that may now have happened with the President’s latest twist to the unfolding drama.