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Ghana plans to issue $1bn Eurobond on heels of IMF deal

Ghana's finance minister Seth Terkper
Ghana’s finance minister Seth Terkper

Ghana plans to issue a $1 billion 10-year Eurobond in 2015 to settle debt that matures in 2017, finance minister Seth Terkper told Reuters, after a financial assistance deal agreed in February with the IMF. The government will also continue to use its oil stabilisation fund, oil price hedging and monetary tightening to manage foreign exchange volatility for Ghana’s cedi currency.
The country has experienced three difficult years characterised by declining economic growth, increasing inflation rates, rising debt levels and financial vulnerabilities. In 2014 economic growth reached its lowest level in many years, with non-oil GDP growing at 4.1 percent, in the context of high interest rates, a fast depreciating currency, low aggregate demand and a deepening energy crisis.

Inflation reached 17 percent, well above the central bank’s inflation target. Large fiscal deficits caused by a ballooning wage bill, poorly targeted energy subsidies and commodity price shocks pushed government debt and financing costs to very high levels, and made the economy more vulnerable to roll-over risks, despite the implementation of corrective measures in the last couple of years.

These domestic imbalances resulted in a weakened external position and pressures on the exchange rate, with net international reserves covering just a few days of import coverage in September 2014, before rebounding on account of the issuance of a Eurobond and a syndicated loan obtained by the Ghana Cocoa Board.

The main priority of the IMF deal is to restore debt sustainability through a sustained fiscal consolidation, and to support growth with adequate capital spending and a reduction in financing costs. The programme rests on three pillars – restraining and prioritising public expenditure with a transparent budget process, increasing tax collection, and strengthening the effectiveness of the central bank monetary policy.

The government is pursuing measures to manage foreign exchange volatility for Ghana's cedi currency.
The government is pursuing measures to manage foreign exchange volatility for Ghana’s cedi currency.

Total GDP growth is expected to decline further in 2015 to 3½ percent on the back of a severe energy crisis and fiscal consolidation. Growth is expected to rebound over the medium term on account of an improved macroeconomic environment and cost effective solutions to address the energy crisis.

Inflation should decelerate substantially, while the stronger fiscal consolidation will stabilise the debt ratio to GDP. The external current account deficit is projected to decline to 7 percent of GDP in 2015, which, together with anticipated increased donor support, should contribute to start rebuilding reserves.

The 2015 budget included a strong set of measures. Swift implementation of these measures, in particular the elimination of distortive and inefficient energy subsidies, the new tax on petroleum products, and stronger containment of the wage bill should contribute to a significant reduction in the fiscal deficit over the medium term, with the fiscal deficit projected to decline from 9½ percent of GDP in 2014 to 7½ percent in 2015 and about 3½ percent in 2017, including the repayments of all arrears outstanding at end-2014.

Since the budget was adopted, the substantial decline in oil prices is projected to result in a shortfall of budget revenue of about 2 percentage points of GDP. To mitigate this shortfall, the government recently approved a set of additional measures totalling 1.2 percent of GDP through a reduction in budget ceilings for current and capital spending.

The remainder of the revenue shortfall will be covered by drawings from the oil stabilization fund – in line with the Petroleum Revenue Management Act. The mission welcomed these additional efforts, including the safeguards put in place to ensure that line ministries’ spending commitments remain within the new ceilings.

It is hoped the government’s ambitious reform agenda will support fiscal discipline and economic growth over the medium term. Key elements of the reforms include improving transparency in the budget process to prioritise spending, enhancing revenue mobilisation and strengthening fiscal institutions, including through the review of possible fiscal rules. Additional public and financial management reforms should contribute to improve predictability and control in budget execution.

ghana gdpTax administration reforms are underway, in particular to improve the effectiveness of the large taxpayer office and to streamline and accelerate VAT refunds. The government also initiated a review of existing tax exemptions with a view to reducing them. Public debt management will continue to be strengthened to ensure that financing needs and payment obligations are met at the lowest possible cost, consistent with a prudent degree of risk.

To strengthen its control on the wage bill and address payroll irregularities, the government started implementing a detailed and time-bound action plan to detect and remove ghost workers, to secure and unify payroll databases, and to sanction those responsible of fraud. In addition, strict control on new hiring and the reduction in the number of subvented agencies will further help contain the wage bill.

Monetary policy aims at achieving a single digit inflation rate over the medium-term, with the support of the government’s fiscal consolidation. The independence of Bank of Ghana (BoG) will be strengthened, with central bank financing of the government gradually reduced to zero in 2016.

BoG reviewed its monetary operations to enhance monetary policy transmission and the efficiency of the inflation targeting framework, and took steps to unify the BOG and interbank exchange rates. Despite a challenging economic environment, compounded by low commodity prices, BoG assess that the financial and banking sectors remain sound- with systemic risks remaining low.

The ambitious economic reform programme is supported by Ghana’s international partners. The authorities have made significant progress in firming up financing assurances from their main bilateral donors and other international financial organizations.’
Some analysts are, however, not so bullish. In its reaction, international rating agency, Fitch, said sticking to the programme, which includes ambitious fiscal consolidation targets, will be challenging ahead of elections in 2016. It believes that projections that the deficit will narrow to 3.5 percent of GDP by 2017 are too far-fetched. ‘We think this is too optimistic given the deepening electricity crisis, which could drag growth lower, and the likely pressure that the upcoming elections will exert on spending.’

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