Adnan Adams Mohammed
Ghanaians are facing a period of economic harshness never experienced after the periods of the military junta in 1980’s.
While inflation is beating about three decades records to record over 54 percent for November 2022 year on year, the Ghana cedi losing value to by over 50 percent to be adjudged as the worst performing currency as at November last year and current ranking second worst performing currency according to Bloomberg data.
Also the country defaulted in debt servicing to both domestic and foreign debtors as the country’s accumulated debt surpassed its Gross Domestic Product recording over over 105 percent debt to GDP ratio. All these compounded with already global slowdown in economic growth and business activities and as well as drop in remittance to the subharran regions.
To anihililate the current challenges, a finance expert has done a deep postmortem analysis of Ghana’s current economic woes and attributed the ‘big factor’ to reckless borrowing and expenditure.
In a question and answer session with a former executive director with Standard Chartered Bank, Alex K. Mensah Mould, he outlined the causes and solutions to our current economic challenge leading us into a ‘killer’ debt restructuring arrangements under the Domestic Debt Exchange (DDE).
- Why are we asking for the DDE?
Ans. The financial crisis was largely a result of structural problems that ignored the loss of tax revenue and the slow down in growth in key sectors in a sustainable way
Government was simply not bringing in enough money to cover its growing expenditure including its debt service
This has been exacerbated by high inflation, high physical deficits, low growth in key sectors ,and problems with the exchange rate
- How did we get here?
Ans. Financial indiscipline and taking wrong bets via ill-thought through policies emanating from populist manifeato promises
Govt also were not constrained in its financial management and violated many covenants it signed up for; namely:
– Deficit not more than 5% of GDP
– Public debt to below 60% of GDP
Govt also misrepresented its ability to keep the exchange rate under control by supporting the Cedi via sustainable strong exports and a strong trade surplus
As long as borrowing cost remained relatively cheap and the economy was still growing then issues like current account deficit continued to be ignored
What government did not do was to stress test the economy to see the vulnerabilities and address them by putting some risk management measures in place to address these vulnerabilities
- Why are we going to the IMF?
Ans. Basically we are going to IMF to assist us getting all our creditors to agree to a debt restructuring once we sign up to a economic performance improvement plan (PIP)
If Ghana brings a credible performance improvement plan IMF will get approval to assist Ghana with a loan to help with the budget
We are not going to the IMF solely for a financial bail out ie IMF funds will not solve our problem
The IMF will insist on financial discipline and should also insist for Govt to address the structural imbalances such as :
– Low taxation
– High imports of goods and commoditiesthat can be produced here
– High unemployment
– Low growth in key sectors
– High Govt sector employment
– Relatively high compensation to
– low productivity of Govt workers
Govt need to be forced not to hide its challenges.
These structural imbalances can be achieved if the following are addressed:
– Dampening inflation
– Lower nominal interest rates
– Encourage private investment in the real sector
– Spur economic growth
– Lower transactions costs
All the above are needed to reduce the deficits and also for debt reduction
- What will happen if we do not get a workable PIP and the resulting bailout for IMF?
Ans. Things could only get worse.
Capital will begin to dry up – we are currently shut out of Eurobond markets
Ghana could face a liquidity crises and will need even larger bailout financing
Ghana could emerge into a recession amidst hyperinflation
Government tax revenues would weaken
This will find many companies failing especially the SMEs which will result in job losses will exasperate the already precarious unemployment situation in the country
