Ghana’s return to the IMF: Can the fund do more to prevent developing countries from becoming dependent?

There is a popular adage in Ghana: “Se wo were fi na wosankofa a yenkyi," which translates as: "It is not wrong to go back for that which you have forgotten.

The Ghanaian government’s decision to return to the International Monetary Fund (IMF) for support, in light of the current fiscal and balance of payment crisis has been met with swift backlash from the general public, commentators, and the main opposition party. It seems the public has decided that, under the current economic conditions, this well-established proverb should not be respected.

What is different this time? Why the public outcry?

Ghana’s return to the IMF, its 17th since 1966, could have passed as a non-event. On average the country has engaged the IMF roughly every three years. In fact, the country has witnessed more IMF interventions than general elections since independence. However, the political decision by the current administration to deride the previous government for going to the IMF in 2015, when they were faced with difficult economic conditions, has made this choice unforgivable, and potentially unforgettable.

The government in its defense has pointed the blame at the “twin-crisis” of COVID-19 and the Russia-Ukraine War.

A casual scurry on Twitter today reveals multiple government officials, then in opposition, making stirring remarks and speeches about former President John Mahama’s economic choices. It was well established back then that, going to the IMF was synonymous with incompetence and mismanagement of the economy. “Ghana Beyond Aid” - a catchy moniker developed by President Akuffo-Addo’s party, became the rallying cry by opposition spokespersons.

As a political strategy, it was very effective and may likely have contributed to John Mahama’s misfortunes in the 2016 poll.

Fast-forward to 2022, with an inflation rate of 28%, a 20% depreciation of the local currency, and a $ 1 billion balance of payment deficit for the first quarter of 2022, an IMF program appears to be the only pragmatic choice.

The IMF has as one of its functions the provision of concessional financial support to help developing countries achieve, maintain, or restore a stable macroeconomic position.

A key tool used by the Fund
to achieve its objective is what is described as “surveillance and capacity building activities.” The Fund engages in continuous monitoring of economic and financial policies with the goal of advising members of the effects of their policy choices.

It is important to point out that a year ago, The
International Monetary Fund (IMF) concluded that Ghana had managed its COVID-19 outbreak effectively and its economy was rebounding with the support of strong policies. The Fund also stressed the importance of “entrenching prudent macroeconomic policies, ensuring debt sustainability, and pressing ahead with structural reforms to deliver a sustainable, inclusive, and green economic recovery.”

The praise from the IMF may have been heard louder than the admonition. Exactly a year later, the country is on its knees with a bowl in hand. The IMF on its part has welcomed the request for support and began discussions with the government.

This begs the question - Is the “ever willing to help” posture of the IMF contributing to the blasé attitude of economic managers in Ghana? A child who knows they can always go back to their rich uncle for a bailout lacks the incentive to properly manage their finances in a way that avoids
bankruptcy.

Shouldn’t the “rich uncle” deploy a stricter approach in its dealings with financially undisciplined relatives?

There is a need for balance. The reality is more complex. Ghana’s struggles are due primarily to the structure of its economy. If the structure of the economy does not change, no amount of temporary relief from the IMF can prevent a future economic crisis.

Understanding the root causes of the present crisis is fundamental to offering any long-term solutions. The Ghanaian economy is largely commodity-based and susceptible to a myriad of external shocks.

A large untaxed informal sector coupled with a relatively small productive sector greatly hampers every government’s ability to generate revenue. Large deficits are financed by external debts, leaving the country with expensive debt service commitments and pressure on the local currency. Prices of commodities such as gold, oil, and agricultural produce are subject to external shocks resulting in balance of payment headaches. Oil replaced gold as the country’s largest revenue source.

However, in the ten years (2011-2021) since Ghana began receiving oil revenue, the country earned just $6.5B over the period. This represents only 20% of the total revenue generated from its oil fields. To put this in context, this amount represents $655M annually or roughly a quarter of the amount spent on education in 2018 alone.

The discovery of oil, is clearly not having the expected impact on the revenue fortunes of the country.

The government’s decision to generate revenue through taxation of electronic transactions, for example, has achieved underwhelming results. The public clearly has little appetite to pay more taxes.

The government has survived the past 18 months through unprecedented financial support from multilateral aid agencies. The World Bank alone approved nearly $ 1 billion for disbursement to Ghana between July 1, 2021, and June 30, 2022. The international capital market which used to be a stable source of financing is no more a realistic option. Rising interest rates, a worsening debt service ratio
and a recent downgrade by rating agencies has made it too expensive to access additional private capital.

Returning to the IMF may be the only option available to the country but it certainly is not the best long-term solution. However, the ancient saying if you give a hungry man a fish, you feed him for a day, but if you teach him how to fish, you feed him for a lifetime should guide the country in its deliberations.

A renewed focus on structural transformation underpinned by private sector-led
industrialization, export-led growth, and import substitution will better position the country for long-term economic sustainability.

The IMF may have to play a greater enforcement role in getting the country to address the root causes of its perennial challenges. The role of the rich uncle may need to be swapped for that of a strict father.

Below are a few suggestions for the Fund:
1. Revise its engagement approach with countries that have a history of excessive borrowing and mismanagement. There should be limits to how often a country can access.

- The fund should channel more of its resources to monitoring and evaluation and
- Warn governments that the fund will not support countries who fail to heed guidance.
-Stricter conditions should be attached to funding programs for such countries, including the risk of restricted future access.

2. Advocate for long-term national development programs as part of the engagement
programs.

Traditionally, the World Bank has played a leading role in assisting Ghana
develop and implement long-term growth strategies. However, political dysfunction, lack of policy continuity, and the absence of a clear blueprint for national development has kept the country well below its potential.

The IMF and The World Bank need to collaborate more closely with Ghana to implement a national growth and development plan.

Financial support offered to the country should be tied to this plan. Additionally, Ghana should be made to agree to a multi-year oversight plan to ensure that country remains accountable. The longest IMF program is the Extended Credit Facility, which lasts 3-5 years. The IMF should consider a program with a tenure ranging from 5-10 years to ensure longer-term fiscal discipline and consolidation of economic gains.

3. Facilitate collaboration between comparable countries. This will provide collaborative feedback for countries on a similar trajectory. The Fund should routinely bring comparable countries together to discuss their economic journeys and share best practices.

4. Encourage governments to tackle corruption. Corruption underlies much of the excessive spending that characterizes underdeveloped countries. A new approach that incentivizes governments to protect the public purse in exchange for direct support could be introduced. For example, special grants can be targeted at countries that show consistent and tangible progress in decreasing public sector corruption.

These grants can be awarded for the execution of specific projects that promote the welfare of the underprivileged including women, children, and the youth, or projects related to climate change mitigation and adaptation initiatives.

5. Engage civil society and other non-government agencies. Ghana boasts of a very active civil society including Think tanks, research organizations, and the media. Over the past year, many of these organizations have been vociferous in raising red flags about the reliability of government data and the choice and effect of government policy on ordinary citizens.

The fund team may benefit from including, these groups in their deliberations to
get a sense of the mood of the people for whom the IMF intervention should ultimately benefit.

These proposals deserve to be considered as an attempt to foster longer periods of sustained economic growth and macroeconomic stability. Ghanaians are hopeful that the current IMF engagement will help weather the economic storm.

Nevertheless, it is certain there will be new and possibly greater crises in the future.

Will political leaders quietly rejoice that their rich uncle will always
provide a stronghold, or will the rich uncle finally decide to force their nephew to develop the kind of structure that allows them to survive on their own?