On September 6, 2017, the Executive Board of the International Monetary Fund completed the 2017 Article IV Consultation with Ghana as well as the fourth review of the arrangement under the Extended Credit Facility (ECF).

Ghana has shown mixed macroeconomic performance in recent years, with significant shocks being amplified by policy slippages and resulting external and domestic imbalances. Growth in 2016 was 3.5 percent, the lowest level in two decades.

A recovery of growth is expected in 2017-18, owing to an increase in oil production, declining inflation, and lower imbalances with the right policy implementation.

Following a sizeable fiscal slippage in 2016, the authorities are targeting a significant fiscal consolidation in 2017, which will require sustained revenue collections and spending controls. Inflation has continued to decline and the exchange rate has been broadly stable. The external position has continued to improve, supported by strong foreign investors’ participation in the domestic debt market.

Over the medium term, both the fiscal deficit and the current account deficit are projected to decline gradually.

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Staff report

Key trends and recent developments

After over two decades of sustained and fairly inclusive growth and a boom from 2010-13, Ghana has witnessed a sharp slowdown in the last three years. Between 2000 and 2013, the average real growth rate was 6.6 percent, well above other low and lower-middle income SSA countries. The poverty rate fell sharply, from 53 percent in 1991 to 21 percent in 2012 (last data available), along with improvements in other social indicators. However, after the oil-related boom in 2010-13, growth started decelerating in 2014, and dropped to 3.5 percent in 2016, the lowest level since 1990.

Recurrent policy slippages have amplified the impact of external and domestic shocks, creating persistent imbalances and contributing to the recent slowdown.

• Over the last decade, large fiscal deficits have added to significant increases in public debt, eroding the fiscal buffers created by the earlier debt relief. Fiscal slippages have been particularly pronounced in election years, setting in motion an increase in external and domestic imbalances from which Ghana has only partially recovered.

• Market access tightened in the context of soaring external and domestic funding needs. The government resorted to central bank financing, with spillovers to inflation, weaker exchange rate, and even higher funding costs. Eurobond spreads and domestic real interest rates surged and domestic maturities shortened, exacerbating rollover risk. Meanwhile, the economy was also buffeted by adverse terms of trade shocks as the prices of key exports significantly dropped, further affecting the exchange rate, fueling inflation, and contributing to the economic slowdown as the external position adjusted.

• In the state-owned enterprises (SOE) sector, lack of timely utility tariff adjustment, accumulation of cross-arrears, and management inefficiencies translated into severe power shortages, further undermining investor confidence and compounding the economic slowdown.

• Feedback-loops from the domestic economy to the banking sector led to a sharp increase in nonperforming loan (NPLs), limiting the ability of the banking system to fund an eventual growth recovery.

In a repeat of previous election cycles, Ghana saw a sizable fiscal slippage in 2016. The overall deficit ended at 9.3 percent of GDP on a cash basis (against the Third Review target of 5.2 percent of GDP), reflecting revenue shortfalls and large expenditure overruns. In a glaring breach of expenditure controls, outstanding claims (3 percent of GDP) incurred in 2016 came to light in early 2017, with 2 percent of GDP outside the Ghana Integrated Financial Management Information System (GIFMIS).

The financial cycle amplified the downturn. Growth in banks’ balance sheets continued to slow down as growth declined, and financial conditions have generally tightened. Asset quality in the banking system continued to deteriorate, as shown by the findings of the 2016 Asset Quality Review. At the same time, growth in credit to the private sector declined and the spread between lending and deposit rates increased.

Despite an improvement in the external position, vulnerabilities persist. A sharp increase in gold exports and import compression narrowed the current account deficit to 6.7 percent of GDP in 2016. At the same time, strong FDI and inflows to the domestic debt market helped the Bank of Ghana (BoG) build up net international reserves (NIR) for the first time in six years. However, the gross reserves coverage remained low at 2.6 months of imports, lower than 3- to 3.6-month levels suggested by a reserve adequacy assessment. While the nominal exchange rate was relatively stable during 2016, according to the Fund’s exchange rate assessment (EBA-lite), Ghana’s external position was weaker than implied by fundamentals, with a REER gap of around 8 percent, largely explained by large fiscal slippages.

Some positive developments have emerged since the new government took office, though risks remain elevated:

• Preliminary data shows that overall growth in Q1 2017 was 6.6 percent, with non-oil growth at 3.9 percent.

• Disinflation finally appears to be taking hold. Since H2 2016, inflation has been declining, reaching 12.1 percent in June 2017, helped by exchange rate stability and earlier increases in the monetary policy rate (MPR).

• Declining inflation and an encouraging fiscal outturn through April 2017 (with an overall deficit of 1.3 percent of GDP) have created room for progressively less tight monetary policy. Accordingly, the Monetary Policy Committee (MPC) reduced the MPR to 21 percent in July 2017 (though real rates, while declining, remain elevated); and interest rates on domestic debt instruments have followed suit.

• Financing conditions have recently eased. Ghana’s external credit spreads have continued to decline from their peak in February 2016. Following the passage of the 2017 budget, the government had a record bond issuance of over GHc 9 billion (net basis) in April, mostly acquired by non-resident investors. With these inflows, over two thirds of the net domestic financing target for the year has been met, with the average maturity profile of domestic debt further lengthening (to almost two years as of May 2017). Partly in response to the large FX inflows, the exchange rate has recovered from the sharp depreciation experienced in Q1 2017.

Article IV Policy Discussions: Anchoring macroeconomic stability

Addressing Ghana’s long-standing challenges calls for an ambitious adjustment and reform agenda. Ghana’s objective of an irreversible path to growth and prosperity hinges on locking in macroeconomic stability, which cannot happen without reversing the fiscal deterioration that occurred in 2016. A comprehensive policy package – based on upfront fiscal adjustment but encompassing reforms across all policy areas – is needed to secure lasting progress. As fiscal discipline becomes entrenched, refinancing risks are reduced and fiscal buffers are rebuilt, the policy mix would be rebalanced away from tight monetary policy, with a reduction in real interest rates in turn spurring investment and growth.

Securing Stronger Growth

Structural reforms – especially in the financial and energy sector – are crucial to reignite and sustain growth. A lasting expansion of the non-oil economy will help absorb the growing labor force.

Ghana generally enjoys a favorable business environment in comparison to its peers, although longstanding challenges continue to constrain private sector activity. Ghana outperforms SSA and non-SSA LICs and LMICs in the latest World Bank Doing Business survey. But business surveys consistently identify lack of access to affordable credit, inadequate power supply and high cost of utilities topping the list of key constraints to growth. Thus, the financial and energy sectors stand out for their key role in enabling stronger growth.

Building a healthier financial sector

Financial depth and inclusion remain limited. Credit to the private sector as a percent of GDP is well below what one would expect for a country with Ghana’s level of income, reflecting low depth in the financial market and crowding out by the public sector’s borrowing. While access to affordable credit is a longstanding problem, financing constraints deepened in 2016, with negative real growth in private sector credit and sharply increased spreads between lending and deposit rates (from already high levels).

Greater financial intermediation hinges on a stronger financial sector. While aggregate financial soundness indicators remain adequate, banks’ capital adequacy and NPL ratios reflect significant heterogeneity. The 2016 Asset Quality Review (AQR), completed in March 2017, highlighted substantial provisioning shortfalls in a subset of banks (with capital needs of around 1.6 percent of GDP). Robust implementation of the Financial Sector Roadmap, including recapitalization of undercapitalized banks and timely resolution of insolvent institutions without prospects of private sector rehabilitation, remains imperative to ensure the soundness of the Ghanaian financial sector and safeguard the interests of depositors. Deficiencies in AML/CFT were also highlighted in the 2017 Mutual Evaluation Report.

The immediate and urgent priority is to bolster financial stability through full implementation of the BoG’s Financial Sector Roadmap. In the medium term, key priorities should be strengthening the supervisory and regulatory framework of the banking system through introduction of riskbased supervision with the implementation of the Basel framework. Steps should also be taken to strengthen the AML/CFT framework.

Rehabilitation of microfinance institutions (MFIs) will support financial inclusion. Although MFIs only account for a small portion of the Ghanaian financial sector, their number has grown significantly over time (to 573 in December 2016) leading the BoG to temporarily cease granting new licenses in June 2017. However, many MFIs are not compliant with minimum paid-up capital and there are indications that some MFIs are operating outside the scope of BoG supervision.

Stronger oversight and more rigorous enforcement of existing regulations and resolution of noncompliant institutions are key priorities to ensure that MFIs contribute to inclusive growth.

Tackling inefficiencies in the energy sector

Power shortages have been a recurring problem in Ghana over the past few decades, taking a heavy toll on growth. In recent years demand far outpaced added new capacity, with electricity-intensive sectors like manufacturing and mining being particularly affected.

The financial viability of the energy sector remains a key issue. Some positive steps were taken in the past, including electricity tariff adjustments and introduction of the Energy Sector Levy Act (ESLA). But continued inefficiencies and poor collections have taken a heavy toll on energy companies’ balance sheets, standing in the way of investment and capacity expansion, and creating contingent liabilities for the government, as underlined by a recent audit of SOE financial operations. The government is currently considering issuing an energy bond (GHc 10 billion, or about 5 percent of GDP) backed by ESLA revenues to address legacy liabilities and strengthen the sector’s financial position.

A holistic strategy is urgently needed to ensure the energy sector’s financial viability. A well-designed energy bond could be part of such strategy, but resolving legacy debt problems will not prevent a further build-up of new liabilities without restoring SOEs’ profitability.