Ghana’s Fiscal Tightrope: A Premature Return to Rules?
In a bold move that has raised eyebrows among economic observers, Ghana’s Finance Minister, Dr. Mohammed Amin Adam, has signalled the nation’s intent to reinstate its fiscal rules as early as 2025.
This announcement, made during the Mid-Year Fiscal Policy Review, comes as the West African nation grapples with the aftermath of a severe economic crisis that necessitated an IMF bailout and comprehensive debt restructuring.
The proposed return to the 5% deficit threshold rule, suspended in 2020 amidst the global pandemic, is undoubtedly ambitious from my standpoint considering the tight or lack of fiscal space even after the painful debt restructuring which has one more step to cover being the signing of the final agreement with the external bondholders.
It reflects the government’s confidence in its ongoing economic recovery efforts, with growth reportedly exceeding expectations at 4.7% in Q1 2024 and inflation declining to 22.8% as of June 2024.
However, I think this optimism may be premature. One may ask me why.
Ghana’s debt burden remains substantial, and the full impact of its recent debt restructuring is yet to be felt. The country’s ability to adhere to strict fiscal rules while maintaining critical social interventions and infrastructure investments is questionable.
By the 30th of July 2024 or I will say next week when Ghana signs the final agreement with the external bondholders (Eurobond Holders), the government will have to cough out some whopping $478,000,000. (Four Hundred and Seventy-Eighty million Dollars) looking at the new bond’s cashflow for 2024 and 2025 we as a country will be expected to pay some $692,000,000 (Six Hundred and Ninety-Two Million Dollars) in payments to these external bondholders looking at the data available.
I honestly do not know if we have made the provisions for these payments and the question remains if we have the funds for these immediate payments which is staring at us. If you care to know between 2026 and 2029, we will be expected to pay over a billion dollars in payments each year.
I ask this important question, where will these monies come from, considering our cash reserve or position is not looking very good?
Moreover, the global economic landscape also remains uncertain. With potential headwinds from global trade tensions and monetary policy tightening in advanced economies, Ghana’s export-dependent economy could face renewed pressures.
The reinstatement of fiscal rules is, in principle, a positive step towards fiscal discipline and macroeconomic stability. However, the timing and rigidity of such rules require careful consideration.
A gradual approach with built-in flexibility might be more prudent if you ask me, allowing the government of the day to respond to unforeseen economic shocks without immediately breaching its own rules as has happened in previous years.
Ghana’s policymakers must strike a delicate balance between fiscal consolidation and supporting economic growth. While the “mindset of possibilities” championed by the Finance Minister is commendable, it must be tempered with pragmatism.
As Ghana navigates this fiscal tightrope, the international financial community will also be watching closely. But let’s bear in mind that the success or failure of this ambitious fiscal strategy could have significant implications for Ghana which is seeking to rebuild fiscal credibility in the post-pandemic era.
