Prior Action 1: Analysis of IMF Conditionalities under the $3 billion EC facility, implication for businesses
Prior Action 1. Enact any legislation and/or executive order necessary to achieve the 2023 fiscal objective — an adjustment of the non-oil primary balance (measured on a commitment basis) of at least 2 percent of GDP, with revenue measures that will permanently improve the non-oil revenue-to-GDP ratio by at least 1 percent of GDP.
Overview
Ghana’s fiscal and debt vulnerabilities have been significantly aggravated by a pattern of excessive borrowing in recent years, leading to a range of adverse consequences. These consequences include the loss of access to international markets, limited domestic financing options, and a growing reliance on monetary financing by the government. To address these pressing issues and qualify for a $3 billion bailout from the International Monetary Fund (IMF), specific diagnostic measures have been imposed on Ghana.
One of the key actions required by the IMF is the enactment of legislation and/or executive orders to achieve the fiscal objective for 2023. This objective entails making adjustments to the non-oil primary balance, measured on a commitment basis, by a minimum of 2 percent of GDP. In addition, Ghana needs to implement revenue measures that will result in a permanent improvement of at least 1 percent of GDP in the non-oil revenue-to-GDP ratio.
The imposition of these measures indicates that Ghana’s fiscal policies have been inadequate and unsustainable, resulting in a deteriorating fiscal situation and heightened debt vulnerabilities. The excessive borrowing and lack of fiscal discipline have significantly impeded Ghana’s ability to access funds from external sources, constraining the country’s capacity to finance its budget deficit and meet its financial obligations.
The risks of not achieving the policy objectives set by the IMF are substantial. Failure to implement the necessary fiscal adjustments could prolong the state of fiscal and debt unsustainability. In the absence of credible fiscal reforms, Ghana may face further deterioration in key economic indicators. The declining international reserves, depreciation of the Ghanaian Cedi, rising inflation, and eroding domestic investor confidence mentioned earlier highlight the severity of the crisis confronting Ghana.
If the policy objectives are not met, Ghana may experience further loss of access to international markets, higher borrowing costs, and increased difficulty in securing external financing. These factors would exacerbate the burden of debt and hinder economic growth. It is imperative for Ghana to address its fiscal challenges comprehensively, restore fiscal and debt sustainability, and rebuild the confidence of international investors to stabilize the economy and foster sustainable long-term growth.
Policy Impact Analysis:
- Austerity Measures and Reduction in Public Spending: To achieve the fiscal objectives set by the IMF, Ghana will likely implement austerity measures and reduce public spending. This can have a negative impact on citizens as it may lead to cuts in social welfare programs, public infrastructure development, and public sector employment. Reduced access to essential services and job losses can worsen living conditions and increase poverty levels among the population.
- Increased Taxes and Cost of Living: Ghana may implement revenue measures, such as tax increases, to improve the non-oil revenue-to-GDP ratio. Higher taxes can burden citizens, especially the middle and lower-income groups, who may struggle to meet their basic needs. The increased cost of living can reduce disposable income and limit individuals’ ability to save or invest, further impacting economic growth at the household level.
- Inflation and Currency Depreciation: The deteriorating fiscal situation and excessive borrowing can lead to inflation and currency depreciation. Rising inflation erodes the purchasing power of citizens, making goods and services more expensive. Currency depreciation can increase the cost of imported goods and essential commodities, further straining the budgets of households and businesses.
- Limited Access to Credit and Investment: Ghana’s loss of access to international markets and increased borrowing costs can limit the availability of credit for businesses and individuals. This can hinder investment, entrepreneurship, and job creation opportunities. Reduced access to credit can also impede economic growth and prevent businesses from expanding or innovating.
- Unemployment and Economic Instability: The economic crisis and fiscal challenges faced by Ghana can lead to increased unemployment rates as businesses struggle to sustain operations. A lack of job opportunities can exacerbate poverty, inequality, and social unrest. Economic instability can also create uncertainty and deter both domestic and foreign investment, negatively impacting long-term economic prospects.
- Reduced Public Services and Infrastructure: The fiscal constraints faced by the government may result in reduced investment in public services and infrastructure development. Citizens may experience deteriorating healthcare, education, and transportation systems, leading to a decline in the overall quality of life. Limited access to quality public services can disproportionately affect vulnerable populations, further widening social disparities.
- Erosion of Investor Confidence and Economic Growth: Ghana’s unsustainable fiscal policies and excessive borrowing can erode investor confidence in the economy. This can lead to a decrease in foreign direct investment and hinder the growth of key sectors such as manufacturing, agriculture, and services. Reduced economic growth rates can limit job creation and opportunities for citizens, exacerbating poverty and inequality.
Overall, the negative impacts of Ghana’s fiscal and debt vulnerabilities, as well as the imposed policy measures, can include reduced public services, increased taxes and cost of living, inflation, currency depreciation, limited access to credit and investment, unemployment, and economic instability. Addressing these challenges comprehensively and implementing sustainable fiscal reforms are crucial for restoring stability, improving living standards, and fostering long-term economic growth in Ghana.
