Business in Ghana

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Zambia’s lesson for Ghana: call the IMF

Posted by Business in Ghana on June 10, 2014

by Javier Blas, Reuters

When Zambia last week approached the International Monetary Fund for financial help, another cash-strapped African country was surely watching: Ghana.

Lusaka and Accra face similar problems: runaway fiscal deficits – the result of electorally-driven increases in public sector salaries – and a swelling current account deficit that is pressuring the exchange rate.

The market response to Zambia’s request should convince Ghana to seek help, too.

By all accounts, the fiscal problem is more severe in Ghana than in Zambia. The ruling National Democratic Congress introduced in Ghana a new public sector salary structure in 2010. After a wave of salary hikes, the government’s wage bill now consumes roughly 70 per cent of the country’s tax revenue.

The market was expecting that Ghana would first approach the IMF. Instead, Zambia last week asked the IMF to discuss “an economic programme that could be supported by a fund arrangement.” The market reaction has been very positive, officials say.

The Zambian currency, the kwacha, has appreciated sharply against the dollar. At one point this year, it was down 27.5 per cent against the US dollar since January, making it the worst performing currency in Africa. But after rallying strongly over the last week as rumours of the IMF plan surfaced, it has cut its losses to 16 per cent.

At the same time, the Ghanaian cedi has continued its downward trend against major currencies, setting a new record low on Monday of 3.14 to the dollar. Since January it is down 29.4 per cent against the dollar, the worst performing currency in the region.

Razia Khan, Africa economist at Standard Chartered, explains why investors have taken such a positive view of Zambia’s move: “The IMF programme will give investors that much more comfort that fiscal consolidation will happen”.

Meanwhile, the market has enormous doubts about fiscal consolidation in Ghana.

Until now, the government of Ghana has insisted it would avoid the IMF route and instead focus on a homegrown solution. But the plan to cut the deficit to 8.5 per cent of GDP this year and 7.5 per cent in 2015, down from 10.8 per cent in 2013, without the supervision – and financial support – of the IMF looks unrealistic.

In its annual review of the Ghanaian economy, the IMF last month warned that under current policies, the fiscal deficit would only narrow marginally to 10.2 per cent this year and 9.3 per cent in 2015, far below the official target. “[IMF] staff saw the government’s targets at risk in the absence of additional fiscal measures,” it said.

The government of President John Dramani Mahama, which now stands accused by the opposition of mishandling the economy, faces some hard choices: either it bets the economy on a homegrown solution that the market so far does not believe in; or it takes the political cost of asking the IMF for help – and eases market pressure.

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