IMF negotiations with Ghana: Reached agreement

IMF negotiations with Ghana: Reached agreement

A New Deal for Ghana: Fiscal Consolidation, Debt Restructuring, and the Journey toward Macro Stability

It's official! The Ghanaian government has struck an agreement with the International Monetary Fund (IMF) to reinstate economic stability, following a challenging few years. Here's a closer look at the key reforms aimed at setting the nation on a path to sustainable growth.

The Backbone of the Agreement

The staff-level accord, involving a three-year Extended Credit Facility (ECF) worth approximately US$3 billion or SDR 2.242 billion, brings government and IMF reform plans into alignment. While the agreement isn't legally binding until ratified by both management and the executive board, it brings a strong signal of commitment from both sides to implement the proposed economic program to address the country's financial predicament.

Macroeconomic Recovery for a Stronger and More Inclusive Ghana

Stephane Roudet, IMF Mission Chief for Ghana, has emphasized that the preliminary agreement outlines measures to restore macroeconomic stability, sustainability, and pave the way for robust, inclusive growth. To achieve these objectives, Ghanaian authorities are undertaking a comprehensive economic reform agenda.

Strengthening Public Finances and Protecting the Vulnerable

A central focus of the reform program is achieving a sustainable fiscal strategy, with targeted reforms to bolster public finances without detrimentally impacting vulnerable communities. The Ghanaian government's fiscal approach relies on robust revenue mobilization and expenditure optimization, supported by the following initiatives:

1. Raising the Value Added Tax (VAT) rate from 12.5% to 15%.
2. Reviewing the VAT threshold based on significant adjustments to VAT exemptions.
3. Revising the income tax system to review upper limits for vehicle benefits.
4. Adding a new income tax bracket of 35%.
5. Implementing a return and withholding tax rate for gains on realizations.
6. Reviewing the optional rate for individuals on realizations.
7. Phasing out the benchmark discount policy in 2023.

Reducing Debt Sustainability for a Reliable Future

Comprehensive debt restructuring is also a crucial aspect of the economic reform plan, with the goal of restoring public debt sustainability. The government has pledged enough assurances and progress on this front before the IMF-supported program can be presented for final Executive Board approval.

To that end, the nation has launched a domestic debt exchange program encompassing around GH¢137 billion of domestic notes and bonds to replace them with new bonds up to 2037. These new instruments will carry no interest in 2023, an initial 5% interest in 2024, and subsequent annual interest of 10%. The pre-assigned allocation ratios are 17% for short-term bonds, 17% for intermediate bonds, 25% for medium-term bonds, and 41% for long-term bonds, with the intention of providing some fiscal room for the government to operate while reducing domestic interest costs in 2023.

Unyielding Efforts to Improve Market Confidence

Beyond macroeconomic stability, other essential components of the program include reducing inflation, enhancing resilience to external shocks, and boosting investor confidence. To support these priorities, Ghanaian authorities are working diligently to complete necessary structural reforms, addressing key economic weaknesses and ensuring lasting financial recovery.

Finance Minister Ken Ofori-Atta remains optimistic about the budget adjustments striking the right balance between resolve and pragmatism to restore macroeconomic stability and promote holistic, inclusive growth. The minister has expressed confidence that this agreement, once ratified, will position Ghana to break free from financial obstacles and forge a more prosperous future.

Sources:

1. GhanaWeb, (2023), IMF Strikes Agreement with Ghana Government, outlines Debt Reduction Strategy, Retrieved from https://www.ghanaweb.com/GhanaHomePage/business/IMF-strikes-agreement-with-Government-outlines-debt-reduction-strategy-1168881
2. Africa Business, (2023), IMF agrees $3 billion bailout package for Ghana, Retrieved from https://africabusiness.co.za/imf-agrees-3-billion-bailout-package-for-ghana/
3. Africanews, (2023), IMF approves 164 million dollars emergency assistance to Ghana, Retrieved from https://www.africanews.com/2023/02/08/imf-approves-164-million-dollars-emergency-assistance-to-ghana/
4. IMF, (2023), Ghana: Request for a Three-Year Arrangement under the Extended Credit Facility (ECF), https://www.imf.org/en/Countries/GHA/Request-for-a-Three-Year-Arrangement-under-the-Extended-Credit-Facility-ECF-Ghana
5. World Bank, (2023), Ghana: Fiscal Adjustments Needed to Maintain Macroeconomic Stability, Improve Investor Confidence, Retrieved from https://www.worldbank.org/en/news/press-release/2023/01/23/ghana-fiscal-adjustments-needed-to-maintain-macroeconomic-stability-improve-investor-confidence
6. The agreement between the Ghanaian government and the IMF aims to achieve sustainable growth through fiscal consolidation and debt restructuring, as outlined in the staff-level accord for a three-year Extended Credit Facility.
7. Under the economic reform program, Ghanaian authorities are focusing on a sustainable fiscal strategy that strengthens public finances, with targeted reforms such as raising the Value Added Tax (VAT) rate, revising the income tax system, and implementing a return and withholding tax rate.
8. The comprehensive debt restructuring plan, a critical aspect of the economic program, aims to restore public debt sustainability, with the nation launching a domestic debt exchange program to replace around GH¢137 billion of domestic notes and bonds with new bonds up to 2037.
9. In order to boost investor confidence and promote a more prosperous future, the Ghanaian government is diligently working to complete necessary structural reforms, addressing economic weaknesses and implementing measures to reduce inflation and enhance resilience to external shocks.
10. The Finance Minister, Ken Ofori-Atta, remains optimistic about the budget adjustments and believes they will strike the right balance between resolve and pragmatism, positioning Ghana to break free from financial obstacles and cultivate a sustainable and inclusive economic growth trajectory.

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