Fiscal gains ease BoG stress
Ghana’s fiscal consolidation drive is beginning to show positive results with an improved cash buffer of GH¢468.97 million (US$121.81 million) of the government account at the Bank of Ghana (BoG) compared to a net borrowing of GH¢1.58 billion (US$410.78 million) in 2014.
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This has eased the pressure on the Bank of Ghana’s financing of the government in the first quarter of the year.
According to a Databank Africa Strategy report, the improvement in the country’s fiscal gains has culminated in a narrowing of the overall fiscal deficit by 300bps Year-On-Year provisionally, at 7.1 per cent since last year.
This has helped contain the liquidity risks to exchange rate stability, which has seen the local currency holding strong against the dollar in the first quarter of the year.
The Ghana cedi is expected to remain firm on regular dollar sales by the central bank, buoyed by offers from local mines and offshore investors amid dwindling corporate demand, analysts said.
The local currency weakened by only three per cent in the first quarter of 2016 on seasonal high corporate dollar demand, but it has since recovered most of the losses following improved currency management by the Bank of Ghana.
The report noted that the realignment of the policy rate, which is currently pegged at 26 per cent with the interbank interest rate currently at 25.40 per cent, has enhanced the transmission mechanism of monetary policy.
Until September last year, the policy rate was significantly below the interbank interest rate, which resulted in a misalignment of rates, undermining the effectiveness of the BoG’s policy rate.
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Liquidity drain
The introduction of a 7-day reverse repo (for injecting liquidity) and a 14-day weekly Open Market Operations to drain liquidity in the system has also improved liquidity management and enhanced the effectiveness of the policy rate, sustaining the cedi’s stability through first quarter of this year.
An Economist at Databank, Mr Courage Kingsley Martey, expects the emerging stability in the foreign exchange market to be consolidated with a pass-through to inflation and short-term interest rates in the coming months.
The International Monetary Fund (IMF) has, however, given the government a pass mark in its performance under the fund programme. The fund disclosed this after it completed its two-week mission visit to Ghana.
The IMF team leader, Mr Joël Toujas-Bernaté, said most of end-December 2015 performance criteria were met, with the exceptions of small deviations in the wage bill and net domestic assets of BoG.
This was despite the more difficult global environment, with lower commodity prices and domestic power shortages; economic growth in 2015 was close to four per cent, slightly higher than expected.
Inflation, which remained high at 19.2 per cent in March 2016, is being affected by the increase in utility tariffs, energy sector levies and transportation costs, but core inflation has started to decline in recent months.
IMF’s concerns
The fund’s discussions with key public officials focused on the implementation of the programme, the medium-term outlook, and policies and structural reforms needed to restore debt sustainability, and a return to high growth and job creation while protecting the poor.
The required fiscal adjustment is on track, with the overall cash deficit improving from 10.6 per cent of GDP in 2014 to 6.7 per cent of GDP in 2015, and the primary balance close to zero, from a deficit of 4.4 per cent of GDP in 2014.
“On a commitment basis, the adjustment is stronger still reflecting larger-than-programmed repayments of arrears,” Mr Joël Toujas-Bernaté stated.
The team also lauded the government in making progress in implementing fiscal structural reforms, although at a slower pace than expected in some areas.
The team also welcomed the recent adoption of several new tax laws and progress in strengthening payroll controls and addressing payroll irregularities, along with advancing public financial management reform, including developing the Treasury Single Account.
However, preparation of a new public finance management (PFM) law and an amended BoG Act has been delayed.
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Fiscal consolidation
Looking ahead, given the high level of public debt, fiscal consolidation needs to continue, notwithstanding the headwinds from low commodity prices.
The team and the government discussed a package of measures which would reduce the risk of expenditure overruns, in particular on the wage bill, and keep the 2016 budget outturn consistent with the programme objectives, with an overall cash deficit now projected at 4.8 per cent of GDP.
Within the framework of the Petroleum Revenue Management Act, the government is expected to reduce expenditures to offset the shortfall in oil revenues.
The relatively large government cash resources available at end-2015 and possible additional donor support in 2016 should allow the government to adapt the budget financing strategy to prevailing market conditions.
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The increase in BoG’s policy rate in 2015 has been instrumental in reducing exchange rate volatility. Building on continued progress in improving the effectiveness of its inflation targeting framework, BoG remains committed to maintaining an appropriate monetary policy stance to bring inflation down toward its medium-term objective.
Underpinned by the recently introduced petroleum and electricity levies, a strategy is being developed to address the difficult financial situation of the state-owned enterprises (SOEs) in the energy sector.
This strategy will be critical to avoid additional fiscal pressures and possible spillovers on the banking system, as well as to sustain the improvement in electricity delivery achieved recently.
The IMF team will continue to support the authorities as they finalise work in the coming weeks in a few areas, including on the new PFM law, the amended BOG Act and the strategy for addressing the financial situation of SOEs.
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