Foreign exchange reforms not effective — IMF

The International Monetary Fund (IMF) says the foreign exchange regulation recently introduced by the Bank of Ghana (BoG) will not be effective unless the underlying macroeconomic imbalances are resolved.

In a statement issued in Accra yesterday, the Board of the IMF said it was worried that the measures could have unintended adverse effects and, therefore, welcomed the decision to review them, with the objective of mitigating any adverse implications and removing the associated exchange restrictions.

The board also commended the BoG for its steps towards adopting a unified market-based exchange rate.

The IMF also expressed concern about the emergence of short-term stemming from high fiscal and external current account deficits.

 According to the fund, the imbalances made the country vulnerable to a deterioration in external conditions and were creating pressure on interest rates and the exchange rate.

“If unaddressed, they risk weakening economic growth and public debt sustainability,” the statement said.

 The IMF, therefore, recommended a more ambitious medium-term consolidation path to stabilise public debt and debt service at sustainable levels.

While the risk of debt distress remained moderate, the IMF expressed concern about the high debt service-to-revenue ratio.

It said a stronger medium-term adjustment could set off a vicious cycle of lower fiscal deficits and falling interest rates, creating space for social and infrastructure spending and crowding-in of private sector activity.

The emergence of large fiscal and external imbalances since 2012, however, had created significant challenges, it added.

The fund said a swift return to macroeconomic stability in 2013 was thwarted by weaker external and domestic conditions reflecting lower gold and cocoa exports, while the current account deficit exceeded 12 per cent of GDP.

The recently revised estimates by the government, it said, pointed to moderate slow down in growth to about seven per cent, while the fiscal deficit target of nine per cent of GDP was missed by about one percentage point, despite significant policy efforts.

Inflation also overshot the 9+/- 2 per cent target range, prompting a further tightening of monetary policy in early 2014.

 The IMF suggested that further tightening might be needed, in combination with fiscal consolidation, to steer inflation back into the target range.

It also stressed that the BoG should limit its net credit to the government, strengthen liquidity management and the inflation forecasting framework and continue to allow the exchange rate to adjust to prevent further erosion of the reserve buffer.

The fund welcomed the government’s recent policy document outlining its home-grown, medium-term reform and consolidation measures.

It supported the government’s intention to rationalise public spending, lower the wage bill, restructure statutory funds and enhance revenue mobilisation and tax administration.

The IMF encouraged the authorities to quickly translate their policy commitments into specific and time-bound action plans to achieve significant and durable consolidation.