Min Zhu speaks to Graphic Business about the economy

The Deputy Managing Director of the International Monetary Fund (IMF) Mr Min Zhu (MZ) was in Accra last Monday where he met with President John Mahama and other senior leaders, along with business leaders, economists, and representatives of civil society.

He also delivered a keynote speech at a conference on the value of Enhanced Data for Better Macro-Policies in Africa.

Our Editor, Theophilus Yartey had a chat with him where he shared some insights of the Ghanaian economy. Below are the excerpts:

GB: At the just ended executive board review on Ghana, it spoke about how implementation of the Extended Credit Facility (ECF) supported programme is broadly satisfactory, but with some downside risks going forward. What are some of these risks, and how can Ghana tame them?

MZ: We just finished the board review, January 13, 2016 and the board has welcomed the authorities’ commitment. The board is satisfied with the implementation of the programme. But it also emphasised a few downside risks, which are two types of risks.

The external growth is still moderate, financial markets are not cheap, and oil price continue on the downside at a time when Ghana is ready to produce more oil. So there is external risk.

And internally, the huge risk is in whether the authorities can implement the fiscal consolidation plan, stick to the fiscal discipline, and ensure that they stick to the two per cent primary budget surplus and continue doing the structural reforms.

In the external risk, we have to deal with it, we cannot change it. The second risk I hope the authorities remain committed to stick to the implementation plan.

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GB: Sustainability is a key challenge for Ghana. How does the Fund assess the medium term debt management strategy the government is implementing?

MZ: It is also a good question. The debt level is still high, compared with its peers, around 70 per cent of GDP. For all its peers, whether emerging markets or frontier markets, they are around 40-45 per cent. So the debt ratio is very high.

Debt sustainability is one of the key issues. When you have a high debt ratio, then the market will be concerned. Meanwhile it will be extremely difficult for you to go back to the market. This is a key challenge.

Now the government has to carefully manage debt sustainability. The key issue is we need to make sure they don’t borrow money to pay the interest rate. This means gradually, we need the roughly two per cent primary surplus and four to five per cent of GDP growth. This way we will be able to stabilise debt and make sure the debt trajectory is on the downside.

This year, we are working really very hard to reach that goal. So the debt is going to peak in 2016 and then we will be on the downside.

GB: Are the fiscal structural reforms showing any positive results?

MZ: They are few things. Fiscal consolidation is one thing, and a broad tax base, eliminating all the exemptions, increasing energy tariffs at a time when oil prices are way low is another thing.

So it’s a good time to increase tariffs and not put too much burden on the consumer’s wealth (disposable income). Also improved the management quality, especially on the investment side, this takes about five to six per cent of GDP and this is a big chunk of the government expenditure.

The government is already doing well on these things, we provide a lot of technical assistance in the past 12 months, and we will continue to do that.

We want to generate more revenues so that we can reduce the deficits further. At this stage, I will say that the fiscal structural reforms have worked well.

GB: One of the reasons the government entered the programme was credibility and at this time we expect the market to see the positives you are seeing so that it will reflect in terms of ratings of the Ghanaian economy and the interest rate of our bonds, but we are not seeing that.

MZ: This is a very good point. But this is a three-year programme which is roughly in its first year. We are building the base to move to much better financial and fiscal outcomes. So if we can continue to do things according to plan and stick to the fiscal discipline by the end of the year, we would be able to stabilise debts. If we are able to stabilise the debts, we will see both inflation and the interest rates heading downwards.

So then the rating agencies and the markets will give positive response.

GB: The authorities have increased utility tariffs and also introduced new taxes. This increment has not gone well with Ghanaians.Is it justified?

MZ: When the oil prices are low, it’s good to do a few things. One, reduce the energy subsidies, which has been beneficial to many many countries which do that.

Also, lift the energy tariffs in order to raise more revenue to support the budget. Of course, you can tell that the oil prices are still lower that the peak price.

For the consumer, this is still okay. Many countries have walked this path. And Ghana should do this because it needs the revenue, needs the fiscal discipline, and fiscal consolidation. This is the reason of the new tax instruments, which is not new.

This is not bringing on more taxes, but to say, we are now collecting whatever we should have collected but did not in the past because of exemptions, and loopholes. This means we are trying to make the tax system more effective and we are trying to update the right tax system. In this sense, the government is doing the right thing.

GB: Inflation targeting hasn’t worked as far as our monetary policy framework is concerned. Do you think we should still adopt inflation targeting framework?

MZ: Inflation targeting is a very important monetary policy framework, particularly in Ghana where we have a very open free economy, free flexible exchange rate and the inflation targeting is always key. We provide technical assistance on it.

The current challenge is not because the framework doesn’t work, but because the deficits were high and the budget deficit is still high. So then inflation is on the upside which forced the Central Bank  to raise interest rates to deal with rising inflation.

The key is still the fiscal issues, so if we can maintain fiscal discipline, we will be able to see debts stabilise and interest rates and inflation will be on the downside.

GB: Finally, what lessons have you picked up from this visit and what are your general impressions?

MZ: One, the government is determined and firmly committed to the programme. They are determined to stick to the fiscal discipline. This is very impressive. When I talked to your President and the Vice President, they kept emphasising and re-emphasising on this one and I think that’s very important.