Ghana policy credibility depends on IMF package after Moody’s downgrade

By David Whitehouse
Posted on Tuesday, 8 February 2022 15:10

President of Ghana Nana Addo Dankwa Akufo-Addo speaks during the UN Climate Change Conference COP26 in Glasgow, Scotland, Tuesday, Nov. 2, 2021. (Hannah McKay/Pool via AP)/

Ghana’s downgrade by Moody’s leaves the government needing to agree a package with the International Monetary Fund (IMF) or the World Bank to achieve policy credibility, economists say.

“The government should approach multilateral donors while there is still breathing space,” says James Dzansi, an economist at the International Growth Centre in Accra. “You don’t go when you are on your knees.”

The government is still resisting the idea of going to the IMF, but Dzansi sees no alternative to an agreed policy package with new borrowing to be disbursed in tranches depending on progress. Otherwise, he says, international markets are unlikely to fully accept government policy pledges. “The government needs policy credibility.”

Moody’s on Feb 4. downgraded Ghana’s long-term sovereign credit risk rating by one notch from ‘B3’ to ‘Caa1’ with a stable outlook. The agency cited worsening public debt, as did Fitch when it downgraded Ghana from ‘B’ to ‘B-‘ in January. The government has said it will appeal the Moody’s downgrade, arguing that the agency omitted key information.

Dzansi says the downgrade is justified. He points to favourable current commodity prices for Ghana and questions what would happen if there was a downside shock.

  • He argues that the political costs of going to the IMF have decreased, with the government having already paid a political price for spending cuts and fiscal tightening.
  • “It’s a matter of time” before the government seeks an IMF or World Bank package, he says.

‘Political suicide’

David Marfo-Ahenkorah, an economist in Accra, sees little justification for the government contesting the downgrade. He agrees that IMF support is needed as the country is “virtually cut off from the international capital market. It will serve the country well if the government goes to the IMF as soon as possible,” he says.

But Marfo-Ahenkorah doesn’t expect that will happen, pointing to the political consequences. The extended credit facility agreed with the IMF in 2015 was Ghana’s sixteenth IMF-backed stabilisation program since independence in 1957. It resulted in freezes on new public-sector employment, which the current government capitalized on to win the elections in 2016.

  • “In my opinion, it will be politically suicidal for this current government to go to the IMF for help due to how they criticized the previous government for doing so,”  Marfo-Ahenkorah says.

The level of short-term external obligations means there is no immediate risk of default, says Courage Kingsley Martey, senior economist at Databank Group in Accra. The risk, Martey says, will increase between 2025 and 2030 if the fiscal account does not improve. Ghana needs a “decisive fiscal improvement” to regain market access, Martey says. As it stands, with its eurobond yields around 12%, the access has effectively been lost, he argues.

The urgent need, Martey argues, is to broaden the tax base by accelerating the roll-out of national identification systems and linking them together for tax purposes. Greater spending discipline is needed, he says. There also needs to be a reduction in tax exemptions, and “realistic property taxes based on realistic property valuations.”

Dzansi agrees that more spending cuts and a stronger drive to increase revenue are needed. Still, he says, government proposals to impose a tax of 1.75% on mobile money are a “misstep”.

  • The plan risks provoking popular demonstrations if the government presses ahead with it, he says, pointing to the country’s tradition of anti-tax protests.
  • And if implemented, it would probably lead to people reducing their use of mobile money, meaning limited fiscal receipts, he adds.
  • A better way forward, Dzansi argues, would be to tax savers on the interest they earn, and the fees incurred by individuals when they execute financial transactions.

Bottom line

An agreed IMF policy package would do more Ghana’s credibility than publicly arguing with Moody’s.

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