New IMF programme for Ghana won’t help any more than the last seventeen  

The chances of securing a new bailout have improved with progress on the government’s domestic-debt restructuring package. The government said on 14 February that it had achieved about 85% acceptance of its proposal, raising hopes for a $3bn IMF bailout.

Some are questioning whether government figures on acceptances are valid. Even if the IMF can be convinced that the restructuring has been effective, there’s “little empirical evidence” to suggest that another bailout “will be any more successful than the past ones,” says Steve Hanke, professor of applied economics at Johns Hopkins University in the US.

Hanke points to a new working paper from Kavish Hajarnavis, Dhruv Mahajan and Hyunwoo Roh at Johns Hopkins on the effects of IMF loan programmes on macroeconomic indicators in the three years after the adoption. The study covers the period from 2000 to 2010. IMF lending arrangements resulted, on average, in a 5.8% increase in the unemployment rate, while control-group countries, which faced similar economic circumstances but did not implement IMF programmes, saw an average 7% decline in unemployment.

Countries with IMF programmes also fared worse than control-group countries in terms of real GDP growth, real export-value growth, and in the reduction of government debt, Hanke says. “This research suggests that many countries would have been better off without any IMF assistance at all.”

Printing presses

In the short term, the government has no choice but to do everything in its power to get an IMF package, says James Dzansi, an economist at the International Growth Centre in Accra. The economy will be left facing a “very serious” uphill struggle if there is no bailout by March, with worsening inflation on the cards.

Printing money has been leading to a cycle of inflation and currency depreciation, Dzansi says. The central bank in recent years has been far exceeding the amount of money it is allowed to print, which legally should be only 5% of the previous year’s tax revenue. At the same time, policy interest rates signal contraction. “It’s like having one foot on the brake and one on the accelerator,” Dzansi says. He sees reductions in government spending as essential. “The government needs to cut back if it’s asking people to take a hit on their savings.”

The cedi is likely to keep depreciating even assuming a bailout is secured, Dzansi forecasts. The need to import food and oil will mean continued strong dollar demand, and multinationals operating in Ghana be closing their accounts and repatriating their dividends, meaning more downward pressure on the currency, he says.

 The prospects are now “very high” for an IMF programme which will help stabilise the currency, says Ghanaian economist Emmanuel Anyidoho. One way to look at IMF interventions is as a form of “check and balance” on government profligacy, Anyidoho argues. There remains resistance to the debt restructuring among the public who are asking why they should pay the price for economic mismanagement, he says, especially among pensioners who depend on government bonds for their survival.

 The deadline for voluntary acceptance of the debt restructuring has already had to be extended five times and the terms sweetened. “There’s a lot of discontent,” Anyidoho says. “The situation has been caused by reckless borrowing.”

Currency boards

Anyidoho argues that controls on the use of foreign currency for consumption would help the economy. There’s not enough local production and there needs to be a process of import substitution, he says. Dzansi sees further gradual depreciation as what the economy needs. The drop in the cedi so far this year has been too fast, and an appreciating currency would hurt the country’s fragile export sector, he says. “The aim is to manage the rate of depreciation.”

 Hanke doesn’t see any prospect of that being achieved. “The cedi is in the tank,” with inflation eating away confidence in the currency.  As of 15 February, Hanke measures annual inflation in Ghana at 101% per year, nearly double the official January rate of 53.6%. Hanke’s inflation dashboard often shows large discrepancies with the inflation rates published by governments. A main reason for that, he says, is that governments use a deliberately restricted basket of goods to construct their inflation indexes, whereas his basket takes into account the prices of everything bought and sold in an economy.

Hanke points to a currency board as the only way to restore confidence in the cedi. A currency board issues notes and coins convertible on demand into a foreign anchor currency at a fixed rate of exchange. It is required to hold anchor-currency reserves equal to 100% of its monetary liabilities. It has no discretionary monetary powers and cannot issue credit.

The Gold Coast had a currency board from 1913 to 1958. Hanke was the architect of modern currency boards in Estonia, Lithuania, Bulgaria, and Bosnia-Herzegovina. “Currency boards have existed in some 70 countries,” he says. “None have failed.”