IMF Program and Ghana’s Debt Dynamics

1. IMF Program and Ghana’s Debt Dynamics Professor Godfred A. Bokpin BSc Admin (Accounting), MPhil (Finance), PhD (Economics) Email: gabokpin@ug.edu.gh

2. Presentation Outline • IMF made Popular by Africa • IMF Program in Context • Ghana’s Debt in Context • Ghana and IMF: Love at first sight, marriage, divorce and remarriage • Domestic Revenue Mobilisation is Key • Political Business Cycle • Political Costs

9. Ghana and IMF: Love at First Sight • Ghana officially joined IMF on 20th September, 1957. • Ghana first approached IMF in 1965 for a fund supported but was rejected by the government then. Ghana. Since then the country has visited the Fund more times (16 times) than an average couple in Ghana has had to visit the labour ward. • Averaging 3.8 since independence or in every 4 years we approach IMF

10. HISTORY OF IMF’S ENGAGEMENT GGHANA Source: IMF Data-Ghana

11. 1965 Program Template has Debt as its Core

12. A helicopter tour of Ghana’s debt • Ghana’s debt started climbing ambitiously. Subsequently IMF/World Bank intervened in 1966. • Ghana has struggled to manage its debt including the unilateral debt repudiation of $94.4m by NRC headed by Gen. Acheampong Achieving sustainable fiscal consolidation have been constrained by revenue challenges and expenditure rigidities.

13. Ghana’s Debt • Ghana’s debt towards the end of 2000 was life threatening. Debt to GDP ratio was approaching 130% from 32% in 1990 signifying debt unsustainability and with serious implications for debt affordability. • Salvation was found then in HIPC which we completed in 2004 and the MDRI in 2006 • Ghana achieved a combined debt relief of over 4 billion dollars bringing our debt to GDP ratio to less than 30% (26%)

14. Historical Values (1990-2013

22. Fiscal Deficit: A Precursor to Debt Ghana has a record history of fiscal indiscipline. Average fiscal deficit in the last 30 years has been 6.5% of GDP. The size, persistence, source, financing of the deficit create problems for the economy It has implications for debt sustainability and debt affordability. Fiscal deficit/fiscal unsustainability and debt unsustainability are intertwined or intricately linked.

23. Elections and Fiscal Slippages

24. Wide deviations show politically motivated overruns

25. Elections and Instability

26. 2015 IMF Program • Both internal and external factors accounted for the IMF program. The IMF asserts that the twin deficits largely account for the move: • Current Account Deficit and • Fiscal deficit • The twin deficits essentially reflect systematic weaknesses in the economy as it interact with the external environment/world economy especially world commodity prices. • Ghana really never recovered from the 2012 election shocks and it largely accounted for the latest marriage born more out of necessity than love

27. Program broad Goals • To ensure a sizeable and frontloaded fiscal adjustment to restore debt sustainability, rebuild external buffers, and eliminate fiscal dominance of monetary • Restoring macroeconomic stability • Restoring the effectiveness of the inflation targeting framework • Eliminate fiscal dominance of monetary policy • Implementing a prudent borrowing strategy • Expanding Social Safety net programs to restore real income of the poor • Strengthening public financial management and revenue administration

28. 2019 Debt Sustainability Analysis Ghana’s risks of external and overall debt distress continue to be assessed as high (IMF, 2019). This was an end of program review against the program objective of restoring debt sustainability. Rebasing of the economy dwarfs Debt to GDP ratio but other measures betrays us hugely

29. Debt Sustainability Issues • Ghana already a high risk debt distress country. The 2018 DSA is used as a guide • Debt to GDP ratio (passed because of rebasing) • External debt service-to-exports (Breached) • External debt service-to-revenue (Breached) • PV of total public debt-to-GDP ratio (Breached) • Debt Service to Revenue ratio (Breached) • PV Debt to Export Ratio (See slide indicating this is problematic) • Debt Service to Export ratio (see slides

30. DSA

31. 2019 Budget: Resource Mobilisation

32. 2019 Budget: Resource Allocation

33. Ignore elections next year, collect more taxes • Tax compliance is usually low in a election year. Ghana’s theoretical Tax frontier is about GHS 89 billion • Given a tax effort of GHS 45, we a gap of GHS 35 billion to close (over to GRA) • Ghana can do between 5%- 12% of GDP (GHS 18-45billion). 2019 budget deficit is GHS 15 billion • Ghana loses more USD 2 billion through trade mis-invoicing (67% of the recent Eurobond issue, 70% of the budget deficit for 2019)

34. Rebasing of Economy Ok but… • Rebasing the economy dwarfs Debt to GDP ratio but betrays the Ghana on tax effort. • We need assess the how the merging sectors are contributing to the revenue envelop • Rebasing necessarily does not increase cash flow to the country. • Does not also affect debt service to revenue ratio which remains highly elevated • 2009 rebased created a wrong impression

35. Source :MoF Fiscal Data-Ghana The National Budget

36. Government Special Initiatives adding rising expenditure rigidities • Planting for Food and Jobs • National Building Corps (check 2016 NDC budget) • Free Teacher and Nursing Trainee Allowances • Free Nursing Trainee Allowances • Special Prosecutor’s Office • Coastal Belt Development Corporations • Zongo Development Fund, etc. • Free Senior High School • One-District One-Factory

39. Ghana in Focus

40. EUROBONDS • Since 2005, 11 out of the 15 Least Developed Countries that issued sovereign bonds were from Africa, with Ghana, Kenya and Cote d’Ivoire leading the pack. • Total Eurobonds issued by Africa in 2016 was US$ 18 billion with the cumulative bond issued since 2006 amounting to $25.8bn. • The excess cost (African Premium) incurred was 2.9bn according to empirical studies • Now century bond/green bond

41. Motivation: Why more revenue needed in Ghana? SSA: Interest ExpenditurePercent of Tax Revenue Source: IMF, World Economic Outlook database.

42. Using rebased GDP, Ghana has the lowest Tax Effort in SSA Total Revenue Excluding Grants and Tax Revenue, Median, 2016Percent of GDP Source: IMF, World Economic Outlook database.

43. VAT productivity average lowest in SSA countries VAT C-Efficiency, Average Sources: World Revenue Longitudinal Database (WoRLD), IMF Fiscal Affairs Department Tax Rates Database, and World Economic Outlook database. 43

44. Ghana my Beloved Country

45. Ghana in Context • In 2011, Tax exemptions/tax expenditures cost the nation 6.13% of GDP translating 2.4 billion dollars • In 2013, Ghana lost 5.2% of its GDP to tax expenditures (Oppong and James, 2016) amounting to USD 2.5 billion and issued Eurobond of USD 750 million at approximately 8% • In 2014, Ghana lost 5% of its GDP to Tax expenditures amounting to USD 2 billion reflecting dwarfed economic growth of the year.

46. Conclusion • THANK YOU AND GOD (JESUS CHRIST) BLESSES YOU ALL • TGBTG