The World Bank Group Board of Executive Directors on Wednesday approved US$150 million budget support for Ghana.
The credit from the International Development Association (IDA) supports the First Macroeconomic Stability for Competitiveness and Growth Development Policy Financing (DPF).
The first of three development policy financing operations, it is aimed at helping the government of Ghana to stabilise its economy and shore up fiscal control by implementing financial policies and processes that are transparent and predictable.
The Board also approved IDAs very first landmark Policy-Based Guarantee (PBG) of up to US$400 million for Ghana, which may be used to support Ghana’s future external debt financings, a statement copied to the Ghana News Agency in Accra said.
The proposed credit is the first in a programmatic series that will make policy more predictable and enhance the productivity of public spending said Santiago Herrera, World Bank Task Team Leader for the Project.
As Ghana transitions from concessional financing towards market-based financing, the cost of public funds will increase, and so would the productivity of public capital to ensure that future obligations can be met. It is our hope that that PBG will minimise costs and risks, the team leader added.
Following a period of high and sustained growth, the Ghanaian economy experienced considerable turbulence reflected in high twin deficits and low growth.
Twin deficits exceeded 10 per cent of GDP, and GDP growth collapsed to four per cent last year after reaching 14 per cent in 2012. Ghana was hit by a series of external and domestic shocks, which have shaken its economy fundamentals very hard.
Consequently, international reserves dwindled, the Cedi depreciated, public debt rose quickly, and interest rates rose sharply. Policy uncertainty prevailed and real economic growth slumped.
A major obstacle to the restoration of macroeconomic stability in Ghana is the level and composition of government debt: total debt had risen to 65 per cent of GDP at the end of 2014 and amortisations have almost doubled from what they were two years ago.
In a recent address to Parliament, Mr. Seth Terkper, Finance Minister, stated that the government has been intensifying the implementation of measures approved in the 2015 budget.
The purpose was to address the revenue shortfalls, ensure the achievement of the objectives of the ongoing fiscal consolidation, and keep borrowing in line with the levels approved in the 2015 Budget.
In the context of rising interest rates and a depreciating currency, extending the maturity of public domestic debt became a daunting task, and debt mangers were forced to issue short term debt to avoid committing future budgets at unsustainable high interest rates.
While the financial objective was achieved, it was done at the expense of rising rollover and liquidity risks. Amortisation of short term domestic debt reached the equivalent of 31 per cent of GDP
Hence, debt composition became a source of risk, trapping debt managers in a vicious cycle of short maturity-high risk-currency depreciation-high debt levels to ensure that there is a significant change in the amortisation profile of the current debt; the IDA is being deployed for the purpose.
A Bank guarantee is a critical instrument in such circumstances as it leverages limited IDA resources: US$100 million of IDA resources allocated to Ghana would allow the deployment of a US$400 million PBG supporting up to a US$1.0 billion financing by Ghana.
“We are delighted to have made history today, by pioneering this innovative policy-based guarantee facility, the first ever by the IDA, to a long standing client who needs it most urgently,” said Yusupha B. Crookes, World Bank Country Director for Ghana.
“We hope this will provide additional space to Ghana to sort out some of its short-term economic challenges and continue to provide for its poorest and most vulnerable citizens through its social safety nets programmes,” he added.
To ensure that the most vulnerable in society are not inequitably affected by the government’s strong fiscal adjustment, the Bank Group has over the past several years supported the expansion of the Livelihood Empowerment against Poverty (LEAP) programme, a social safety net that provides cash transfers to the poorest families in Ghana.
This current facility included a component by which about 350,000 poor households will be provided with cash transfers by 2017.
The World Bank’s International Development Association (IDA), established in 1960, helps the world’s poorest countries by providing grants and low to zero-interest loans for projects and programmes that boost economic growth, reduce poverty, and improve poor people’s lives.
The IDA is one of the largest sources of assistance for the world’s 77 poorest countries, 39 of which are in Africa. Resources from IDA bring positive change for 2.8 billion people, the majority of whom live on less than $2 a day.
Since 1960, IDA has supported development work in 112 countries. Annual commitments have averaged about $18 billion over the last three years, with about 50 per cent going to Africa.