IMF Deal Isn’t Foregone Conclusion

Seth Terkper PixAn IMF programme that supports fiscal consolidation and addresses macroeconomic imbalances in Ghana can stabilise the outlook on the country’s ‘B’/Negative sovereign rating, Fitch Ratings has said.

“However, an IMF programme is not a foregone conclusion, nor is its effective implementation. A lasting reduction in exchange rate and funding pressures is unlikely until a programme is agreed and a credible deficit reduction strategy is implemented,” the rating agency said in a statement issued yesterday.

The government over the weekend said it would approach the IMF for talks on a possible programme, after months of announcements and policy initiatives that appeared to make talks unlikely in the short term.

Fitch said the government would probably sought endorsement for the country’s ‘home grown’ strategy, but given its recent track record, might find the IMF’s likely suggestion of faster, front-loaded fiscal consolidation challenging.

Ghana’s strategy focuses on raising government revenue, improving public financial management and alleviating the energy crisis.

It stated that proposed fiscal consolidation remains modest, saying “we forecast a fiscal deficit of 10.1 per cent of GDP in 2014, against the government’s forecast of 8.8 per cent (recently increased from 8.5 per cent in the supplementary budget) moderating to six per cent of GDP in 2016.”

Ghana has also been planning a Eurobond issue for as much as $1.5 billion, and according to Fitch, a successful issue may strengthen the government’s hand and lengthen the negotiations.

“Macroeconomic challenges have continued to intensify this year. Government funding costs have risen steeply. 182-day treasury bill yields have jumped above 25 per cent, from 19 per cent. Interest costs now account for one-fifth of government expenditure,” it said.

In addition, high yields have seen auctions of five- and seven-year bonds cancelled. A shortage of local currency liquidity has resulted in banks and non-bank financial institutions cutting holdings of government securities — one reason the central bank funded $1billion (or 85 per cent) of the budget deficit during the first five months of 2014.

This, Fitch said, had complicated liquidity management and added to inflationary pressures and cedi weakness. The cedi has plummeted 30 per cent since the beginning of the year.

The statement said challenges in the forex (FX) market had intensified with a gap opening between the rate at which the Central Bank supplies dollars to the market (GH¢/$3.03), and the interbank rate (GHC¢/$3.43).

“This gap has widened to GH¢40 since May, from GH¢10c. Parallel exchange markets are creating distortions in the domestic economy and exacerbating the shortage of dollars. Gross international reserves have continued to fall, to $4.5 billion or 2.2 months of current external payments (CXP) in June from USD5.6bn at end-2013. Stripping out swap facilities, reserves cover only 1.5 months of CXP,” the rating agency said.

According to Fitch, a Eurobond issue and the upcoming USD2bn syndicated loan to the Ghana Cocoa Board to finance the purchase of this year’s cocoa crop might alleviate short term pressure on foreign exchange reserves.

“However, pent-up dollar demand and a double-digit current account deficit could see these dwindle again over the coming months,” it said.

Fitch placed Ghana’s ‘B’ IDR on Negative Outlook in March, highlighting deteriorating external and fiscal balances and the increasing challenge and cost of financing the deficit.

A further deterioration in external finances and an erosion of international reserves that jeopardised external financing capacity are negative ratings sensitivities.

The next scheduled rating review is on September 26.

By Times Reporter

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