By John LIPSKY
Africa was far from the epicenter of the global financial crisis. Despite that, Ghana and other countries in the region were hit hard by the aftershocks. Falling global demand reduced prices for many commodity exporters and resulted in slumping sales for many nontraditional exports. The turmoil in the financial markets in the developed countries also means that investors had less money to invest in countries like Ghana. Africans abroad had less income to send home. And as growth in Africa slowed, so did tax revenues in many countries.
Reflecting these developments, the global recession has created very real cost for Africa. After averaging more than 6 % growth since 2002, last year African countries averaged just 1 % growth. That means per capita income actually fell by 1 % – the first decline in African living standards in 10 years. The IMF is keeping that in mind as we work with Ghana and its neighbours to speed the process of recovery. Restoring strong and sustainable growth is the necessary path for achieving our goals of improving the lives of all of our citizens.
Support from the IMF
As the global financial crisis erupted, we looked urgently at how the IMF could help Africa weather the emerging recession. From similar crises in the past, the IMF has learned several lessons. We work hard to understand the unique circumstances of each country and to help our members best confront the global developments that they face.
Among our first responses to the financial crisis was to ensure that low-income countries had rapid access to IMF financing in order to strengthen their balance of payments – thereby helping avoid the sort of contractionary economic impact that would only make the downturn more severe. Last year, IMF lending to sub-Saharan Africa was up almost five-fold from the year before, reaching US$5 billion. Interest rates on these operations for the most part are extremely low – through 2011, for instance the interest rate for loans to low-income countries has been set at zero, and subsequently at just a quarter of 1 %. And IMF loans are tailored closely at member country needs, so that we can disburse low-cost funds quickly when a country has temporary, urgent needs, or we can set up arrangements for disbursements over several years when this is appropriate. Our approach to how countries manage public borrowing today provides more flexibility in countries with strong macroeconomics and public debt performance and with well-developed debt management institutions.
Ghana has benefited considerably from the new policies: One of the largest IMF operations in African in 2009 was the $600 million three-year arrangement with Ghana. Countries from Cameroon to Tanzania similarly benefited from these changes.
The conditions on our financial arrangements also have also been made more flexible. The goal is to focus IMF conditionality on reforms that are critical to economic success while ensuring that countries have the opportunity to follow policy approaches that are appropriate for their circumstances. We want to work with our members to explore a variety of options for economic reforms that will generate real progress.
To relieve concerns about whether countries would be able to ride out the global financial crisis, IMF members approved a general allocation of Special Drawing Rights, or SDRs, which are an international reserve asset, much like foreign currency holdings. The new allocation pumped some $250 billion into the world economy, spread across our 186 members. Ghana’s share was $450 million. This boosted its gross international reserves by about 25 %. A reserve cushion is very important to maintain confidence in a country’s ability to meet its external financial obligations.
Given the global recession, we have encouraged countries that started with a strong budget position to allow some temporary easing of fiscal policies to provide a cushion for growth and jobs. That is why on average sub-Saharan African countries have gone from a fiscal surplus of about 1% of GDP in 2008 to a projected deficit of nearly 5% in 2009. We are, of course, also thinking ahead with member governments on how they can most efficiently get back to a solid, sustainable budget position once the storm has passed.
In our discussions with authorities in member countries, monetary and exchange rate policies also are regularly on the agenda. Since the recent global food and fuel crisis waned, inflationary pressures have been reduced throughout the continent, such that about two-thirds of the countries in the region have been able to lower interest rates, supporting renewed growth.
Looking forward in Africa
The news is that, through international cooperation among advanced economies on economic stimulus, the global economy is stabilizing, with evidence of resumed growth in many advanced economies. In time, this will also become increasingly evident in Africa.
Looking back over the past 18 months or so, we are encouraged that many African countries, including Ghana, have come through the financial crisis not only better than they did in the past but also better than many other countries throughout the world. In considerable part, this is because of the strengthening of monetary and budget policies, as well as structural reform in many countries. One result, for example, is that African central banks started the crisis with stronger international reserve positions than in the past, providing a cushion against balance of payments shocks. Debt relief from the IMF and many others also has helped, because it freed up resources that could be used to improve the business environment, invest in infrastructure, and support the poor.
But with a legacy from the global recession of sluggish growth and higher poverty, it will be critical for African countries to raise their growth performance further, to help accelerate job creation and boost incomes. This will require additional progress in improving macroeconomic management and the business climate. To help with that task, the Fund offers members extensive technical assistance. For instance, in 2009 along, Fund staff provided Ghana with technical expertise on a broad range of issues, such as public financial management, revenue administration, natural resource taxation, ways to manage natural resources, regulation of the financial sector, and economic statistics. Some of the technical assistance was provided by headquarters staff and some from the regional technical assistance centers, which take a field-based regional approach. We will be adding two more centers in Africa, one of which will be based here in Accra.
In helping foster a return to balanced global growth, we also want African countries to have a clear voice in the international financial institutions. We are working to reform our own governance in part so that our members in Africa and other countries have a larger say in what the IMF does. In particular, we are working to ensure that the world’s fastest-growing countries have an adequate voice in Fund governance. At the same time, we want to ensure that the voice of low-income countries will be protected, with the aggregate quotas of sub-Saharan African members even rising slightly.
But let’s now look directly at Ghana and IMF.
Ghana and the IMF
As you are probably all too well aware, Ghana accumulated massive fiscal imbalances in 2008, which meant that in 2009 as the world crisis widened, the country had no room to pump money into the economy through fiscal stimulus. With inflation surging, public debt snowballing, and the cedi depreciating rapidly, clearly something had to be done. Ghana turned to the IMF for financial support. The three-year economic program that was negotiated centered on fiscal adjustment and on reforms to budget management to prepare Ghana for the transition to oil producer status.
The first assessment by a Fund mission, in October 2009, was broadly positive. Management of spending has been tightened, helping to reduce the deficit. That, and tighter monetary conditions, have helped to stabilize the exchange rate so the cedi is no longer depreciating. That helps keep inflation down, which is good not just for the government but for every Ghanaian. In addition, several critical fiscal reforms have been launched, including measures on revenue administration, tax policy, and financial management.
Not everything is rosy, of course. The deficit is still far too high, and public is still rising. Large-scale borrowing is keeping interest rates high, which means more out-of-pocket costs for repayment. And government bills are not being paid on time, so Ghana is again facing arrears.
As you in Parliament have recognized clearly, the deficit must be pruned, both this year and next. This is important for Ghana to stabilize its debt and bring it down to manageable size. Equally important, however, sound finances are needed so that future oil revenues can underpin an expanded public investment program. Investment spending at current levels simply cannot deliver the quality of infrastructure – from power to roads – that is need to boost economic growth. While oil resources can finance these investments, this will require a disciplined non-oil budget. Unless Ghana can mobilize more revenue and better contain recurrent spending costs, a fiscal deficit of the magnitude that Ghana has been recording recently would absorb all of Ghana’s future oil revenues, leaving nothing for increasing capital spending.
The Challenge for Policymakers
Legislators and other policymakers are thus faced with a major communications challenge: explaining to Ghanaians that unless the country’s fiscal affairs are managed carefully, even austerely, oil revenues will not be able to make a real difference to growth, job creation, and living standards.
You are now faced with the problem of weighing the short-term costs of fiscal adjustment against the long-term gains that can come from oil-financed investments. It is no surprise that natural resource wealth has been used most productively in countries that have been able to manage economic policies with an eye to the longer term – here Botswana, Chile, and Norway come to mind.
The challenge, then, is to ensure Ghana’s future by encouraging a rich and active debate on the merits of sound budgeting and the best ways to use Ghana’s prospective oil wealth wisely. That is likely to be the central economic policy challenge for Ghana for some time to come.
This is an edited version of a presentation made to Ghana’s Parliament by John Lipsky, First Deputy Managing Director of the IMF.
Africa was far from the epicenter of the global financial crisis. Despite that, Ghana and other countries in the region were hit hard by the aftershocks. Falling global demand reduced prices for many commodity exporters and resulted in slumping sales for many nontraditional exports. The turmoil in the financial markets in the developed countries also means that investors had less money to invest in countries like Ghana. Africans abroad had less income to send home. And as growth in Africa slowed, so did tax revenues in many countries.
Reflecting these developments, the global recession has created very real cost for Africa. After averaging more than 6 % growth since 2002, last year African countries averaged just 1 % growth. That means per capita income actually fell by 1 % – the first decline in African living standards in 10 years. The IMF is keeping that in mind as we work with Ghana and its neighbours to speed the process of recovery. Restoring strong and sustainable growth is the necessary path for achieving our goals of improving the lives of all of our citizens.
Support from the IMF
As the global financial crisis erupted, we looked urgently at how the IMF could help Africa weather the emerging recession. From similar crises in the past, the IMF has learned several lessons. We work hard to understand the unique circumstances of each country and to help our members best confront the global developments that they face.
Among our first responses to the financial crisis was to ensure that low-income countries had rapid access to IMF financing in order to strengthen their balance of payments – thereby helping avoid the sort of contractionary economic impact that would only make the downturn more severe. Last year, IMF lending to sub-Saharan Africa was up almost five-fold from the year before, reaching US$5 billion. Interest rates on these operations for the most part are extremely low – through 2011, for instance the interest rate for loans to low-income countries has been set at zero, and subsequently at just a quarter of 1 %. And IMF loans are tailored closely at member country needs, so that we can disburse low-cost funds quickly when a country has temporary, urgent needs, or we can set up arrangements for disbursements over several years when this is appropriate. Our approach to how countries manage public borrowing today provides more flexibility in countries with strong macroeconomics and public debt performance and with well-developed debt management institutions.
Ghana has benefited considerably from the new policies: One of the largest IMF operations in African in 2009 was the $600 million three-year arrangement with Ghana. Countries from Cameroon to Tanzania similarly benefited from these changes.
The conditions on our financial arrangements also have also been made more flexible. The goal is to focus IMF conditionality on reforms that are critical to economic success while ensuring that countries have the opportunity to follow policy approaches that are appropriate for their circumstances. We want to work with our members to explore a variety of options for economic reforms that will generate real progress.
To relieve concerns about whether countries would be able to ride out the global financial crisis, IMF members approved a general allocation of Special Drawing Rights, or SDRs, which are an international reserve asset, much like foreign currency holdings. The new allocation pumped some $250 billion into the world economy, spread across our 186 members. Ghana’s share was $450 million. This boosted its gross international reserves by about 25 %. A reserve cushion is very important to maintain confidence in a country’s ability to meet its external financial obligations.
Given the global recession, we have encouraged countries that started with a strong budget position to allow some temporary easing of fiscal policies to provide a cushion for growth and jobs. That is why on average sub-Saharan African countries have gone from a fiscal surplus of about 1% of GDP in 2008 to a projected deficit of nearly 5% in 2009. We are, of course, also thinking ahead with member governments on how they can most efficiently get back to a solid, sustainable budget position once the storm has passed.
In our discussions with authorities in member countries, monetary and exchange rate policies also are regularly on the agenda. Since the recent global food and fuel crisis waned, inflationary pressures have been reduced throughout the continent, such that about two-thirds of the countries in the region have been able to lower interest rates, supporting renewed growth.
Looking forward in Africa
The news is that, through international cooperation among advanced economies on economic stimulus, the global economy is stabilizing, with evidence of resumed growth in many advanced economies. In time, this will also become increasingly evident in Africa.
Looking back over the past 18 months or so, we are encouraged that many African countries, including Ghana, have come through the financial crisis not only better than they did in the past but also better than many other countries throughout the world. In considerable part, this is because of the strengthening of monetary and budget policies, as well as structural reform in many countries. One result, for example, is that African central banks started the crisis with stronger international reserve positions than in the past, providing a cushion against balance of payments shocks. Debt relief from the IMF and many others also has helped, because it freed up resources that could be used to improve the business environment, invest in infrastructure, and support the poor.
But with a legacy from the global recession of sluggish growth and higher poverty, it will be critical for African countries to raise their growth performance further, to help accelerate job creation and boost incomes. This will require additional progress in improving macroeconomic management and the business climate. To help with that task, the Fund offers members extensive technical assistance. For instance, in 2009 along, Fund staff provided Ghana with technical expertise on a broad range of issues, such as public financial management, revenue administration, natural resource taxation, ways to manage natural resources, regulation of the financial sector, and economic statistics. Some of the technical assistance was provided by headquarters staff and some from the regional technical assistance centers, which take a field-based regional approach. We will be adding two more centers in Africa, one of which will be based here in Accra.
In helping foster a return to balanced global growth, we also want African countries to have a clear voice in the international financial institutions. We are working to reform our own governance in part so that our members in Africa and other countries have a larger say in what the IMF does. In particular, we are working to ensure that the world’s fastest-growing countries have an adequate voice in Fund governance. At the same time, we want to ensure that the voice of low-income countries will be protected, with the aggregate quotas of sub-Saharan African members even rising slightly.
But let’s now look directly at Ghana and IMF.
Ghana and the IMF
As you are probably all too well aware, Ghana accumulated massive fiscal imbalances in 2008, which meant that in 2009 as the world crisis widened, the country had no room to pump money into the economy through fiscal stimulus. With inflation surging, public debt snowballing, and the cedi depreciating rapidly, clearly something had to be done. Ghana turned to the IMF for financial support. The three-year economic program that was negotiated centered on fiscal adjustment and on reforms to budget management to prepare Ghana for the transition to oil producer status.
The first assessment by a Fund mission, in October 2009, was broadly positive. Management of spending has been tightened, helping to reduce the deficit. That, and tighter monetary conditions, have helped to stabilize the exchange rate so the cedi is no longer depreciating. That helps keep inflation down, which is good not just for the government but for every Ghanaian. In addition, several critical fiscal reforms have been launched, including measures on revenue administration, tax policy, and financial management.
Not everything is rosy, of course. The deficit is still far too high, and public is still rising. Large-scale borrowing is keeping interest rates high, which means more out-of-pocket costs for repayment. And government bills are not being paid on time, so Ghana is again facing arrears.
As you in Parliament have recognized clearly, the deficit must be pruned, both this year and next. This is important for Ghana to stabilize its debt and bring it down to manageable size. Equally important, however, sound finances are needed so that future oil revenues can underpin an expanded public investment program. Investment spending at current levels simply cannot deliver the quality of infrastructure – from power to roads – that is need to boost economic growth. While oil resources can finance these investments, this will require a disciplined non-oil budget. Unless Ghana can mobilize more revenue and better contain recurrent spending costs, a fiscal deficit of the magnitude that Ghana has been recording recently would absorb all of Ghana’s future oil revenues, leaving nothing for increasing capital spending.
The Challenge for Policymakers
Legislators and other policymakers are thus faced with a major communications challenge: explaining to Ghanaians that unless the country’s fiscal affairs are managed carefully, even austerely, oil revenues will not be able to make a real difference to growth, job creation, and living standards.
You are now faced with the problem of weighing the short-term costs of fiscal adjustment against the long-term gains that can come from oil-financed investments. It is no surprise that natural resource wealth has been used most productively in countries that have been able to manage economic policies with an eye to the longer term – here Botswana, Chile, and Norway come to mind.
The challenge, then, is to ensure Ghana’s future by encouraging a rich and active debate on the merits of sound budgeting and the best ways to use Ghana’s prospective oil wealth wisely. That is likely to be the central economic policy challenge for Ghana for some time to come.
This is an edited version of a presentation made to Ghana’s Parliament by John Lipsky, First Deputy Managing Director of the IMF.
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