IMF monies diverted from BOP to 2018 budget support

By Toma Imirhe

In a marked departure from the original strategy for Ghana’s three year Extended Credit Facility, being provided by the International Monetary Fund, the US$200 million or so the country will receive as disbursements following its successful combined 5^th and 6^th programme performance reviews, is to go into financing of the 2018 budget deficit rather than Balance of Payments support. This is a major change in that the entire US$918 million Ghana is receiving over three years under the programme was meant to be balance of payments support aimed at boosting the country’s gross foreign reserves and thus raising confidence among the international financial and trading communities as to its ability to met its foreign exchange bills and obligations. Indeed, this is why all the disbursements under the programme are made to the Bank of Ghana, which manages the country’s international reserves,  rather than to government itself, and indeed all of the previous US$500 million or so received hitherto have been used for that purpose.

However, faced with increasing fiscal pressures from high debt servicing costs incurred in financing its annual fiscal deficits, government, in the third quarter of 2017 successfully convinced the IMF to allow it use part of the disbursements to finance its 2018 budget deficit and thus lower its financing costs considerably.

With the successful issuance of  US$2 billion in Eurobonds in early May this year, government and its central bank have agreed that the country’s gross international reserves are now large enough to comfortably accommodate its BoP position and so the latest IMF disbursement can be used for 2018 budgetary support instead. The latest Eurobond issuance  comprising US$1 billion in 10 year bonds at 7.26% and US$1 billion in 30 year bonds at 8.26% - has taken Ghana’s Gross International Reserves to US$8.1 billion, enough to cover some 4.4 months of imports which is well above the 3.5 months import cover target for this year.

The latest IMF disbursement, equivalent to about GHc884 million  will now form part of the GHc2.9 billion planned for as the foreign sourced component of the GHc10.9 billion needed to finance the projected  4.5% of Gross Domestic Product fiscal deficit for 2018. The other GHc8 billion is being secured from domestic sources although this includes the foreign exchange proceeds of medium and long term bonds denominated in cedis but bought up by foreign investors.

With US$750 million out of the latest Eurobond issuance, equivalent to about GHc3.3 billion being allocated for 2018  budget support as well, this means the foreign sourced component of this year’s budget deficit is fully financed, and indeed government will have extra financing in its coffers of well over GHc1 billion.

Importantly, the Governor of the Bank of Ghana, Dr Ernest Addison is in full agreement with the revised strategy for using the latest IMF disbursement, pointing out that while government can have access to increased cedi resources for its budgetary spending, the foreign exchange itself still forms part of Ghana’s increasingly comfortable gross international reserves.

 This now gives government the option of reducing the proportion of its budget deficit that will be financed from domestic sources [projected at 73% in the 2018 budget itself] and replacing part of it with foreign financing at lower interest rates [but bigger foreign exchange exposure]; or refinancing more than originally planned of the relatively expensive Eurobond debt issued by the Mahama administration. Instructively, this is what government claims it wants to do with the other US$1.25 billion in proceeds from the latest Eurobond issuance.

A third option, albeit an unlikely one, would be to increase this year’s deficit beyond the targeted 4.5% of GDP, in order to accelerate its capital expenditure programme, which was derailed last year by public expenditure cuts forced by a 9% revenue shortfall. Government has come under severe criticism for its restrained capital expenditure despite having drawn up ambitious development plans that require substantial, but as yet unavailable, public spending. However government has so far opted to hold back on much of its capital expenditure plans rather than exceed its fiscal deficit targets.