What good will come out of the IMF bail-out?


History may be a guide for the present

A long-standing relationship has existed between Ghana and International Monetary Fund (IMF) dating back to 1966. From that time, successive governments have signed separate loan arrangements with the IMF. Indeed, the relationship has suffered bitter divorces and ambivalent reconciliations over the years. For instance, when in 2006 the country was exploring other financing options, it pulled out from the IMF loans arrangement. But it came back in 2009 to borrow a whopping US$602 million from the international financial institution. Thus, reaffirming the important role that the Fund plays in the economic life of Ghana.
From a pluralistic stand point, the IMF policy prescriptions have received mixed reactions. On the positive side, Ghana’s relationship with the IMF has resulted in stabilisation and economic growth which, however, occurred on the altar of employment losses as evinced in the implementation of Structural Adjustment Programmes (SAPs). On the negative part, the pursuance of the IMF policy prescriptions led to socio-economic hardships and political instability, which among other factors, triggered the overthrow of the government in 1972.here are two schools of thought with regard to the role of the IMF in the country’s economy, and the impact of its prescribed policies on its socio-economic development. The first school considers the policies of the IMF as a necessary evil rather than a preferred strategy. The second school criticises IMF-supported programmes as ineffective and unjustifiably restrictive of government spending and unreasonably interruptive of much-needed expansions to critical sectors such as education and health.

One of the scars created by the 2008 global financial crisis is the unquenchable thirst for economic stimulus packages by countries. This has cajoled many developing countries to resort to the IMF for bail-outs from their economic difficulties. These developing countries lack the privilege of a strong regional economic co-operation and monetary unions such as the European Union (EU) to rely on for liquidity. It is against this backdrop that Ghana’s turn to the IMF for salvation in spite of the palpable impact of the Fund’s conditionalities on the economy. To better assess the implications of the recent IMF bail-out and the conditions accompanying it, a study of the historical data to ascertain what went right or wrong with the economy with or without the IMF’s loans.


Economic prosperity

At the dawn of independence in 1957, Ghana swam in economic prosperity with a relatively high growth rate, substantial foreign exchange reserve and a strong civil service to guide economic growth. To promote socio-economic development, the government instituted a policy of free education, healthcare and initiated mass industrialisation. However, external shocks arising from deterioration the price of cocoa, the country’s main export, the economic situation declined. In 1965, Ghana was faced with the challenge of dealing with an economic downturn. Needing an external bail-out, the Nkrumah administration approached the IMF. The Fund proposed a reduction in government spending to levels that could be covered by public revenues in order to fight inflation. The Convention People’s Party (CPP) government rejected these conditions.

Adopting these policies would have trammelled the expansionist development programmes which included diversification of the Ghanaian economy through import substitution industrialisation. Moreover, if the government had accepted the IMF loan and conditionalities, it would have affected the momentum of its economic development strategy. The IMF policies would have forced Nkrumah to cut back on capital spending. Since the government was overthrown in 1966 by a coup d’etats, it is impossible to determine whether its policies could have tackled the economic downturn without the IMF support.

Notwithstanding this, the data indicates that Ghana’s socio-economic situation in 1965 – a year before the coup – was not only gloomy but also heralded the country’s economic doom. Besides the high level of debt stock which stood at US$500 million in 1965, the external reserve position had deteriorated considerably  when recounting from 1957 where net reserves stood at US$269 million to 1966 when they were negative at –US$391 million. This resulted in a deteriorating balance of payments position and a poor credit rating. Consequently, inflation ballooned astronomically from 0.98 per cent in 964 to 26.4 per cent in 1965.

The deteriorating economy, with the attendant fall in living standards, was one of the premises on which the military ousted the purportedly socialist Nkrumah government. The soldiers-led, pro-capitalist National Liberation Council (NLC) regime approached the IMF for financial support. The NLC implemented disinflationary policies aimed at stabilising the macro-economy. The IMF proposed the following conditionalities:

  • Reduction in overall government expenditures (affecting mainly the capital budget) and in the size of the deficit, and recourse to non-inflationary sources of borrowing to cover the remaining deficit;
  • Reduction in bank credits to both the public and private sectors;
  • wages and salary controls;
  • Large-scale retrenchments in the public and private sectors. This constituted over ten per cent of total wage labour;
  • Devaluation of the national currency (by 30 per cent against the U.S. dollar); and
  • Short-term rescheduling of the external debt and restrictions on fresh short-and-medium term borrowing.

Indeed, these antidotes yielded a rapid effect as the objectives of stabilisation were largely achieved. GDP growth increased from -4.28 per cent in 1966 to six per cent in 1969. The balance of payment moved into surplus and the current account and government budget deficits were also reduced. This caused inflation to decrease from 13.24 per cent in 1966 to 6.5 per cent by 1969.

After the 1969 election, the Progress Party (PP) led by Dr. K. A. Busia also continued to pursue and aligned with the austerity measures that accompanied the liberalisation policies. The IMF conditionalities led to the required stability and improved economic performance. On average, GDP growth increased by seven per cent during 1969-1971 while inflation fell to three per cent by 1970. The Bretton Woods Institutions, one of which is the IMF, operates with these entrenched beliefs that economic growth cuts poverty and that anyone who cares about the poor should favour the growth-enhancing policies of good rule of law, fiscal discipline or low government consumption, and openness to international trade. It is,   therefore, not surprising that, from the beginning, all the Fund’s engagements have reflected these values and beliefs.

Other school of thought, however, comes with divergent views that rapid and sustained poverty reduction requires pro-poor growth: a pace and pattern of growth that enhances the ability of the poor to participate effectively, contribute substantially to and benefit from growth. This second school of thought is validated when the sustained growth recorded between 1965 and 1970 is interrogated with respect to its effects on employment and poverty reduction.

Referencing the Aliens Compliance Order in 1970 which aimed at creating employment spaces for Ghanaian citizens by deporting foreigners, clearly paints the picture of the employment situation in the country. While GDP growth between 1965 and 1970 averaged 5.3 per cent annually, formal sector employment for the same period went up from 396,000 jobs to 398,000, an increase of 2,000 over the period, about 0.1 per cent per annum, given an average population growth rate of 2.05 per cent.

Despite the economic achievement recorded, the structure of the economy remained unchanged, still largely dependent on cocoa, making it highly susceptible to cocoa price volatility. The achieved growth failed to usher the economy onto the path of rapid development. By 1972, the economy found itself in a similar position in some respects as it was in 1965, with reduced growth and increasing fiscal and current account deficits.


Without IMF: 1972-1982

The Busia government on the advice of the IMF responded to the downward spiral movement in the economy with a massive devaluation of the Cedi by 48.6 per cent in December 1971. This was among other austerity measures which included wage freezes and tax increases. These measures immediately resulted in widespread socio-economic hardships which provided the spring-board for another coup d’état in January 1972. The National Redemption Council (NRC), which later became the Supreme Military Council (SMC), led by General Acheampong, immediately truncated the hand of the IMF in the affairs of the country. In line with this, the devaluation of the Cedi was reversed. This was followed by rescinding unilaterally to pay all external debts, amounting to US$94.4 million. This approach antagonised the donors, who withdrew their support, with serious implications for capital inflows. The ensuing funding gap was tackled by the introduction of a policy of self-reliance and mobilisation of domestic resources for national development. The government was highly successful in this regard, especially during 1972-1974.

The regime also implemented the twin programmes of ‘Operation Feed Yourself’ and ‘Operation Feed Your Industries.’ Everything seemed to work well. But the domestic mobilisation efforts were defeated by oil price hikes of the mid-1970s; and political graft as well as fiscal indiscipline. As a result, the government’s tax base shrank disproportionately. The government revenues, which amounted to 21 per cent of GDP in 1970, dropped to nine per cent in 1976.


Revenue collapse

The revenue collapse increased reliance on the banking system to finance expenditures. The loss of monetary control resulted in increased inflation which, among other factors, resulted in intense public unrest, culminating in the palace coup in 1978. It is worthy to note that, although the SMC regime encountered similar external shocks, with GDP tumbling from 6.85 per cent in 1974 to a record low of -12 per cent in 1975, economic growth was restored to 8.5 per cent within three years. Inflation fell from 116.5 per cent in 1977 to 73.09 per cent in 1978. All these happened without the involvement of the IMF.

External factors worsened the economic situation as prices of cocoa, coffee and timber fell, and the oil price shock in 1979 further played a part in the country’s economic decline. Thus its external debt, at the end of 1982, stood at 105.7 per cent of GDP. The deterioration was so severe that in April 1983, against considerable internal opposition, the Government adopted an Economic Recovery Programme (ERP), considered to be one of the severest adjustment programmes the IMF and World Bank have ever persuaded a developing country to accept. The ERP started with the Cedi devaluation. The periodic adjustment of the exchange rate made it possible to improve the economy.

The policy package under the programme, inter alia, sought to: realign the exchange rates; realign interest rates; reform and restore productive incentives; reduce the cumulative deficit; rehabilitate the country’s economic and social infrastructure; encourage private savings and investments; restore fiscal and monetary discipline; and establish workers priorities for the allocation of scarce foreign resources.

The IMF supported the programme with three successive stand-by arrangements totalling Special Drawing Rights (SDR) 611 million. In November 1985, the Government presented to the Third Meeting of the Consultative Group for Ghana in Paris the policy framework for 1986-88, which consisted of the second phase of the ERP. The funding for the second phase included the World Bank’s US$ 130 million Structural Adjustment Programme (SAP) for 1987-1989, and the IMF’s US$ 245.4 million Extended Fund Facility (EFF) for 1987-90. The main objectives of this programme were to consolidate the gains made throughout the first three years of the ERP, and to institute a gradual process of structural adjustment aimed at accelerating growth, improving incentives, strengthening the capabilities of the Ministries in policy planning so as to remove the remaining barriers to efficiency and growth.

Meanwhile, the EFF set annual macro-economic targets in terms of additional conditionalities, growth rates in GDP, domestic inflation, rate of velocity and growth of broad money supply. Thus, the Rawlings government’s attention was focused on three aspects of development policy: ensuring economic stability, creating incentives, and improving human development. These three aspects correspond to the categorisation of different types of policies that constituted Ghana’s structural adjustment process.

Though it improved economic growth, the SAP impacted negatively too. First, there were signs in 1988 of a fall-off in local private investment in the economy. Second, and related to this, foreign investors and commercial lenders continued to hold back, wary of the country’s political stability and investment opportunities. Third, there can be no guarantee that external aid and lending agencies would continue their rate of support for the country. Fourth, Ghana’s recovery remains vulnerable to international commodity price changes. The resulting trade deficits largely reflected the effects of declining world market prices on commodities such as cocoa. Fifth, Ghana’s heavy external indebtedness continues to act as a constraint on economic growth. In this regard, Dr Kodwo Ewusi noted that “the ERP has not only increased the level of indebtedness but has increased debt servicing to unrealistically high levels. One major problem resulting from the ERP is the increasing dependency and vulnerability of the economy to external economic factors.”


Increased poverty

In addition, the ERP and SAP resulted in certain conditions such as in increased poverty and increased debt burden, which placed constraints on the government’s capacity and commitment to check environmental degradation. Though Ghana did not enter the ERP with a debt problem, it came to have one. At the end of 1982, Ghana’s long-term outstanding and disbursed loans stood at US$1.1 billion. The IMF debt totalled US$21.4 million and the short-term debt was US$195.0 million. By the end of 1987, long-term debt outstanding and disbursed was US$2.2 billion, IMF debt amounted to US$778 million and in the short-term debt was US$108 million. At the end of 1994, Ghana’s total external public debt stood at US$4,851.00 million. Most of the loans were used to support the SAP that the country has been implementing.

The domestic and international investor communities remain wary, the external lending base remains uncertain, external indebtedness is rising, and the world market prices for its products continue to decline. There was an increasing problem with unemployment (especially as public servants were retrenched); class, regional and gender inequalities remain stubbornly in evidence; and the quality of life for the ordinary worker and farmer had improved little. The effect was to create strains on the state as it proceeds with its recovery programme till the country transited into constitutional multi-party governance in 1993.

After a decade of adhering to the economic reforms, as prescribed by the IMF and the World Bank, in which Ghana was used as a debatable success story for SAP in Africa, the National Democratic Congress (NDC) government under the same Rawlings who was at helm of the PNDC came into power. From 1992 to 2000 growth fell below five per cent, leading to increasing poverty. Post-election deficits discouraged investment until in 1997 when the government, impressed by the Asian Tigers like Malaysia, launched Vision 220 for vigorous export growth. But whereas a skilled labour force, high savings/investment ratio and low national debt had accounted for rapid growth in Asia, political uncertainty, high propensity to consume, lack of savings and human capital formation prevailed in Ghana. Agriculture suffered from cuts in subsidies for inputs and extension services while low producer prices and unstable currency reduced cocoa production. Mining and forestry did show a 10 per cent growth, but few linkages with manufacturing were built.

The New Patriotic party (NPP) government under President John Kufuor accepted a Highly Indebted Poor Country (HIPC) initiative from the Bretton Wood institutions. The NPP government went into a three-year programme with the IMF known as the Poverty Reduction and Growth Facility (PRGF). But the wind that blew Ghana to the IMF recurred in 2008 as the economy took a nose dive. The budget deficit ballooned to about 14.5 per cent of GDP against a 2007 figure of 9.2 per cent. Inflation rose from 12.7 in December 2007 to 18 per cent at the end of 2008.  In addition, the overall balance of payment recorded a deficit of US$941 million in 2008, compared with a surplus of US$413 million in 2007. Between July 2007 to December 2008, the Cedis depreciated by 31 per cent against the dollar.

The IMF approved US$602 million loan to Ghana in 2009 which was disbursed under the ECF, which was created under the newly established Poverty Reduction and Growth Trust (PRGT). The ECF is used as a tool by the Fund to provide medium term support to Low Income Countries (LICs), with higher level of access, more concessional financing terms and more flexible programmes, as well as streamlined and more focused conditionality. In furtherance to IMF conditionality, loan-receiving governments are expected to comply with such programmes performance criteria as: ceiling on the overall fiscal deficits (including grants); a floor on the net international reserves; a continuous zero ceiling for the accumulation of new external arrears;  a ceiling on the contracting or guaranteeing of new external non-concessional debt; a ceiling on the net domestic financing of the government; and a ceiling on the net domestic assets of the central bank.

The government’s allocation into the National Insurance Fund in 2009 fell by 40 per cent as compared to 2008. In addition, the health budget in 2009 saw a 20 per cent reduction in real terms against the previous year. This decrease is due almost entirely to IMF advice to the government to cut back on expenditure in order to restrain the budget deficit. One of the IMF conditionalities / benchmarks under the recent US$940 million loan and in 2009 was for the government to delay payment to domestic suppliers. The stock of domestic expenditure in arrears at the end of 2009 was GHC830 million. Furthermore, the government in 2009 did not embark on any investment projects in fulfillment of IMF conditionality of reining in the budget deficit. The accumulation of these payment arrears constitutes proxy borrowing by the government which locked up working capital of contractors and suppliers of goods and services to Ministries, Departments and Agencies (MDAs). However, if payments to contractors are in arrears, their ability to pay their creditors and workers are reduced thereby forcing financial institutions to keep their interest rates high. When this happen, it deprives the economy of liquidation, inhibiting businesses to expand and recruit.

Further, since no new opportunities are opened up by way of award of new contracts as a result of IMF conditionalities, labourers, artisans, food sellers and their households are the most affected. It is again worthy to note that even before the present loan arrangement, there is a moratorium on the award of new contracts and contracting new loans with a change in focus to pipeline items. GETFund, intended for infrastructure development and improvement across all sectors of public education, in 2009, was robbed its capacity to execute their mandate due to the IMF conditionality in 2009. In addition, the IMF structural benchmark of net hiring freeze in the education sector caused serious shortage of teachers.

Now, the budget deficit is close to 11 per cent, while the inflation rate was 16.50 per cent for February this year. One cannot but to project that the same effect that the Fund’s intervention had on the economy in 2009-2011 will repeat itself in the impending intervention this year. With this balanced juxtaposition, one can confidently discourse that the detrimental effects the IMF bail-out had on the economy, particularly on the social front, will repeat itself. The IMF policy prescription for the current challenged economy may worsen the situation.

This is because the three elements, namely the IMF conditionalities under the Extended Credit Facility is still operational, the macro-economic and micro-economic indicators remain virtually the same, and the immovable, undiluted beliefs and values of the Bretton Wood institution are still in view.


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