IMF loan package backs Ghana’s infrastructure and investment plans

The IMF’s executive board said the three-year extended credit facility package will underpin Ghana’s medium-term economic reform programme.

IMF deputy managing director Min Zhu said despite two decades of “strong and broadly inclusive growth”, increasing debt in recent years was partially responsible for a slowdown in growth, which was putting Ghana’s “medium-term prospects at risk”.

However, Zhu praised Ghanaian authorities for adjusting spending to “mitigate the shortfall in oil revenue and avoid a larger debt build-up”. He said: “The government’s efforts to mobilise additional revenues will also help create more space for social spending and infrastructure investment, in particular in the energy sector.”

Zhu said “enhanced transparency in the public finances will be critical to garner broad support for reforms”, while “safeguarding financial sector stability” would be important to support private sector activity.

According to the IMF, a “ballooning wage bill” in recent years, coupled with “poorly targeted subsidies and rising interest payments”, outpaced rising oil revenue. A $1 billion Eurobond, successfully issued in September 2014, was done so “at significantly higher interest rate than other issuers in sub-Saharan Africa”, the IMF said.

The IMF said Ghana’s 2015 budget, adopted by Parliament, included “a strong set of measures” which are expected to lead to “the elimination of distortive and inefficient energy subsidies, the new tax on petroleum products, and stronger containment of the wage bill”.

“Tax administration reforms are under way, in particular to improve the effectiveness of the large taxpayer office and to streamline and accelerate value added tax refunds,” the IMF said. “The government also initiated a review of existing tax exemptions with a view to reducing them. Public debt management will continue to be strengthened to ensure that financing needs and payment obligations are met at the lowest possible cost, consistent with a prudent degree of risk.”

Akshai Fofaria of Pinsent Masons, the law firm behind Out-Law.com, said: “the funding provides Ghana with a much-needed opportunity to stimulate growth, however this will depend on the containment of spending and a medium-term approach, particularly in light of the elections due next year.”

A report published earlier this year by the Ghana Institute of Governance and Security said the country received more than $2.7bn in total revenue from the oil sector after four years of production activities under the existing ‘modern concession system’. However, the report said the figure could have been around $6.4bn if the country had adopted production sharing agreements.

A ‘multi-annual strategic plan’ for Ghana for 2014 to 2017, prepared in cooperation with the Netherlands’ government, said “there is a sound basis for a larger role in service provision by the private sector”, particularly in sectors such as water, waste management and sanitary services. The report said “market research... shows there are sufficient entrepreneurs with business ideas willing to invest in service delivery”.

Heather Self, a tax expert at Pinsent Masons, said:  “It is encouraging that one area of focus is on the administration of the tax system.  Too often, reforms focus on “big ideas”, when the returns from getting the fundamentals right can make an important contribution to tax revenues”.