Economic uncertainty to reduce with IMF deal

The expected disbursement of around US$600million through the IMF programme, along with other anticipated concessional inflows, is anticipated to significantly bolster the nation’s balance of payments (BoP) position and gross foreign exchange reserves. This favourable development is projected to strengthen the cedi’s stability and prompt a corrective run.

The cedi has already demonstrated resilience against major trading currencies, appreciating against the US$, € and £ on the retail market last week. Following news of a breakthrough in engagements with offshore creditors, the local unit opened the week on a solid note – and the corrective run is expected to continue in the weeks ahead.

This positive trend is further supported by financing assurances from Ghana’s official creditors, granting approval of government’s request for debt treatment beyond the Debt Service Suspension Initiative (DSSI).

The financing assurances obtained represent a significant milestone, as it paved the way for the IMF to approve Ghana’s US$3billion three-year extended credit facility.

The approval of Ghana’s request, which was confirmeed yesterday, marks a formal commencement of the programme and associated economic and structural reforms.

The cedi initially traded sideways at the end of last week, but gained stability following announcement of the debt relief by external creditors.

With assistance from the central bank’s foreign exchange support, the local unit displayed stability and registered a 0.21 percent appreciation against the US$ on the retail market compared to the previous week. The domestic currency also recorded gains against the euro while remaining unchanged against the GBP.

The US$ experienced volatility following the Federal Reserve’s interest rate hike in April 2023. Although some investors sought refuge in the US$ as a safe-haven currency, concerns arose due to the postponement of discussions regarding the US debt ceiling increase. However, the recent debt relief extended to Ghana by the Paris Club and China paved the way for approval of the IMF board-level agreement and subsequent processing of Ghana’s programme. A total disbursement of approximately US$750million is expected in the upcoming weeks, further bolstering the IMF deal’s positive market impact.

Debt market

The IMF approval and the positive assurances have a ripple-effect on both the bond and foreign exchange markets. Investors are likely to be more confident in Ghana’s economic prospects, leading to increased interest in the country’s bond market. This heightened investor confidence can result in lower borrowing costs for government, allowing for more sustainable debt management.

The stability and support provided by the IMF deal and financing assurances from official creditors create a conducive environment for foreign direct investments (FDI). International investors are more likely to view Ghana as a stable and attractive investment destination, which can spur economic growth and job creation.

The IMF programme also sets the stage for comprehensive economic and structural reforms in Ghana. Government’s commitment to these reforms demonstrates its determination to address fiscal imbalances and achieve debt sustainability. By implementing these reforms, Ghana aims to reduce its debt-to-GDP ratio to 55 percent by 2028. Such efforts can enhance the country’s macroeconomic stability and create a favourable business environment.

Concessional funding sources from multilateral development banks and other development partners will play a crucial role in supporting the nation’s economic development. These funding options provide long-term financing at favourable interest rates, reducing the country’s reliance on short-term borrowing. As a result, Ghana’s money market yields are expected to decline in the second half of 2023, further encouraging investment and economic growth.

The positive market sentiment resulting from the approval of the IMF deal also has broader implications for the country’s overall economic outlook. It signals to international markets and credit rating agencies that government is committed to implementing necessary reforms and improving its fiscal standing. This, in turn, can lead to improved credit ratings, lower borrowing costs, and increased access to international capital markets.

While the IMF deal and financing assurances bring optimism to the domestic market, it is essential for government to remain committed to the agreed-upon economic and structural reforms. Maintaining a stable macroeconomic environment, fostering transparency, and ensuring efficient implementation of reforms will be critical to sustaining investor confidence and realising the programme’s full potential.

Moving forward, Ghana will focus on negotiating terms and parameters of external debt treatment under the G20 Common Framework. Given the magnitude of fiscal imbalance and necessary adjustments to restore debt sustainability, government will aim for favourable terms; particularly for Eurobond and other commercial creditors holding a larger proportion of the total external debt.