The IMF & MCC requirements to Ghana

Transcription

1 The IMF & MCC requirements to Ghana.What does it mean? Quarterly effective review of electricity rates Privatization of ECG Revision of VAT thresholds before August 2015 Has Africa really benefitted from the IMF? The frequency of International Monetary Fund (IMF) bailouts in Africa gives a clear indication that it s a necessary evil. Over 45 countries in Africa have benefitted from the IMF programme and many keep going back amid the many conditions attached to their loans. The notable factors drawing countries to the IMF are high fiscal and current account deficits, soaring public debts, high depreciation of the domestic currency, ineffective monetary and fiscal policies, corruption, change of government and political instability. Previous IMF bailouts have been characterized by contractionary fiscal and monetary policies, minimal government interference, deregulation, reduced protection of domestic industries, privatization of State Owned Enterprises (SOEs), increase in commodity exports, higher interest rate and prioritization of debt repayments at the expense of improvement in education, health and other developmental projects. However, these conditions have not reduced the appetite of member countries (especially African countries) for more IMF bailouts. Within the period of 2008 to 2012, the IMF advanced over US$2.9 trillion to 21 countries in Africa. Angola received the highest bailout of US$ million, followed by Ghana (US$ million), and then Cote d Ivoire (US$ million) whereas Congo Republic received the lowest bailout of US$ 5.32 million. During the first year of the programme, most countries witnessed a decline in GDP growth due to the tight monetary and fiscal policies required by the IMF. However, subsequent years in the programme recorded relatively higher GDP growth and lower inflation levels. For instance, Cote d Ivoire witnessed a decline in GDP growth from 3.3% in 2009 to -4.4% in 2011, before increasing to 10.7% in After the program, GDP growth declined to 8.7% in 2013 and 7.5% in During the last quarter of 2014, Cote d Ivoire again engaged the IMF for an Extended Credit Facility arrangement of US$ 94.7 million to honour delayed budget subsidies to the electricity sector and domestic arrears.

2 Ghana just ended a three year programme with the IMF in 2012, which was targeted towards reducing fiscal and current account deficits, inflation, rebuilding of foreign exchange reserves, stabilizing the exchange rate and financial sector as well as sustaining economic growth. The stringent policies associated with the bailout largely reduced GDP growth rates during the first year. In particular, the agricultural, industrial and services sector shrunk to 7.2%, 4.5% and 5.6% respectively as compared to 7.4%, 15.1% and 8% recorded in The growth in agriculture sector continued to decrease to as low as 0.8% in 2011 before shooting up to 2.3% in This resulted in growth in unemployment rate by 9.52%. However, inflation rates reduced from double digits in 2009 to 8.84% by December Unfortunately, in less than 3 years, Ghana is experiencing the same macroeconomic instabilities that took us to the IMF in 2009 and is required to administer almost the same reforms as enshrined in the previous IMF bailout. The US$918 million approved by the IMF on April 3, 2015 has the following structural reform benchmarks and timelines; Ghana to review tax policy Ghana to struggle to meet tight IMF requirements Government is expected to adopt a presumptive income tax, followed by revision of VAT thresholds before August Additionally, government is expected to identify tax exemptions enjoyed by State Owned Enterprises (SOEs) and free zone companies that will be eliminated in 2016, latest by September The initiative by government to eliminate exemptions enjoyed by SOEs and free zone companies is a move in the right direction. As at December 2014, the total revenue lost due to exemptions granted by parliament and special permits amounted to GHC million. Currently, free zone enterprises are enjoying several exemptions including a ten year tax holiday before paying a corporate tax rate of 15%. However, government needs to access the free zone sector carefully and access the impact of this new reform on the market before implementation. Government to pay attention to Public Sector Policy Reforms In an attempt to meet the human resource management and payroll management reforms before the first review in July, government has halted public sector employment which is even affecting the health sector. For instance, graduates nurses and midwives that completed their National service in December 2014 and January 2015, have still not been posted.

3 The civil sector reform is also expected to freeze public sector employment as well as reduce the size of public employees to a sustainable level. The private sector has already laid-off many workers due to the power crisis and many more are expected to follow suit if the power crisis is not minimized. Given that, government is the largest employer, we expect unemployment rates to increase with its devastating effects on expected government revenue and GDP growth rates. Ghana to reduce debt burden Government is expected to develop a medium-term debt management strategy and present to parliament for approval before June This document is expected to include practical steps to pay up old and new debts, identify risk priorities and be published for public consumption. This is expected to restore business confidence in the market and minimize the high interest costs associated with sovereign bonds and Eurobonds. Ghana to eliminate fiscal dominance of monetary policy The proposition by the IMF to reduce monetary financing of government budget to 5% of previous year s revenue in 2015 and zero from next year onwards is key to ensuring a successful fiscal consolidation. However, given the forthcoming election, it remains less plausible to expect government to commit to zero central bank financing and initiation of new tax policies. The MCC expectations might repair Ghana s image Ghana stands to benefit The Millennium Challenge Corporation (MCC) has done extremely well since its inception in Countries that have subscribed to this economic partnership have witnessed significant economic development. Some selected countries with their year of subscription to the pact include Ghana in 2006, Morocco in 2007, Burkina Faso in 2008 and Senegal in more from MCC but For instance in Namibia, 18% of their greenhouse gas emission is attributed mainly to activities of livestock but timely intervention by MCC has worked to reduce this menace of land degradation through rangeland management interventions. MCC has also partnered with the government of Senegal to construct a transport corridor that link one of the poorest region in Senegal, Casamance to its neighboring countries.

4 In February 2007, Ghana was granted a total of $547 million Millennium Challenge Compact to reduce poverty by raising farmer incomes through private sector-led agribusiness development. The compact was spent on three key projects namely the agriculture project, the rural development project and the transportation project. Based on the achievements chalked in the first compact, the MCC selected Ghana as eligible to apply for a second compact. A joint analysis done by the US Government team and the Government of Ghana (GOG) identified inadequate and unreliable supply of electricity as a key hindrance to promoting economic growth and reducing poverty in Ghana. Ghana misses first opportunity In August 2014, Ghana and Millennium Challenge Corporation (MCC) signed a $498 million, five year compact to transform Ghana s power sector. The Compact is expected to make the power industry lucrative and sustainable and to create an investment climate that will attract more private investments. However, the conditions required to be satisfied before entry into force includes the delivering of the following documents to MCC (non-exhaustive); (i) (ii) (iii) (iv) (v) The tender documents for an Acceptable ECG PSP Transaction released for competitive selection through an open and transparent process acceptable to MCC Documents on substantial compliance with the Gas Action Plan, including copies of the executed agreements required in accordance with the Gas Action Plan A long term Gas Sector Master Plan, accepted by MCC and approved by the government Substantial compliance with the Electric Distribution Utility Payment Action Plan Approval and implementation of quarterly tariff adjustments in accordance with the existing formula for each of the calendar quarters between the initial Compact Implementation Funding disbursement and entry into force of this compact.

5 Again, the success of this project is highly dependent on government commitment to implement the following reforms; 1. Institutional reforms Financial Restructuring of ECG and NEDCo The ECG and NEDCo are expected to recover their debts and work independently of government to manage their financial positions. This will be done through restructuring of utility operations, improvement in revenue collection, reduction in power outages and commercial losses and encouragement of private sector participation. Strengthen the GOG Cross Debt Mechanism to ensure timely payment of bills. GOG is expected to strengthen its cross debt mechanism to facilitate timely payment of utility bills. Thus, after 2013, government terminated the cross debt settlement arrangement with the Ministries, Departments and Agencies (MDAs) and requested of them to prioritize payment of utilities in their budget since government would not make any provision for it (2015 Budget implementation instructions). 2. Governance reforms Review power sector corporate governance, standards and implement recommendations. Government is expected to encourage private sector participation through an open and transparent tendering process acceptable to the MCC. However, with regards to the distribution sector, ECG has outsourced the collection of pre-payment revenue to private vendors. 3. Regulatory reforms Strengthening of power sector regulatory agencies such as Energy Commission (EC), Public Utilities and Regulatory Commission and Ministry of Energy and Petroleum (MoEP). This will be in the form of capacity building to improve the supervisory and monitoring roles performed by the various regulators. Creation of gas allocation policy and pricing framework Tariff update, cost-based pricing model and procedures, and transparency of tariff setting Review and update the Strategic National Energy Plan (SNEP)

6 Ghana has already lost out on the mid-year expectation of getting the first tranche of MCC Compact II amounting to US $279.3 million to revamp its power sector and is more likely to miss the December target if the above conditions are not met. As stipulated above, government is expected to pay-up its debts to ECG, reduce its interference in ECG s operations by selling some of its shares or issue new shares or give a concession to a private company to manage its operations. ECG is expected to charge realistic prices that could cover its costs and ensure efficiency in its operation. This will be done on quarterly basis until the price charged is commensurate to unit cost of production. Can Government exert political will to achieve purpose? The probability that a private firm will be skewed towards meeting the demands of its shareholders as compared to serving national interest is very high. The incentive to extend electricity to communities that are relatively poor, use less electricity and cannot afford to pay higher rates will be very low. Some workers of ECG, VRA and GRIDCO are expected to lose their jobs in the coming months to foreign expatriates of the takeover firm. Tertiary students who are hopeful of government delaying its position of sharing utility costs should start making arrangement to cater for their utility costs since government position cannot be compromised. Amid the current macroeconomic challenges such as high inflation rates, high unemployment rate, high interest rates, weakening of the domestic currency, high energy costs and presently high fuel costs, it remains less obvious whether government has the political will to implement the quarterly utility tariff adjustment and the cost-based pricing model conditions stipulated in the MCC agreement. Given that, next year is an election year, government has a high incentive to delay these reforms and solicit for finance through other sources to finance its power sector challenges. However, an upward review of utility tariffs in July and subsequent quarters should be expected to finance the power sector. Thus, inflation and inflationary expectations are expected to heighten which will undermine the potency of the tight monetary policy stance currently administered by the central bank.

7 TEAM Samuel K. Ampah Head. GN Research Jacob K. Buxton Economic Analyst For enquiries please contact us at our office: Business Address: Groupe Nduom Head Office, C625/3 Fourth Crescent, Asylum Down, Accra. Postal Address: P.O. Box GP 17187, Accra-Ghana. Address: Tel: / Disclaimer This document is published for informational purposes and users are advised against relying solely on the information contained herein to make their investment decisions. The information should neither be considered as a solicitation, nor offers to buy or sell an investment. The information is obtained from internal and external sources which GN Research considers reliable but GN Research has not independently verified such information and GN Research does not guarantee that it is accurate or complete.