The Ghanaian economy has been in serious economic trouble for the last few years. The once-well-respected democracy in West Africa is currently experiencing one of the worst economic crises in its history, which is earnestly jeopardizing its status and credibility. The economic crisis that Ghana is experiencing is linked to an expansive monetary policy which subsequently led to hyperinflation and a rapid depreciation of the local currency; the Ghanaian Cedi. Inflation remains very high at more than 40%, and many families are battling to make ends meet. Overall, inflationary pressures have been deteriorating the Ghanaian economy and bringing it to the brink of total collapse.
In addition to the inflationary pressures shaping its economy, the Ghanaian economy recently defaulted on its external debt. This sovereign default exacerbates the credibility of Ghana on the international debt market as an unreliable debtor in the eyes of international creditors, which makes it more difficult for the Ghanaian government to borrow. In order to somewhat alleviate the pain of the economic crisis, the International Monetary Fund (IMF) has agreed to lend $3 billion to the Ghanaian government. This $3 billion three-year loan is a bailout to help ease the problems and is expected to receive the first tranche of $600 million soon. But the real question to ask ourselves is to know how much difference will that loan make?
On May 17, 2023, the IMF Executive Board approved $3 billion over a 36-month ECF arrangement for Ghana. The authorities’ economic program, supported by the ECF-arrangement, builds on the government’s post-COVD-19 Program for Economic Growth (PC-PEG), which aims to restore macroeconomic stability and debt sustainability and includes wide-ranging reforms to build resilience and lay the foundation for stronger and more inclusive growth. Moreover, the Executive Board stated that securing timely debt restructuring agreements with external creditors will be essential for the successful implementation of the new ECF arrangement.
Despite being one of the world’s largest producers of cocoa and the leading producer of gold in Africa, one of Ghana’s basic problems is that it does not earn enough through its exports to pay for everything it imports. This is because Ghana does not have any real bargaining power in the negotiation process since it exports cocoa and gold as raw commodities rather than manufactured goods. It costs more to sell manufactured goods than raw commodities because the cost of production is included in the manufacturing process of the commodity. Thus, a country that sells manufacturing goods has leverage in price negotiations and can sell its goods at a much higher price than a country that only sells the commodity as a raw product. Hence, Ghana’s revenues from its exports are less than what they would truly be if it sold its commodities as manufactured goods instead of selling them as unprocessed goods.
The fact that Ghana’s imports are higher than its exports results in a balance of payments deficit. And the IMF loan is designed to help with compensating for that deficit. Moreover, this loan is also expected to significantly slow the rate of inflation and ensure a stable local currency. All of this is designed to benefit ordinary Ghanaians through stable prices of basic commodities including imported ones. It has been, however, considered to lend money to Ghana, but with the new IMF program, it should mean that the country can borrow again to implement its policies. If these lent funds are used efficiently for the macroeconomic purposes as indicated, then Ghana should be able to stabilize its economy. This loan granted to Ghana was, however, no charity. It came with specific conditions. Ghana’s government will have to increase its income while reducing spending. This means that taxes are likely to rise. The Ghanaian government has already introduced new taxes on goods such as cigarettes, sweet drinks, spirits, and wine, as well as an increase in income tax. But does it mean that Ghana will then be able to pay back the loan?
Perhaps not, because this loan was merely designed to make the Ghanaian economy break even. But it will not lead to the economic results generating fiscal surpluses. Indeed, while many Ghanaians believe that the bailout will address current challenges, it will not lead to poverty reduction, job creation, or salary increases. Thus, the taxes that the Ghanaian government is currently raising will only be the revenue necessary to pay back the loan, and not to distribute across the economy from fiscal surpluses.