Reading IMF “between the lines” on holidays-Seth Terkper Writes


The 2020 new year holidays have come and gone and, despite assurances of an “exit” from the Institution a few months back, the most significant market and fiscal developments relate to the International Monetary Fund (IMF) post-Budget Statement.

  • IMF Article IV: based on “headline” scores, the view was bullish in some official and unofficial quarters of the post-2020 Budget IMF Board’s 2019 Article IV assessment—butas with the alert on debt, the information “between-the-lines” is more sobering;
  • “GHEXIT” (exiting IMF programs, not membership): as noted in the past, Ghana may exit IMF Programs but its Bretton Woods (IMF and World) membership is what matters—opening our books under Article IV still matters to markets and others.

The article compares the Fund’s conclusions with official government disclosures and past articles by this author. While awaiting the full Staff Report, the Board Statement will still be a factor in the fast-track “roadshow” in January 2020 for a Sovereign Bond issue

IMF Board Article IV assessment

Tables 1 to 3 highlight the Fund’s treatment of some contentious fiscal issues since 2017. Table 1 (“Ghana: Selected Economic and Financial Indicators, 2017 to 2024”) is an extract of Ghana’s actual and projected fiscal position from the Board Statement.

It is necessary to compare relevant data from a summary of Ghana’s Fiscal Tables from MOF’s Website and 2020 Budget for 2013 to 2023 with the IMF Table 1 above.

The treatment of “exceptional” expenditures has become needlessly contentious even though the pre-2017 data shows that Ghana had always treated “exceptional” expenditures “above the line”—not as Appendix Memorandum items. Table 3 confirms, based on data from its 4thReview of the ECF Program in 2016, the Fund follows the all-inclusive disclosure.

Matters arising

The holiday picks include (a) the IMF’s inclusion of financial sector bailout costs and energy arrears “above-the-line”, not as footnotes (or burial in amortization); (b) the Fund’s retroactive revision of domestic debt data from 2017; (c) a tight 2020 fiscal and domestic market situations that seems to warrant a rush to the external markets; and (d) surreptitious extension of ESLA, a “tax”, through refinancing of existing ESLA Bonds (discussed in a forthcoming article).

Deficit is 7.0 percent (not even 5.2 percent)

The IMF adjustments confirm the author’s past articles that the substantive 2018 and 2019 fiscal deficits are approximately 7 percent—not the “headline” 3.7 and 4.7 percent respectively.Further, the IMF’s 7 percent deficit for 2019 is higher than the 2020 Budget figure of 5.2 percent in Appendix Memorandum. (Appendix Memorandum).

The recent “headline” or memoranda method is a departure from conventional fiscal rules. Itcontinues to lure us into complacency, kicks the can down the years, and postpones our fiscal pain.

Vindication: financial sector bailout and energy arrears are “above-the-line”

As noted in the Tables, Ghana has always showed “exceptional” expenses “above the line”.The IMF did not isolate Ghana’s these expenses that weighed heavily on past Budgets with an “of which” [o/w] line.

The stress was from items such as Single-Spine (wage overruns), energy sector costs (basis for ESLA), and the precipitous fall in crude oil prices in 2015 and 2016 that slowed Ghana’s growth but did not take it into recession as other African countries.

IMF’s provision from 2020 for bailout and energy costs is not zero

Unlike the IMF, Government does not make provisions for bailout costs and energy sector arrears from 2020 onwards—even though HE President Akuffo Addo has directed the payment of all depositors’ funds (in 2020) in defunct or consolidated banks (universal, savings and loan, and microfinance). The zero provision in the 2020 Budget and Medium-Term Expenditure Framework clearly underrates a difficult fiscal situation ahead of the nation.

It continues to give a false “impression” of rapid fiscal consolidation in 2020 (Election year) and onwards—as with zero provision for bailout costs and setting aside a term sheet in 2017, when the tripartite (Banks, VRA, and Government) ESLA-backed restructuring of banking sector debt had started, as far back as March 2016.

Stagnating revenues and high expenditures

The annual revenue shortfalls worry government, given the high expenditures in an expansionary fiscal program, notably education and other Presidential Initiatives. Tables 1 and 2 show a more conservative IMF position to the official data.

The gap persists, despite positive oil and gas flows from higher output and price—suggesting that the outcomes from much-touted tax initiatives have been distortionary, negative, and populist rather than positive.

Exceptional expenditures and public debt

The IMF’s eventual warning on “risk of debt distress” has roots in factors such as (a) the expansionary fiscal policy; (b) stagnant revenues; and (c) “offsets” of arrears that equate budget deficits to “headline” fiscal balances [on cash and commitment basis].

The achievement of impressive “headline” fiscal consolidation on paper has led to off-budget transactions, and fiscal balances that understate the real amount of “financing”. The exclusion of “exceptional” bailout costs from expenses leads down a slippery road of separating them from public debt.

Initially, the ECF Program did not allow the “net” debt concept under the 2013/14 New Debt Management (NDM) initiatives. Thus, the public debt figures from 2014 to 2016 were grossed-up with verifiable Assets such as the Sinking Fund and Cash in BOG accounts in New York Bank (part of the 2015 Sovereign Bond for refinancing or replacing existing public debt).

The setting up of “asset” accounts is useful but its application must be consistent, not distort the fiscal rules with a capricious application. This may have made it necessary for the Fund set aside the ESLA Debt Service Account by adding the ESLA Bonds to domestic debt.

As Table 4 and Figure 1 show, the signs were clear from end-2017 to 2018 when the deceleration in the growth of debt started to reverse and end-2018 gross debt (57.6 percent) exceeded that of end-2016 (56.8 percent). The suppression came from isolating the bailout costs in the 2018 and 2019 Budgets.

Adjustments to the Public Debt Data

As noted, Table 5 shows that the IMF has elevated the Public Debt stock by including the ESLA Bonds and bailouts costs in the Domestic Debt part. It pushes back the reversal of the decline in rate of debt accumulation to end of 2017 (57.3 percent), not 2018.

The adjustments that increase Public Debt comes at a bad time when Ghana is preparing for an early January 2020 “roadshow” for its next Sovereign Bond.

Other obstacles include (a) exit by non-residents from the domestic bond markets; (b) auction shortfalls leading to gradual replacement of the more competitive Book-Building option with private placements and tap-ins; and (c) threats to withhold budget support from some important DPs.

Conclusion—IMF Membership Dilemma

The IMF’s 2019 Article IV Consultation is cautionary about its authority over financial markets and development partners (DPs). The exit from IMF Programs, not membership, does not stop the Fund from issuing Program-like reports.

Exiting IMF programs is no slogan—as an emerging middle-income country (MIC), the eventual loss of grants and concessional loans makes it imperative to draw a transition plan with consistent application.

As proof of its authority, the Fund could adjust Ghana’s fiscal data when changes occur certain assumptions and economic “fundamentals”, including retroactive addition of the ESLA bonds and exceptional costs to the fiscal balances and public debt.

The effective way to wean the nation off the Fund, while retaining membership and the right to funds in emergencies, is fiscal discipline and better use of new resources such as oil and gas revenues to establish buffers to manage debt and stabilize the budget from known events such as droughts and precipitous fall (or sudden escalation) in commodity prices—as happened in 2014 to 2016 and could happen again with current developments in Iran and Iraq.