In the hope of ending a fiscal crisis that has persisted since 2012, and as a general election looms while popular discontent grows, the government of Ghana is pursuing an IMF economic recovery plan. Excessive spending on public wages, crippling energy shortages, and lower-than-expected revenues from the oil, gold and cocoa industries – which account for 80% of exports – triggered the economic crisis under the watch of central bank governor Kofi Wampah.

On April 4 President John Mahama appointed Abdul-Nashiru Issahaku as the Bank of Ghana’s new chief. Issahaku served as second deputy governor since 2013 and replaces Wampah, who retired four months before the end of his term, reportedly to use outstanding vacation time and to allow his successor to settle in ahead of the November general elections. Governor Issahaku has said he will maintain the pace of fiscal reforms.

The Bank of Ghana has attempted to curb inflation and stabilise the cedi (Ghanaian currency). Despite repeated increases in the benchmark interest rate, inflation rose to a six-year high of 19.2% in March, up from 18.5% in February. This followed a 0.5% drop in inflation in February, the first fall since August 2015. Meanwhile, the cedi has been relatively stable in recent weeks. It had depreciated by 1.4% as of March 17 since the start of the year, compared with 11.2% in the same period last year.

Sovereign and currency risks are likely to remain high throughout 2016

Politically-driven spending is likely to threaten the government’s fiscal consolidation plan and progress. The IMF has set a zero limit on gross credit from the central bank to the government, down from 10% previously. However, fiscal reforms are likely to lose some momentum ahead of the November polls: election campaigns in Ghana tend to coincide with higher government spending on vote-winners like public sector salaries. In 2012, the last general election year, government spending increased to 34.5% of GDP, blowing the deficit out to GHS 8.7 billion ($4.6 billion), or 12.1% of GDP – against a target of GHS 4.7 billion ($2.49 billion), or 6.7% of GDP – of which the central bank reportedly financed 31%. Despite Issahaku’s pledge to maintain fiscal discipline, the bank is likely to come under pressure in the coming months.

Furthermore, fiscal reforms will take time to have an impact. The government will have to accommodate much lower than anticipated revenues from taxes and oil production amid the slump in crude prices, and a poor cocoa harvest in 2015. Although Ghana is unlikely to default on its debt obligations, overall levels of debt will remain extremely high and are likely to rise to around 74% of GDP by late 2016. Meanwhile, the cedi is likely to continue to depreciate, albeit more slowly than in 2015, when it fell by around 15% against the dollar.

•Sourced from FORBES.

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