August 06 ,2014 | by Hari Sri

Ghana turns to IMF for bailout from financial crisis

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Ghana was once one of Africa’s most promising economies, but the country has turned to the International Monetary Fund for support to prop up its economy.

Ghana is one of the West African nations which is often thought of as having plenty of growth potential. But news emerged this weekend that the government in Accra is pursuing talks with the International Monetary Fund (IMF) for a bailout programme that could help Ghana fix its ailing economy.

So how did Ghana get into trouble and how will it get out?

 

What happened to Ghana’s economy?

Accra has been releasing contradictory statements for months around whether it needs emergency financial support, but problems have been bubbling for quite some time. Ultimately, the issue stems back to heavy overspending and over-borrowing by the government.

Although Ghana is actually a large exporter of resources such as oil, gold and cocoa, it has developed a massive budget deficit – according to Bloomberg, the current account deficit is expected to exceed ten per cent of the nations’ gross domestic product by the end of this year.

Investors have lost patience with the nation and a currency crisis has escalated as a result. The cedi has fallen by close to 40 per cent so far this year – making it the worst performing currency in the world – and inflation is also spiralling as a result. In June, inflation hit 15 per cent, causing the central bank to raise interest rates by one percentage point to 19 per cent.

Ghana’s deputy communications minister in charge of information Felix Kwakye-Ofosu has insisted that the Ghanaian economy is not in crisis, but the outlook is not promising.

 

Why the IMF?

Bloomberg reports that the Ghanaian finance minister Seth Terkper said the IMF’s intervention is designed to introduce a level of certainty that will reassure investors that Ghana is trying to tackle its economic problems.

As Donald Kaberuka, president of the African Development Bank, told the news provider, the IMF’s key competence is in establishing the broader economic framework to facilitate growth. It is hoped that their expertise will allow Ghana to restructure its economy to fight the imbalance of payments.

At the moment, it appears that the plan could last for two or three years, though the amount of finance involved has not yet been confirmed.

 

Has it happened before?

Ghana is certainly no stranger to IMF support. In 2009 it was given a three-year loan worth $600 million as the world became worried about the impact of the financial crisis on poorer economies. At the same time, they were told they could draw up to $450 million from a special IMF facility aimed at boosting developing economies.

IMF has been called on to support plenty of countries in the past few decades when they have faced problems. Even the UK sought an emergency loan in 1976, while India, Russia, Hungary and Mexico have all asked for support at some point. Since the financial crisis, countries such as the Republic of Ireland and Portugal have also made use of IMF.

 

How could it affect Ghanaians?

In the short term, IMF support is likely to mean little to Ghanaians but, over the duration of the programme, a stronger macroeconomic framework is likely to make a major impact. Spending cuts from the government could mean that frontline public services are affected and it is possible many public sector workers will eventually be laid off.

But if the end result is lower inflation and stronger, more sustainable economic growth, everyone in Ghana is likely to reap the benefits.

Hari Sri

Hari is the LSBF Blog's News Editor. He manages the editorial content on the blog and writes about current affairs, SME, entrepreneurship, energy, education and emerging market news.

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