Introduction and Background
After having faced two continuous years of large twin (fiscal and current account) deficits with thin external buffers, increasing depreciation pressures on the domestic currency and serious financing difficulties in 2013 and 2014, the Government of Ghana (GoG) initiated and entered into negotiations with the International Monetary Fund (IMF) from about the third quarter of 2014 for an economic reform program that could be supported by the Fund. The primary purpose was to regain policy credibility and stabilize the economy.
In early-April 2015, the Executive Board of the IMF approved a US$918 million three-year Extended Credit Facility (ECF) arrangement to support the country's economic reform program. The ECF-supported Program aimed at restoring debt sustainability and macroeconomic stability in order to foster a return to high growth and job creation.
Coming along with the Program were critical guideposts for achieving external sustainability including:
- improving the merchandise trade and current account deficits to more sustainable levels -i.e, around 3 percent of GDP and 5 percent of GDP respectively - by 2017;
- narrowing the overall balance of payments (BOP) deficit with the goal of achieving surpluses in the medium term;
- building international reserves as external buffers to cushion adverse exogenous shocks - with the gross and net reserves cover rising to the equivalent of 4 months and 3½ months of imports of goods and services in the medium term; and
- the BoG moving away from swap and bridging loan facilities, which have typically been used as „window dressing' to shore up the gross international reserves (GIR).
In addition to these, a floor has been set on the net international reserves (NIR) of the Bank of Ghana, while ceilings are placed on non-accumulation of external arrears and contracting and/or guaranteeing of new external debt.
This brief note is CEPA's assessment of performance in respect of the external trade and payments for 2015 and the policy implications going forward.
The focus of the assessment is in three areas:
i. an examination of the merchandise trade balance in the face of continuing commodity price declines in global markets;
ii. the current account deficit and its financing in the near term; and
iii. a scrutiny of the overall balance of payments (BOP) deficit in the context of effective management of international reserves.
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