They also support the government’s transformation agenda, focused on economic diversification, social inclusion, and macroeconomic stability.
In a press statement after the conclusion of article IV consultations, the IMF Directors, however, expressed concern over the emergence of significant short-term vulnerabilities stemming from high fiscal and external current account deficits.
These imbalances make the country vulnerable to a deterioration of external conditions and are creating pressure on interest rates and the exchange rate.
“If unaddressed, they risk weakening economic growth and public debt sustainability,” the Directors said and emphasized the need to restore macroeconomic stability to preserve a positive medium-term outlook.
The Directors commended the authorities’ policy efforts and supported the fiscal measures in the 2014 budget.
They noted, however, that achieving the 2014 fiscal deficit target would be challenging, in light of high interest rates, a depreciating currency, and a possible growth slowdown. They urged the authorities to take additional short-term measures to reduce the fiscal and external imbalances.
The statement welcomed the government’s recent policy documents outlining its homegrown medium-term reform and consolidation measures.
They supported the government’s intention to rationalize public spending, lower the wage bill, restructure the statutory funds, and enhance revenue mobilization and tax administration.
They encouraged the authorities to translate their policy commitments quickly into specific and time-bound action plans to achieve significant and durable consolidation.
In light of current imbalances, the Directors recommended a more ambitious medium-term consolidation path to stabilize public debt and debt service at sustainable levels.
While the risk of debt distress remains moderate, they expressed concerns about the high debt service-to-revenue ratio. A stronger medium-term adjustment could set off a virtuous cycle of lower fiscal deficits and falling interest rates, creating space for social and infrastructure spending and crowding-in of private sector activity.
The Directors welcomed the recent monetary policy tightening. They suggested that further tightening may be needed, in combination with fiscal consolidation, to steer inflation back into the target range.
They stressed that the Bank of Ghana should limit its net credit to the government, strengthen liquidity management and the inflation forecasting framework, and continue to allow the exchange rate to adjust to prevent further erosion of the reserve buffer.
The statement emphasized that the new foreign exchange regulations would not be effective unless the underlying macroeconomic imbalances were resolved.
In particular, they were concerned that the measures could have unintended adverse effects. They therefore welcomed the Bank of Ghana’s decision to review the measures with the objective of mitigating any adverse implications and removing the associated exchange restrictions. They also commended the Bank of Ghana for its steps toward adopting a unified, market-based exchange rate.
The Directors welcomed that the financial system was currently sound, adequately capitalized, and liquid and stressed the need to monitor exposures closely, noting that, a weaker macroeconomic outlook, rising interest rates, and currency depreciation expose the financial sector to credit and currency risks.
Accordingly, the Directors encouraged the authorities to strengthen their crisis prevention and management capabilities and welcomed recent actions to improve the bank supervision framework.