Ghana to Seek Help from International Monetary Fund
Ghana has said it will seek financial aid in the form of a loan from the International Monetary Fund (IMF) to help stop the rapid decline in the value of the cedi, Ghana’s currency, and close a large budget deficit. Ghana’s transformation from one of Africa’s fastest-growing economies to the home of the world’s worst-performing currency has become a concern. The exchange rate depreciated by 40% against the US dollar in 2014. The fall in the currency has led to increases in the price of consumer goods such as sugar and fuel; inflation is at an unacceptable 15%.
Despite being a major exporter of gold, oil, and cocoa, Ghana’s current account deficit has risen sharply to 12% of its gross domestic product (GDP). This is partly due to a rapid increase in demand for imports and falling gold prices. Additionally, oil revenues have not been as strong as expected.
The government is also struggling with a wide budget deficit, which stood at 10% of GDP last year. Ghana’s good reputation for fiscal responsibility has worsened considerably as the government tripled salaries for police officers and soldiers.
It is expected that the news of talks with the IMF will be positively received in international financial markets. The finance minister has said the step would help to stabilize the currency, to bring domestic prices under control, and also to restore investors’ confidence in Ghana’s economy.
A Ghanaian spokesperson noted that the IMF would insist on the government introducing measures to tackle inflation and reduce its budget deficit. The IMF says that Ghana needs to tighten its budget immediately, by reducing public sector wages, lowering subsidies, and increasing taxes. The IMF is likely to demand a limit on borrowing and perhaps some privatization of power and water companies.
Earlier this year, problems in the economy had led to nationwide protests, with thousands of workers across the country protesting in the streets about the rise in the cost of living. The country’s largest trade union says the government has been mismanaging the economy. In response to the protests, a government minister said that the government would work very hard to achieve economic development to make life easier for the working people of Ghana but that all Ghanaians would have to make “some sacrifices for the economy to recover.”
Table 1: Ghana’s Macroeconomic Indicators
| Year | Exchange Rate (GHS/USD) | Inflation Rate (%) | Budget Deficit (% of GDP) | Current Account Deficit (% of GDP) |
|---|---|---|---|---|
| 2012 | 1.9 | 8.6 | 5.2 | 7.3 |
| 2013 | 2.3 | 11.1 | 8.3 | 9.4 |
| 2014 | 3.2 | 15.0 | 10.0 | 12.0 |
Table 2: Selected Macroeconomic Data for IMF Evaluation
| Indicator | Value | IMF Recommendation | Expected Impact |
|---|---|---|---|
| Inflation Rate | 15% | Reduce subsidies | Lower price levels in the long run |
| Budget Deficit | 10% of GDP | Cut public sector wages | Reduced government spending |
| Current Account Deficit | 12% of GDP | Encourage exports | Improve balance of payments |
List two possible consequences of a high inflation rate on an economy.
- Reduced purchasing power for consumers.
1 mark - Increased cost of borrowing due to higher interest rates.
1 mark - Firms may face increased costs as they frequently update prices in response to inflation.
1 mark - High inflation creates uncertainty, discouraging long-term investment and slowing economic growth.
1 mark
Using information from Table 1, calculate the percentage change in Ghana’s exchange rate from 2012 to 2014.
Define the term "budget deficit."
- A budget deficit occurs when a government’s total expenditure exceeds its total revenue.
1 mark - This happens within a given fiscal year, excluding borrowing.
1 mark
Draw a diagram to show the impact of currency depreciation on the price of imported goods.
Using an aggregate demand and aggregate supply (AD-AS) diagram, explain how an increase in government spending on public sector wages can contribute to inflation.
Using a foreign exchange market diagram, explain how an increase in demand for imports affects the value of the Ghanaian cedi.
Using a balance of payments diagram, explain how a rising current account deficit can impact Ghana’s economy.
Using a market failure diagram, explain how reducing subsidies on essential goods might lead to equity concerns.
Using information from the text, tables, and your knowledge of economics, evaluate the effectiveness of IMF-recommended policies in addressing Ghana’s economic challenges.
For full marks, students should:
- Identify and explain key IMF-recommended policies mentioned in the text
- Analyze the effectiveness of these policies using economic theory
- Evaluate both positive and negative impacts of the policies
- Use relevant data from the tables to support arguments
- Consider short-term versus long-term effects
- Discuss alternative policy approaches
- Reach a balanced conclusion about overall effectiveness
