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International Monetary Fund
The International Monetary Fund (IMF) will make resources equivalent to US $ 1 billion available to Ghana on Monday, August 23, 2021, in the form of an allocation of Special Drawing Rights (SDRs).
Initiated for all countries to respond to the world’s worst peacetime recession since the Great Depression, the SDR allocation follows the disbursement of emergency funding, also of $ 1 billion, under the rapid credit approved by the Fund 18 months ago to help fight the global pandemic.
To put these amounts into perspective, the Fund disbursed a total of US $ 925.9 million to Ghana over four years under the last Extended Credit Facility (2015-2019).
The attribution is a “blow in the arm” of the Ghanaian. It comes at a pivotal time to help consolidate the country’s foreign exchange reserves at the Bank of Ghana. The COVID-19 crisis has increased the foreign exchange that Ghana needs to do business with the world (for example, to pay for imports of vaccines or machinery and equipment), while the ability to earn foreign exchange through to exports has not necessarily improved. Ghana has so far turned to international borrowing to meet these additional foreign exchange needs.
This SDR allocation offers an alternative to borrowing as Ghana does not need to repay the Fund. The allocation is not a loan as it represents Ghana’s share of the $ 650 billion in SDR reserve assets created by the Fund and distributed to its members. SDRs (SDR 456 billion = US $ 650 billion) are distributed in proportion to countries’ participation in the capital (or quota) of the IMF, which in turn is closely related to the size of their economy.
This is only the fourth general allocation since the creation of the IMF in 1944 and by far the largest. The most recent dates back to 2009, during the global financial crisis, when the IMF allocated the equivalent of US $ 250 billion in new SDRs to its members. This time around, the SDR allocation would provide liquidity support to many struggling low-income and developing countries, enabling them to pay for health care and support vulnerable people.
How SDRs are used is a sovereign decision and depends on the specific needs and circumstances of each country. Initially, SDRs are placed as a reserve asset in the books of the central bank. As such, they add to foreign exchange reserves, making the country more financially resilient as it can tap into higher reserves in an emergency.
However, SDRs can also be exchanged for hard currencies and used to finance government spending. In this case, it is recommended to allocate it to priority areas compatible with a medium-term expenditure framework. In the form of foreign exchange or financing of public expenditure, the allocation will bring relief to Ghana.
Good governance and transparency are crucial in the use of these new resources. For example, improved budgetary procedures should be used to process expenses related to COVID-19, including internal and external audits.
But to be clear, SDR allocation is not a panacea. Allocation helps meet short-term foreign exchange needs, but it does not solve the root problem. In the case of Ghana, foreign exchange requirements are mainly due to large and persistent budget deficits and growing interest payments. Of course, Ghana’s success in saving lives and protecting livelihoods during the pandemic is also behind the larger deficits.
But in the future, deficits and financing needs will have to fall to keep debt under control and reduce demand pressures on the economy. Therefore, improving domestic revenue mobilization remains crucial, as does reducing borrowing.
Progressive revenue measures, which spare the most vulnerable, and a more rapid return to pre-pandemic spending levels should go a long way to consolidating public finances.
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