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A cabinet full of bitter pills.

There was clear relief when the Ghanaian currency, the cedi, eventually stopped its alarming slide in September but few are convinced that the economy, which has been limping badly, is on the mend. The re-entry of the IMF in the country's policy space has also reawakened fears of the disastrous structural adjustment plans of decades ago. This is not an easy time for President Mahama's administration, writes Eric Kwame from Accra.

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Against the backdrop of a ballooning import bill, a shortfall in the supply of the US dollar and a generally haemorrhaging economy, even the most optimistic observer of Ghana's economy would have exercised a high level of caution in predicting a comeback of the world's worst-performing currency, the Ghanaian cedi. But whether through a stroke of luck or prudent economic policies, pessimists are being proved wrong and Ghana's President, John Dramani Mahama, has found a reason to smile--the cedi is on a rebound! Returning from a recent trip abroad, he cautioned that the Ghanaian economy was "not out of the woods yet" but he looked a very relieved man.

After nearly a year of continuous slide, the local currency, the cedi, finally found some brakes to slow down the downhill plunge.

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A quick recap of events will show that the cedi traded at 2.34 against the US dollar in January 2014, and as of Friday 1st August it stood at 3.035 to the US dollar, reflecting a cumulative depreciation of 22.9% over the period, according to figures from the Bank of Ghana. International media platform, the Financial Times, however, thought the figure was actually 40%, citing IMF sources. But in a strong show of character, the local currency has, since 24th August fought back from a high of 3.90 to the US dollar, to its current rate of 3.13 to the US dollar.

Derided by critics as the worst performing currency in the world, the cedi has been the most visible indicator of how bad things have been for the country once considered Africa's economic star. So one may be tempted to forgive pro-government spokespersons for rejoicing at the change in the narrative.

Many are not so sanguine, however. Sydney Casely-Hayford, a financial analyst, for example, has warned that the cedi's rise may be artificial and not indicative of the turnaround that is being desperately sought.

He argues that the rise could be due to the $1bn Eurobond that the country issued in September as well as the $1.7bn syndicated cocoa loan. Casely-Hayford's point may be valid in some ways. But ultimately, government's ability to sustain this recent strong performance of the cedi will determine whether the currency's rise is artificial or not.

There are other factors as well. The Eurobond itself was delayed twice this year, on account of conditions "not being right". Those conditions improved following a confidence-boosting intervention from the IMF, to whom the government finally appealed for assistance after months of prevarication. In the wake of the announcement, the markets had kinder words to say about the Ghanaian economy than they had had for months, resulting in a more positive response to the bond issue.

Discussions with the IMF have themselves exposed the deep challenges that the economy faces. After the first round of discussions were concluded in Accra in late September, both sides spoke of frank and open discussions that had been generally fruitful.

Unpleasant exchanges

However media reports hint at more robust exchanges that bordered on the unpleasant. The CEO of the Chamber of Bulk Oil Distributors, Senyo Horsi, had to issue a press statement denying that there had been a near bust-up between the Finance Minister, Seth Terkper, and himself over the government's indebtedness to members of his chamber. He did, however, admit some differences which he said were in the general spirit of the discussions.

Many on the sidelines remain apprehensive. After claiming that its "home-grown solutions" could resolve the economy's problems, it took the intervention of the IMF to placate the markets. For many Ghanaians, resorting to the IMF is not only a reminder of how bad things have become (the country quit the programme in 2007) but a return to the "dark days" of the 1980s, when, under the Bretton Woods-directed Structural Adjustment Programme, the country had to undertake a bitter and socially disruptive programme of economic realignment.

The Trades Union Congress, for instance, has issued a statement decrying the development and promising to resist any draconian measures that the move may bring. Members of the opposition, especially the New Patriotic Party have been quick to point out that the move vindicates their characterisation of the Mahama-led administration as out of ideas and out of its depth. Should government agree to any difficult measures, as it may well have to, it would face a political battle in selling the package to an already uneasy nation.

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Which may be why the President is urging restraint. Problematic issues identified in the first round of talks include the enormous wage bill, the untargeted and overgenerous subsidy regime and tax waivers that government almost routinely hands out to attract foreign investment. None of these will be easy to deal with.

Under the late President Mills, a hiring freeze in the public sector led to a huge outcry, with the opposition NPP, somewhat incongruously for a pro-market party, accusing the government of causing unemployment by refusing to add more numbers to the already bloated public service.

The government has little wiggle room with the Single Spine Salary Structure. The new salary scheme was meant to correct imbalances in public sector pay but as a side effect, caused several fold increases in the wage bill.

A similar fate can be said to have befallen the subsidy regime. While generally acknowledged as a drain on government revenues and poorly targeted, any attempts to revise subsidies leads to outcries from the chattering classes who are often the worst hit but who, government argues, need the subsidies least.

Government itself often promotes these subsidies to appear "caring", while it struggles to pay for them. The bulk distribution companies are as badly hit as utility companies, including the state-run Electricity Company of Ghana, which is also owed a fair sum in subsidy payments.

Revising the tax regime would not come easy either. George Blankson, head of the Ghana Revenue Authority, signalled the intention of the government to withdraw some of its waivers almost immediately after the first round of talks with the IMF. Businesses have been quick to react, arguing that higher taxes in times of economic difficulty would further threaten jobs and the economy itself.

Faced with all these problems, it may be too early to celebrate. The cedi may be rebounding but the core issues remain. The Ghanaian economy will have to take some bitter pills before it heals completely. As an election approaches in 2016, we may find that the economy's managers do not have the stomach for the bitter pills.
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Title Annotation:COUNRYFILE: Ghana
Comment:A cabinet full of bitter pills.(COUNRYFILE: Ghana)
Author:Kwame, Eric
Publication:African Business
Geographic Code:6GHAN
Date:Nov 1, 2014
Words:1167
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