Ghana sought a $3 billion bailout package from the International Monetary Fund (IMF) in June 2022 due to the depletion of its gross international reserves.
The rapid depletion had put immense pressure on the cedi, making it difficult to meet import bills.
The 2023 IMF Regional Economic Outlook Report indicates that Ghana’s international reserves will only cover almost three weeks of import by the end of 2023, making it among the countries with the lowest import cover, alongside Zimbabwe, South Sudan, and Ethiopia.
The country’s reserves have come under pressure from both the demand and supply sides of the foreign exchange market.
On the demand side, the expansion of public and private investment, particularly in the oil and gas sector, has led to an upsurge in imports in recent years.
On the supply side, Ghana has suffered from lower export earnings due to lower commodity prices and production disruptions caused by the COVID-19 pandemic and Russia’s invasion of Ukraine.
The country has also faced numerous downgrades, which forced it out of the Eurobond market. For the past six years, Ghana has relied on inflows from the capital market to manage protracted balance of payment challenges, usually averaging $1 billion.
The level of international reserves is a significant indicator of any economy’s external vulnerability, as it measures the country’s ability to meet its foreign exchange obligations and cushion itself against external shocks.
Bank of Ghana (BoG) data shows that the country’s gross international reserves have dwindled by nearly 40% in less than two years, and as of February 2023, import cover was below three months. This alarming situation made it impossible to continue with debt servicing this year, particularly at the external front.
Ghana’s Finance Minister, Ken Ofori-Atta, revealed in the 2023 budget statement that the country’s import bill exceeds $10 billion annually.
With just close to $3 billion left as net foreign reserves as of February 2023, the government needs close to $500 million each month to bring in oil products alone.
The fall in reserves could lead to instability in the exchange rate and inflation, and the BoG’s ability to intervene effectively depends on its level of reserves, which provide a buffer against external shocks and speculative attacks.
The low level of reserves limits the apex bank’s capacity to defend the cedi against depreciation pressures.
The IMF has revised Ghana’s growth rate downwards to 1.6% after expanding by more than 5% in 2021 and expects 45.4% inflation in 2023, while the external debt-to-GDP ratio might hover around 52%.
If the IMF’s $3 billion support is delayed, it could erode Ghana’s thinning reserves and derail the progress made in reducing inflation and stabilizing the cedi against major trading currencies.