The International Monetary Fund (IMF) has diagnosed the Ghanaian economy, and thinks that spending within limits is government’s biggest challenge for this year. Against a backdrop of an election year, the challenge becomes enormous. The government’s main challenge for 2012 will be to maintain the hard-won stabilisation gains — strong broad-based growth, single-digit inflation, and fiscal consolidation — in the face of resurgent global risks. A sizeable depreciation of the cedi in January likely reflected a combination of seasonally high demand for foreign exchange and the increased risk perceptions of foreign investors. Interventions by the Bank of Ghana and a subsequent increase in the policy rate helped reverse the slide, partly, in February. Nevertheless, the economy is exposed to upside risks to inflation from currency depreciation and high domestic demand, as well as to a possible deterioration in the external position should a deeper global slowdown weaken foreign inflows. In 2011, services and income payments plus a strong demand for consumption-goods imports offset trade-deficit improvements from new oil exports that came on-stream, leading to the current account deficit widening to US$3.billion. Bank of Ghana Governor Kwesi Amissah-Arthur has said he is worried about growing consumption imports that have put pressure on the cedi and the Central Bank’s reserve buffers. The bank recently supported the cedi with US$800million in reserves after sharp falls against the US dollar. “We’re beginning to see an increasingly import-dependent economy. If the goods are meant for manufacturing, which will fuel future growth, then that is good; but we need to curb our demand for consumption imports,” Amissah-Arthur said. An IMF Mission to Ghana led by Christina Daseking, which visited Accra for 10 days to conduct discussions for the sixth review under the IMF’s Extended Credit Facility, raised some of these concerns. The mission met with Finance Minister Dr. Kwabena Duffuor; Bank of Ghana Governor Kwesi Amissah-Arthur; other senior officials, members of the Parliamentary Finance Committee; and representatives of the private sector and trade unions. “In light of these risks, the mission cautioned against any actions that could jeopardise the government’s 2012 fiscal deficit target of 5.2 percent of non-oil GDP. Achieving this target will now require additional effort, in light of the carry-over of claims and residual costs from fuel price subsidies in 2011,” the statement noted. Moreover, rising world oil prices if not passed on to consumers will result in the reemergence of costly subsidies, while the recently-agreed pay increase for the public sector of 18 percent will require significant savings from a planned payroll audit to keep the wage bill in check. To this end, the discussions focused on identifying opportunities for fiscal savings from higher revenues or reduced spending, including contingency measures that could be activated if needed. “Discussions with the Bank of Ghana focused on sustaining low inflation and policies to strengthen monetary operations and liquidity management. The mission considered that further policy actions may be needed in the course of 2012, should upside risks to inflation become pronounced,” the statement said. It encouraged the Bank of Ghana to continue to build a strong buffer in foreign reserves and take measures to increase the liquidity in the foreign exchange market as a way to reduce excessive exchange rate volatility. The economy expanded by an estimated 13½ percent in 2011, boosted by the onset of oil production and strong broad-based non-oil growth, while end-2011 inflation reached 8.6 percent — below the government’s 9 percent target. Despite a strong export performance, the provisional current account deficit rose to a level of nearly 10 percent of GDP in 2011 on account of rapid import growth. In 2012, the economy is expected to continue growing at a robust rate of 8-9 percent; and with appropriately tight macroeconomic policies, inflation is projected to remain within the inner target band of 6.7-10.7 percent. The fiscal deficit in 2011 of 4.4 percent of non-oil GDP (4.2 percent of total GDP) was below the programme ceiling by 0.7 percentage points of non-oil GDP, supported by an impressive improvement in revenue collection. However, the wage bill, exceeded earlier projections, and spending obligations of about 1 percent of non-oil GDP were carried over into 2012. The government made commendable efforts in settling past arrears to the tune of GH¢1.5billion (3 percent of non-oil GDP).