TIME FOR THRIFT

A mounting deficit forces Ghana to ask for help

SPECTATORS of the euro crisis have learned to look for a few defining precursors when trying to decide which peripheral European country was next in line for a bail-out. These usually include slow economic growth, high indebtedness (either private or public) and a wobbly banking system. They may have to tear up those rules when looking at Ghana, which on August 4th asked the IMF for help after its currency, the cedi, fell by a third against the dollar since the start of the year.

Until recently Ghana was something of a model for good governance inAfrica, so its fall from grace is a shock. It enjoyed a run of economic growth averaging about 6% a year, and although that moderated to 4.4% last year, growth of 6-9% is expected in the next few years. Privatesector debt remains low and Ghana started this decade with public borrowing of below 40% of GDP. Such seemingly sound fundamentals meant its debut bond issue in 2007 was a huge hit among foreign investors.

But recently Ghana has been living beyond its means. Public debt is rising rapidly and now tops 50% of GDP on official figures. Fitch, a rat- ings agency, puts it even higher at 62%, taking into account a revaluation of its foreigndenominated debt. The main cause is a yawning fiscal deficit, which stood at 10.1% in 2013 and is forecast by Fitch to remain above 8% in each of the next two years.

Ghana’s deficit is in tur n mainly the result of big rises in public-sector pay. In 2012 civil servants’ wages gobbled up 70% of government revenues, which have also been squeezed by falling commodity prices. The gover nment hopes to cut that to 35% in three years.

Meanwhile, the administration of John Dramani Mahama, the president, has changed tack on fuel subsidies—they were cut, then quietly reinstated—and has been unable to prevent tax collection falling short of expectations. A weakening global gold price has also sapped Ghana of a vital source of foreign exchange. The country had a currentaccount deficit of 12.3% of GDP last year.

The IMF will probably demand a cap on borrowing, a public-sector pay freeze, a more consistent policy on subsidies and perhaps some privatisation of power and water companies. None of this will be popular. Having spent too freely for a few years, Ghana looks set to experience a bit of Europeanstyle belt-tightening.

Ghana’s deficit is in turn mainly the result of big rises in public-sector pay. In 2012 civil servants’ wages gobbled up 70% of government revenues, which have also been squeezed by falling commodity prices

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