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Ghana’s Budget Discipline Key to Cedi’s Performance for Rest of Year



  • Central Bank’s target of US$800-million inflows by end-March very positive for FX liquidity and price stability.

Further depreciation of Ghana’s Cedi in 2019 is limited based on our outlook on key economic indicators and foreign exchange inflows this year. This expectation firmly stems from our view that we are to witness another period of discipline from the economic authorities regarding the budget deficit.

Ghana delivered a strong performance on the budget in the last two years, which attracted significant portfolio investments into the country. The deficit was reduced from 8.7% of gross domestic product in 2016 to 5.9% of GDP in 2017 and further to 3.8% last year, (rebasing may have influenced this) according to latest data release by the Ministry of Finance on 4 March 2019. While the New Patriotic Party government which came into office at the beginning of 2017 must take credit for this performance, it is also noted that this performance was under the watch of the International Monetary Fund.

The nearly US$1-billion Economic Credit Facility Program with the Fund came to an end in December (IMF Executive Board to meet in April to appraise Ghana’s performance, the 7th and 8th reviews) so this year marks a fiscal test for the Akufo-Addo government. We are confident that the government will stay within the deficit target. We expect that the new Fiscal Council, (set up by the President last year for the promotion of sustainable fiscal policies) and the enactment of a law this year capping the deficit shortfall at 5% of GDP in any given year, to underpin the restrain.

That said, we observe that for both years, the government had to sacrifice some planned expenditures to achieve the deficit targets as tax revenues underperformed. In 2018 for instance, almost 1 billion Cedis worth of spending was sacrificed as taxes missed the target by 800 million Cedis. We urge the government not to lose focus on enforcing tax compliance this year since it could greatly improve the fiscal outcome and calm a lot of nerves among the investor community. Investors are on tether hooks to see what will happen without the IMF watchdog. While this posture may slow portfolio investments in the first-half, positive budget delivery during the period is bound to convince many people to return to Ghana’s bond market.


Compared with the closing rate in December 2018, the Cedi has lost over 10% to the US Dollar, 2019 year to date, trading currently around 5.51 per dollar. We note that this performance was driven largely by external developments, and on the lighter side by the wait-and-see attitude of investors in relation to the budget as to whether there would still be discipline without an IMF watch.

Talking of external environment, the US Fed’s interest rate increases in 2018 and the US-China trade issues have tilted the risk-on effect in favor of developed markets. Ghana like all emerging and frontier markets has suffered from capital flights. The consequent decline in foreign exchange supply on the local market has impacted the Cedi’s performance.

Ghana is targeting a budget deficit of 4.2% of GDP this year and we foresee the authorities steadily delivering on this through the year. Ghana should therefore win back the appetite of offshore investors for its bonds and stocks halfway through the year. This will culminate with the Fed’s target this year to do only two interest rate increases compared with four upward adjustments in 2018. In addition to Ghana’s positive trade balance, which we forecast to remain in surplus for a third year in 2019 on increased hydrocarbon production, we think the Cedi’s losses to the US Dollar will be limited going forward.

Given the recent developments in exchange rate, we expect inflation numbers for February and March to reflect high pass-through effects of currency weakness before tapering off from April as the authorities take delivery of major foreign exchange supply principally through the Eurobond Program. Ghana’s inflation eased to 9% in January and we see it remaining between single digit or closely around 10% in the first half, on stable utility prices and increased foreign exchange supply.

The Central Bank is making financing arrangements to replenish its reserves with US$800-million as early as the end of March, according to various reports and government sources. Hopefully the country’s final two reviews under the IMF Program will be favorable. This will make way for the disbursement of approximately US$200-million to Ghana. A Eurobond sale, which we see happening any time after the IMF review is set to boost supply—currently the target is US$3-billion. A good performance in the cocoa sector also means a busy minor season with Ghana Cocobod ready to draw down US$300-million from its annual syndication. Increased oil production should see the country earn more foreign exchange from the commodity than a year ago— operator of Jubilee and TEN oil fields Tullow Oil Plc forecasts combined production of over 180,000 barrels per day in 2019 from 58,100 barrels per day last year. Lastly an initial draw down of US$647-million of a US$2-billion deal with China’s Sinohydro Corp. for roads may start trickling in this year, which will help to beef up foreign reserves of the country.

Considering Ghana’s restrictive budget, positive trade balance, single digit inflation and the expected foreign exchange inflows, we think that the Cedi’s recent depreciation is short lived, and stability should return soon.


Victor Yaw Asante is the Head of Commercial, Corporate and Investment Banking (CCIB) at First National Bank Ghana. Victor started his career at Unilever and has held several managerial roles in leading financial institutions in Ghana and elsewhere and has covered other key markets like London, Cameroun, Cote D’Ivoire, Gambia, Botswana and Sierra Leone. Victor holds an MBA in Marketing.

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Infrastructure moves to the front burner



The beginning of the major rainy season, which lasts from April to June, is the beginning of rising anger and expense for Ghanaian motorists. Heavy rains cause already poor roads to further deteriorate, exposing deep potholes that slow down traffic and increase motoring risk—not to speak of causing damage to vehicles. Rural roads are especially parlous, and non-existent in some places, limiting movement and economic opportunity for millions of people. This has stirred up resentment among citizens, with growing incidents of violent protests against poor road conditions.

The paucity of good roads is the most striking indication of Ghana’s infrastructure woes. Although the country’s infrastructure has been built up steadily from the ruins of the 1970s-80s, infrastructure provision, from roads to ports, schools, hospitals, and utility systems, has persistently lagged demand, creating a huge and constantly accumulating deficit. Compounding the insufficiency of investment is poor maintenance of existing infrastructure, which reduces its reliability, lifespan, and benefits to the economy. The cost of the infrastructure deficit is felt in reduced productivity, decreased economic growth, and a lower quality of life.

In the last few years, government capital investment, already low by historical standards, has been cut due to austerity. From 3.9% of GDP in 2013, central government capital spending declined to 3.6% of GDP in 2016, and dropped further to 1.6% of GDP in 2018. In addition to this expenditure, a number of statutory funds, including an education trust fund and a road fund, receive resources from the government for infrastructure investment. These resources have also been curtailed with the purpose of curbing the budget deficit.  

The government’s 2019 fiscal policy aims to reverse the trend of budget cuts by increasing central government capital investment to 2.5% of GDP, as well as allocating more resources to the infrastructure-dedicated education and road funds. This is not all: in April, the administration launched a US$2 billion package of infrastructure investment, which will be funded by China through an infrastructure-for-bauxite agreement. The deal requires Sinohydro, a Chinese state-owned construction company, to build US$2 billion worth of infrastructure for Ghana, which will be paid back by ferrying an equivalent amount of the country’s bauxite to China.

Three quarters of the Sinohydro investment is going into roads, reflecting the dire state of affairs in that area. Out of the country’s 72,381-kilometer road network, only 39% is classified as good, with 32% in fair condition and the remaining 29% in poor condition. The proportion of roads that is asphalted is a measly 23%. Sinohydro will construct new roads and interchanges, including the first ever interchanges in the north and west of the country, and rehabilitate crumbling roads. The non-road infrastructure that it will develop includes hospitals, housing, court buildings, and industrial parks.

Revived attention is being paid to rail transport, too, although the plans proposed are so grand as to seem incredible at times. It is no exaggeration to state that the existing rail network is obsolete and anachronistic, with most of it in disuse, as a result of which rail travel accounts for a miniscule share (less than 2% versus 97% for road) of the transport market. The Ministry of Railways Development, created by the government in 2017, proposes to rehabilitate the entire network, which is concentrated in the south, and to extend it to the north, with linkages to Ghana’s northern neighbors. A portion of the state’s petroleum revenues is being invested to revamp key sections of the network, while public-private partnerships are being considered for large-scale investments.

To expand education infrastructure, the government has secured US$500 million, by collateralizing 40% of the education trust fund, to fund new classrooms, dormitories, dining halls, and teachers’ housing in senior high schools, which have experienced an explosion in their populations since the coming into effect of the free senior high school policy two years ago. A further US$1 billion is to be raised in a similar way to boost infrastructure in basic and tertiary schools.

The increase in infrastructure investment will generate multiple economic benefits. In the short term, construction activity will provide jobs and incomes, and drive economic growth. Successful delivery of projects will enable beneficiary communities to enjoy new and improved roads, schools, hospitals, and other amenities. This in turn will support enhanced livelihoods while widening economic opportunities.

For these benefits to multiply to the point where the productive capacity of the economy is permanently strengthened, the country needs to sustain high levels of infrastructure investment for a long period of time. And it must do this without borrowing excessively, since the public debt burden is already large—58% of GDP in 2018—and expensive to service. This means the government must focus its efforts on growing domestic revenue, which is presently low (15.6% of GDP), to provide resources for increased capital investment.

It is vital also to improve the efficiency of public investment by reforming the way it is planned and executed. Due to poor planning, many infrastructure projects that are started suffer long delays before completion or may not be completed at all. As a result, the investments do not yield their full benefits. One study has found that one-third of capital projects begun by local governments do not get completed. Essentially, officials are more inclined to initiate new projects than finish ongoing ones. This practice represents an expensive waste of resources and needs to be checked.

Poor infrastructure is one of the characteristics of poor countries. As Ghana has ambitions to become an industrialized, prosperous nation which does not depend on aid, it cannot afford to spend meagerly on infrastructure, which is needed to drive the economy’s transformation. On top of ensuring that every citizen eventually obtains reliable electricity, clean water, a decent education, efficient transport services, first-class healthcare, and the like, raising capital investment in an efficient way will spur higher productivity in the economy, bolster competitiveness, and catalyze industrialization. The government would do well therefore to keep the infrastructure issue on the policy front burner.

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