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CLAMORING FOR ECONOMIC RESILIENCE:  Moving Past the Gloom of an Existing Era

CLAMORING FOR ECONOMIC RESILIENCE: Moving Past the Gloom of an Existing Era

The COVID-19 pandemic is regarded as the most disruptive experience since the great depression and has taken a heavy toll on the global economy– and Ghana has not been an exception. The pandemic, which started in Wuhan, a city in China, in December 2019, has affected over 200 countries, bringing economic activities to a standstill. This once-in-a-century pandemic caused most countries and cities to completely lockdown, with airlines, restaurants, shops, pubs and night clubs closed down.

The pandemic has led to disruptions in global supply chains with drops in value creation and delays in shipments of major goods and services; widespread supply shortages and attendant huge price increases; slowdown in investments and mass lay-off of workers which further dampened economic activities; and unprecedented volatility and collapse of stock markets which recorded all-time low indices.

The pandemic also led to a decline in the international price of crude oil with significant revenue loss to oil exporting countries; decline in tourism, resulting from border closures, fewer international trips, cancellation of cruise lines, airline suspensions, and cancellation of regional and global events; unanticipated increases in health spending; and higher public debt burden.

With the situation somewhat stabilizing, the global economy has seen the easing of restrictions and things appear to be returning to what has been described as the ‘new normal’. Besides the restrictions being eased gradually, various countries across the world are beginning to put together building blocks to rebuild their economies post- COVID-19.

Looking at the happenings, Dr. John Kwakye, the Director of Research at the Institute of Economic Affairs (IEA), presents a worrying view of the pandemic’s effect on the Ghanaian economy and also discusses the post-covid-19 outlook of the economy and suggests measures the government could put in place to speed up the country’s recovery after the pandemic.

Ghana’s economy before COVID

Ghana’s economy was on the growth trajectory before COVID-19 struck, with economic growth for 2019 projected to be 7.1 percent, while non-oil GDP was also projected to grow by 6 percent. Provisional data available on the performance of the economy as at the end of September 2019 showed that most of the macroeconomic indicators were on target.

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Dr. Kwakye confirmed in his narration that pre-COVID, the Ghanaian “economy was doing quite well, with GDP growth projected at 6.8 per cent for 2020, following an equally impressive performance in 2019. This rate of growth was high per African and international standards.” Inflation was within the Bank of Ghana’s 8 percent band, and the overall budget deficit was projected at 4.7 percent.

This year also, the budget deficit was projected to be 4.7 percent which was still below the five percent cap set by the Fiscal Responsibility Act. Although the country’s public debt was on the rise, Dr. Kwakye said as a debt to GDP ratio, the debt was growing at a slower pace than the immediate past. He further indicated that interest rates were also declining, and although banks’ lending rates were still unacceptably high, they were trending downwards. The external sector of the economy had improved, driven by good export performance. “However, because of the fiscal consolidation program, the government was keeping spending and the deficit down. The financial sector crisis had affected banks and some workers had lost their jobs. The Menzgold saga had also affected peoples’ investments. All of these had combined to create some liquidity crunch in the economy.

“It was therefore understandable to hear people say there was no money in the economy due to the liquidity crunch but on the whole, if you put everything together, the economy was doing very well before COVID struck,” Dr. Kwakye disclosed.

Impact of COVID on economy

International research institutions and multilateral organisations, including the International Monetary Fund; the World Bank, the UNECA, the Economic Intelligence Unit, and Fitch Solutions are all projecting significant slowdown of global GDP growth with most predicting a recession or a severe economic contraction.

Though the IMF had indicated earlier in March 2020 that the impact of the COVID-19 on global growth was difficult to predict, the Bretton Woods Institution was certain that 2020 growth will slow down significantly from the projected 3.3 percent to rates far below the 2019 outturn of 2.9 percent. UNECA predicts that the Africa 2020 projected GDP growth will drop by 1.4 percentage points from 3.2 percent to 1.8 percent. The World Bank also estimates that a 1 percent decline in developing countries’ growth rates traps an additional 20 million people into poverty.

Presenting an update on the economic impact of the virus to Parliament on March 30, the Minister of Finance of Ghana, Mr. Ken Ofori-Atta, said a preliminary analysis of the impact of the Coronavirus menace on Ghana’s economy showed that the 2020 projected real GDP growth rate could decline from 6.8 percent to 1.5 percent.

In his view, Dr. Kwakye submitted that the assessment of the Finance Ministry paints a very gloomy picture of the Ghanaian economy. “I recall that the Minister made a statement to Parliament and provided an assessment of the impact of the pandemic on the economy and then said that growth was projected to be between 1.5 percent or 2.6 percent, depending on the severity and the duration of the pandemic.”

With crude oil prices falling to all-time low as a result of the pandemic, preliminary analysis by the Ministry of Finance showed that at an average crude oil price of US$30 per barrel for year 2020, government would register a shortfall in crude oil receipts amounting to GHȼ5.6 billion. The anticipated decline in import volumes and values, as well as the slowdown in economic activities, is also expected to lead to shortfalls in both import duties and other tax revenues. Based on the performance of import duties to date, as well as assumptions on projected decline in import volumes and values, preliminary analysis shows that import duties will fall short of target by GHȼ808 million for the 2020 fiscal year.

Similarly, the projected slowdown in non-oil GDP as a result of the pandemic is expected to result in shortfalls in tax revenues (excluding oil tax revenues and import duties) amounting to GHȼ1.44 billion, bringing the total estimated shortfall in non-oil tax revenues to GHȼ2.25 billion. In all, the total estimated fiscal impact of the pandemic is expected to be GHȼ9.5 billion.

The country’s overall fiscal deficit for 2020 which was projected to be 4.7 percent of GDP is now projected to slip to 7.8 percent of GDP. In considering the situation, Dr. Kwakye indicated the situation did not look good for the economy. “Now the fiscal deficit is being projected to be over 7 percent compared with the original projection of 4.7 percent. Public debt is rising, export revenues will be lower because of the closing of borders, oil prices have also slumped and we are going to lose revenue from there.” Remittances are also going to be lower because the virus has severely affected countries where most of Ghana’s remittances come from; tourism receipts are also expected to be lower which would all affect the economy and the Bank of Ghana’s reserves. Businesses have also been affected which would impact on employment and people’s livelihoods.

Impact on public debt

The fiscal impact of the pandemic has left the government with no other option than to borrow more.

Commenting on this development, Dr. Kwakye argued that this was something that was happening everywhere, as every country would have to borrow in the wake of the pandemic, with the exception of a handful of countries who may have reserves that they can dip their hands into. The government has so far borrowed US$1 billion from the IMF and also borrowed GH¢10 billion from the Bank of Ghana to support the 2020 budget.

Dr. Kwakye, said although this will cause the country’s debt to rise, it was a necessary evil because the government has no choice at the moment. “Given the size of money that we need, we cannot afford not to borrow so even though we should be concerned about the rising debt, immediately what we should be thinking of is how to survive. We need to survive now and we will deal with the debt situation later.”

BoG’s support of the budget

To help the government address the economic challenges of COVID-19, the Bank of Ghana (BoG) in its May Monetary Policy Committee (MPC) press release indicated that it has triggered the emergency financing provisions, which permit the central bank to increase the limit of its purchases of government securities in the event of any emergency to help finance the residual financing gap, in line with section 30 of the Bank of Ghana Act, 2002 (Act 612) as amended.

Dr. Kwakye, who is a member of the Monetary Policy Committee threw his support behind the central bank’s decision, stating that “I am happy that the BoG is providing some of the money to support government in these times.” Under its Asset Purchase Programme, the central bank purchased a Government of Ghana COVID-19 relief bond with a face value of GH¢5.5 billion at the Monetary Policy Rate with a 10-year tenor and a moratorium of two (2) years (principal and interest). The Bank also indicated that it stands ready to continue with its Asset Purchase Programme up to GH¢10 billion in line with the current estimates of the financing gap from the COVID-19 pandemic.

“If BoG was not providing part of the money, it will mean that government would have to borrow the amount from outside which might come at a higher interest rate. What I know as an economist is that, it is more prudent to increase domestic debt than external debt. The debt level will rise but we should just make sure that we use the money prudently,” he professed.

On the decision of the central bank to finance government budget despite an MoU with the Government not to do so, Dr. Kwakye intimated that “the MoU was applied in normal times but we are not in normal times now.” Before the MoU, there was a lending ceiling of 10 percent but under the IMF programme, the BoG signed a memorandum with Government to reduce its lending to zero percent.

Dr. Kwakye noted that this was a gentleman’s agreement which had not been enacted into the Bank of Ghana act yet, and thus saw nothing wrong with the central bank supporting the government is such times. “We are not in normal times and government needs to borrow from the BoG. In abnormal times, the central bank must be open to support government.” Because the money was being borrowed from the BoG, he believes it could be negotiated at a cheaper rate than what the government would have gotten from the international market or the domestic bond market.

There have been concerns from some economists and the Minority in Parliament that the decision of the central bank to support the government’s budget would increase money supply in the economy which may lead to higher inflation. This, Dr. Kwakye corroborated but was quick to say that inflation was a lesser evil at this time. “Our survival is critical, so let’s survive today and if it causes inflation, we will see how we can tackle that post-Covid-19. It is better for government to owe its own central bank than to owe foreigners.”

Other measures from the BoG

As part of measures to contain the impact of the COVID-19 on the Ghanaian economy, the central bank at its March MPC press conference announced some measures to help banks to lend more to the private sector in these times. The Primary Reserve Requirement was reduced from 10 percent to 8 percent to provide more liquidity to banks to support critical sectors of the Economy, and the Capital Conservation Buffer (CCB) for banks of 3 percent was also reduced to 1.5 percent to enable the banks provide the needed financial support to the economy. This effectively reduced the Capital Adequacy Requirement from 13 percent to 11.5 percent.

In his view, Dr. Kwakye said this was the right thing to do, noting that “in this time that we need to support the economy, we needed to free some resources for banks to be able to lend more to the private sector. He intimated there must, however, be a stakeholder committee to ensure that the banks don’t use the freed up cash to purchase government securities. He suggested the stakeholder committee must include BoG, Ministry of Finance, representatives of the banks, AGI and CSOs.

The central bank as part of the measures moreover lowered the Monetary Policy Rate 150 basis points to 14.5 percent to enable banks to lend to customers at a reduced rate. In response to these measures, banks in the country also reduced their lending rates, provided some loan repayment holidays to their customers and granted new loans to businesses which have been hardly hit by the pandemic. The Ghana Association Bankers, has pointed out that banks had, as at end of May, supported businesses in different forms to the tune of GH¢3.6 billion. The amount was in the form of new loans; rescheduling of loan repayments; interest write offs, among others.

Furthermore, Dr. Kwakye, said figures available to him indicated that banks’ lending rates had come down a bit. “We don’t expect the lending rates to come down in the same magnitude as the reduction in policy rate. From history, when we reduce the policy rate, there is some kind of inertia from the banks in reducing their lending rates.” Banks have over the years tended to be more responsive when the policy rate goes up but there is generally an inertia in the transmission of monetary policy. This has become a problem because currently the BoG cannot force any bank to reduce its lending rates, leaving the central bank with moral suasion as the only tool to convince the banks to reduce their lending rates.

Dr. Kwakye, however, believes the central bank must be more forceful in this regard. “We should be more forceful and make a case that the policy rate has come down so they also need to come down. The gap between lending rates and deposit rates is also too wide and I am not happy with the extent to which banks respond to policy rate reductions. If we leave the banks to do their own thing, my concern is that they may not readily bring down the lending rates and may not lend their free reserves to the private sector.”

Ghana’s Post-COVID recovery process and time frame

The issue of how long the Ghanaian economy will take to recover from the COVID pandemic has dominated discussions in recent times, with the Finance Minister indicating that the economy might take up to three years to fully recover. However, Dr. Kwakye said it was difficult to predict how long it will take for the economy to recover. Every country is definitely going to recover at some point and some may take longer. Some will have a V-shape recovery where they go down the cliff and after COVID they come up sharply, while others will have a U- shape, implying that when they go down, they stay down for a much longer time before they climb up again.

But, Dr. Kwakye hinted it would be difficult to predict how Ghana’s case would be due to the many uncertainties surrounding the pandemic.

“The recovery will also depend on how quickly we are able to lift the restrictions we have imposed on the economy. I won’t be able to put a timeline on it though because the factors are too many and uncertain.”

How to quicken the country’s recovery?

While the period to recover is uncertain, Dr. Kwakye outlined some measures that the government could put in place to quicken the country’s recovery. Many have argued that the pandemic provides an opportunity for countries to rethink their economic policies and Dr. Kwakye believes it was time for Ghana also to rethink its entire economic policy going forward. “It’s time to rethink our entire economic policy going forward. We have to create a more resilient, self-reliant and robust economy, leveraging our natural resources. The pandemic has disrupted the world economy and value chains and we need to move away from strictly specializing in a small number of economic activities and products. We should not concentrate on producing just a few low value-added products but rather position ourselves to self-sufficient.”

The country cannot continue to depend on others to produce things for us. We cannot produce everything, but there are some critical things that we must begin to produce ourselves locally. The government must therefore take the necessary steps to restructure the economy. Dr. Kwakye said this could be done by leveraging the country’s natural resources to transform agriculture and manufacturing.

He said data available to the IEA suggested that the country’s natural resources, which include; oil, gas, gold, bauxite, manganese and iron ore was valued at over US$12 trillion. Over US$12 trillion of natural resources is buried under ground and you ask yourself why as a country we have not been able to exploit this to develop and transform the economy.

“The portions that we have exploited, we have given them away through concession contracts to foreigners and our portion of it is very minimal. We are giving out what we are exploiting to foreign investors and their cohorts in Ghana when we should be using our natural resources judiciously to transform our agriculture and manufacturing sectors,”

the research director stated.

Protecting local industries

In a bid to industrialize, many have called for the need to introduce policies that will protect local industries and impose tariffs on goods that could be produced locally. Responding to such suggestions, Dr. Kwakye subscribed to this school of thought, stating that “I am doing research looking at the liberal policies that we have been implementing all these years. Liberal policies like: open trade, privatizing all our public enterprises, not providing subsidies and other incentives, liberalization of the financial sector, production concentration, etc. One of the problems is the open trade that western financiers have been preaching to us and because of that we have removed quotas on all goods and reduced tariffs to very minimal levels and as a result our country is being flooded with cheap imports from outside which is killing the local infant industries. If we need to put in quotas and increase tariffs to protect our industries, then we should do that. I am not talking about across board restrictions, but we should be selective in protecting our local industries. The advanced countries who have been preaching open trade to us, when they were developing, did not practice what they now preach.”

Stimulus package

As part of measures to alleviate the impact of the pandemic on small businesses, the government launched a GH¢1 billion stimulus package to provide relief to Micro, Small and Medium Enteprises (MSMEs) who have been hardly hit. In addressing which sectors the stimulus package should target, Dr. Kwakye averred the package must target businesses in the agriculture and manufacturing sectors. “These are the bedrocks of the economy but unfortunately for us it looks like the services sector has shot up to become the lead contributor to GDP. If you look at the development of countries; countries develop by using agriculture and the manufacturing sectors as the base of their economy. We should therefore not ignore these two sectors. The extractives sector is doing well but it does not generate enough employment like agriculture and manufacturing,” Dr. Kwakye concluded.

Dr. John Kwakye Director of Research at the Institute of Economic Affairs IEA

Dr. John Kwakye, Director of Research at the Institute of Economic Affairs (IEA)

Ghana: Recent Economic Developments and Outlook

Ghana: Recent Economic Developments and Outlook

Ghana’s economic growth slowed down continuously after an all-time high of 14% in 2011, spurred by the coming on stream of first oil production in the country. High economic growth resumed after 2016, spurred by the coming on stream of new oil and gas production from the Sankofa and TEN fields. The economy grew by 8.1% in 2017, making it the second-fastest growing economy in Africa after Ethiopia, driven by strong recovery in oil production and high gold output, with cocoa production remaining stable. Non-oil GDP growth remained at 4.6% in 2017, same as in 2016, as marginal expansions in the services and agriculture sectors offset slower growth in non-oil industry. The economy continued to expand rapidly in 2018, albeit at a slower pace than the rate in 2017, with a real GDP growth of 6.3%. This was spurred by the expansion of the mineral component of the industry sector and a larger GDP resulting from the rebasing exercise conducted in October 2018. The growth of agriculture was high in 2018 and was also a key supportive sector to the overall economic growth during the year. Nonetheless, the services sector remained the dominant sector of the economy, accounting for 46% of GDP in 2018. This means that while the main driver of economic growth in 2017 was oil production, in 2018 the impact of the oil production on GDP growth reduced significantly as it recorded a growth rate of 3.6% (GSS, April 2019). The economy continued to expand in 2019 with a growth rate of 6.7% in the first quarter, driven by a strong recovery in the services sector which recorded a growth of 7.2% in the period.

Inflation dropped from a peak of 19.2% in March 2016 to 12.1% in June 2017 due to base effects and lower domestic food price pressures. The inflation rate stabilized thereafter to levels within the central bank’s target range of 8±2%. Inflation declined to 9.4% in December 2018, the lowest in five years, reflecting the continued monetary restraint by the central bank, sharp moderation in non-food inflation, the relative stability of the cedi as well as the impact of the fiscal containment during the period. The moderation in inflation created room for monetary policy easing beginning in July 2017, with the policy rate cut from 21.5% in January 2017 to 16% in January 2019 in an effort to spur non-oil economic growth. Inflation continued to remain in single digits in the first half of 2019, rising gradually from 9% in January to 9.5% in April 2019 and then declined to 9.1% in June 2019, driven mainly by low food inflation.

The government launched a concerted fiscal consolidation efforts in 2017, aimed at reducing the large fiscal deficit. As a result, Ghana’s fiscal performance showed a broad turnaround in 2017, with the fiscal deficit (on cash basis) narrowing to 4.8% of GDP during the year, from 6.5% in 2016. The government sustained the fiscal consolidation efforts in 2018, leading the fiscal deficit for the year to drop to 3.9% of GDP, although achieving revenue targets remained a challenge. The primary balance turned positive at the end of 2017, the first time in almost a decade, and remained positive in 2018. The fiscal consolidation efforts continued in 2019 even though there were still challenges in meeting the revenue targets. The fiscal performance in the first half of 2019 showed a budget deficit (on cash basis) of 3.3%, due both to revenue shortfalls and expenditure cuts.

Whilst fiscal consolidation seemed to be gaining ground since 2017, this did not reflect the true state of the country’s public finances. First, there were huge expenditure and liabilities incurred by the government that were outside the budget approved by Parliament. These include a US$2 billion Sino-hydro Group loan secured for infrastructure development, bonds issued to bail out ailing banks under the banking sector reforms, and extra-budgetary borrowings by the Ghana Education Trust Fund. Second, domestic revenue mobilization was not only weak but consistently undershot the budget targets. As revenue projections were not achieved in 2017 and 2018, budgeted capital spending were sacrificed to safeguard the deficit targets. According to the World Bank (June 2018), including the cost of the financial sector reforms would have raised the fiscal deficit to 7.2% of GDP in 2018. The same situation is playing out again in 2019 as the government responded to the revenue undershoot of 17.6% in the first quarter of the year by spending 4% less than budgeted, with investment expenditure falling by 28.7% relative to target and bearing the brunt of the expenditure cuts. This means that, beginning in 2017, government investment spending has been at risk of severe retrenchment due to revenue underperformance. Not surprisingly, the weak areas of tax revenue were the same ones that were described as nuisance taxes by the government and were abolished in 2017.

Fiscal policy outcomes in the last decade have caused a serious impact on Ghana’s public debt stock. The stock of public debt at end-2018 stood at GHȻ173.1 billion, from GHȻ9.8 billion in 2008. By end-June 2019, the debt stock had risen to GHȻ204 billion, comprising domestic debt of GHȻ96.3 billion (47.2% of total debt) and external debt of GHȻ107.7 billion (52.8% of total debt). As a result, the debt/GDP ratio which stood at 57.9% in 2018 rose to 59.2% at end-June 2019, despite the nearly 25% increase in GDP due to the rebasing in September 2018, keeping Ghana at a high risk of debt distress. Fiscal expansion, contingent liabilities from energy sector state-owned enterprises (SOEs) and additional debts incurred by the government to support the financial sector clean-up presented a serious risk to debt sustainability. The March 2019 IMF/World Bank debt sustainability analysis maintained Ghana’s high risk of debt distress despite the fact that the country’s external debt indicators significantly improved on account of the rebased GDP. Vulnerabilities associated with debt service remain, with debt service to exports and debt service to revenue in breach of their baseline thresholds (IMF, 2019).

Interest rate risks continued to be a serious concern for both external and domestic debt. In addition, over half of Ghana’s public debt was exposed to exchange rate risk. The country’s debt portfolio exchange rate risk dropped to 49.1% in September 2018 from 52% in December 2017 but is projected to rise to 54.6% in 2019, with the issuance of the US$3.0 billion Eurobond in March 2019 (World Bank, 2019). Even though the nominal exchange rate was relatively stable during the first three quarters of 2018, the depreciation of the cedi in the last quarter of 2018 and in the first quarter of 2019, combined with the relatively higher proportion of external debt made Ghana’s public debt portfolio still vulnerable to exchange rate volatility.

The overall banking sector remained profitable despite some weaknesses. An asset quality review undertaken in 2016 by the central bank highlighted serious under-provisioning and capital shortfalls. Some banks were found to have exceeded their single obligor limits, with capital erosion following the asset quality review, generating further pressures. The weak economy and the power sector problems during the 2014-2016 period also affected the banking sector adversely, leading to high non-performing loans. As a result, the financial sector came under serious stress after 2016. Heightened vulnerabilities in the sector resulted in the resolution of five indigenous banks in 2018 in addition to two banks that were closed down in 2017, with substantial fiscal costs to the government.  The assets and liabilities of the two banks closed down in 2017 were transferred to a state-owned Ghana Commercial Bank (GCB) while those of the five banks closed down in 2018 were transferred to a bridge bank, Consolidated Bank Ghana (CBG). The CBG was capitalized by the government in the amount of GHȻ450 million and the issuance of special resolution bonds of GHȻ7.6 billion in two tranches to cover the gap between the liabilities and the good assets assumed by the bank.

After spending some GH¢13 billion in cleaning up the banking sector, the IMF estimated that government will have to spend, at least, GH¢5.5 billion more of taxpayers money in 2019 to address the challenges in the micro-finance, savings and loans institutions, as well as the Heritage and Premium banks that were collapsed and added to the Consolidated Bank Ghana Ltd. The Bank of Ghana also introduced reform measures to address the remaining financial sector weaknesses. As a result, the overall financial system became adequately capitalized and well-positioned to support credit growth and investment going forward. The fiscal deficit, including the financial sector clean-up however reached 7.2% of GDP in 2018, compared to 3.8% without the financial sector clean-up. As the clean-up cost continues in 2019, the fiscal deficit (including the financial sector clean-up) is projected to reach 5.6% of GDP (IMF, 2019).

Ghana’s merchandise trade recorded strong performance after 2016, with the trade balance recording a surplus of US$1.2 billion in 2017 and US$1.8 billion in 2018, attributable to improvement in export receipts from cocoa and gold and stronger performance in export earnings from oil. The trade surplus declined to US$0.8 billion at end of March 2019, due to a drop in imports values, while export earnings remained at the same level as in 2018. With the trade balance turning into surpluses, the current account showed significant improvement, with the deficit declining from 2% of GDP in 2017 to 1.4% of GDP in September 2018 and gross international reserves reaching US$6.8 billion (3.9 months of imports). The current account continued its improvement, reaching a surplus of 0.3% of GDP for full year 2018. Although improvement of the current account continued into 2018, lower than expected foreign capital inflows reduced the capital and financial account net inflows, leading to a decline in both the gross and net international reserves in 2018, with the import coverage of the gross international reserves dropping to 2.6 months of import cover from 2.7 months in 2017. The current account recorded a surplus of 0.1% of GDP during the first half of 2019, supported by favorable trade conditions. This, together with significant inflows to the capital and financial accounts, resulted in an overall balance of payments surplus, equivalent to 1.9% of GDP. Together with the US$3 billion Eurobond issued in March 2019, Ghana’s international reserves significantly improved, with gross international reserves reaching US$8.6 billion, equivalent to 4.3 months of import cover at the end of June 2019.

Despite the relative exchange rate stability that prevailed after 2016, a few episodes of sharp surges in the exchange rate occurred in 2018 and persisted through the first quarter of 2019. The cedi remained stable in the first half of 2018 but came under considerable pressure in the second half, and in the first quarter of 2019. Between January and May 2018, the cedi depreciated cumulatively by 1.3%  but the pressure on the currency strengthened thereafter as external financing pressure increased and the US dollar strengthened, leading investors to rebalance their portfolios. At the end of 2018, the cedi had depreciated against the US dollar by 8.9% cumulatively, attributed mainly to a sudden sell-off of domestic government bonds held by foreign investors. The central bank intervened in 2018 to slowdown the depreciation, which resulted in the gross international reserves dropping by US$250 million. This policy action was discontinued in an effort to stop loss of reserves. As a result, the depreciation of the cedi intensified in the first quarter of 2019, reaching its lowest point in mid-March 2019 when year-to-date depreciation reached 11.1%. With the successful issuance of three Eurobonds totaling US$3.0 billion in March 2019, the increased foreign exchange reserves provided enough buffer to reverse the downward trend of the cedi depreciation. As a result, the cedi bounced back and by mid-April it had appreciated by 6% over the mid-March low-point (World Bank, 2019).

Outlook and Challenges

Ghana’s medium-term economic prospects looks positive, with economic growth expected to reach around 7% in 2019, to be driven mainly by the expected increase in oil production from the Jubilee and TEN fields. Aker Energy also announced in February this year that it has discovered 450-550 million barrels of oil in the Deep-water Tano Cape Three Points block, with potential recoverable reserves of nearly one billion barrels (EIU, 2019). Non-oil GDP is also expected to grow by 6.2% as the government’s “Planting for Food and Jobs Program” to boost agriculture production and promote agribusiness begin to take effect. The government has also indicated its intention to continue to prioritize industrialization in line with its election pledge to establish one factory in each of the country’s 254 districts by 2020. The 2020 Budget and Economic Policy of the government is therefore expected to focus on providing liquidity to boost industrialization in the country in order to sustain the economic transformation. External support from the US and China has been secured under the initiative to support small and medium-sized enterprises, but progress has been hampered in some regions by a lack of supporting infrastructure (especially electricity), poorly trained workforce and weaknesses in the business environment. The government has also indicated its intention to establish a refinery to support the downstream oil sector to improve value-addition and revenue generation.

While the past economic growth momentum helped place Ghana at the forefront of poverty reduction in Africa, the changing determinants of growth in recent years have reduced its impact on poverty. In addition, the oil and gas-driven growth has increased volatility in the economy. Inefficiencies in the public sector also had a negative impact on economic growth, private sector development and the labor market. Ghana therefore has to accelerate economic transformation if it is to achieve higher, sustainable and inclusive growth. The country needs to invest more to diversify the economy through agricultural transformation and industrialization, and increase productivity if it is to have a significant and sustained impact on poverty reduction. However, progress is likely to be delayed due to fiscal, infrastructure and local financing constraints.

In December 2018, Ghana introduced a fiscal responsibility law and also established a Fiscal Council. The law establishes a de facto 5% of GDP cap on fiscal deficits in any given year, although we expect the government to pursue an expansionary fiscal policy in the run-up to the 2020 general elections. The public sector wage bill, together with high interest payments and capital expenditure to help deliver the agriculture, industrialization and infrastructure promises will drive expenditure increases ahead of the 2020 elections. To this end, the fiscal deficit is likely to slip beyond the 5% cap in 2020. Financing constraints will necessitate a shift to proper fiscal consolidation beyond 2020 so the fiscal deficit is expected to be brought within the fiscal rule ceiling of 5% of GDP. However, the government’s efforts towards fiscal consolidation remain constrained by high public spending in the face of relatively weak domestic revenue mobilization, owing to high levels of tax exemptions and tax avoidance. Tax enforcement remains a big issue as many individuals and companies continue to benefit from various loopholes in the tax system. Maintaining a fiscal consolidation stance and staying on a sustainable path through the 2020 election cycle will be a big challenge, pointing to an urgent need to fundamentally improve revenue mobilization, through tax compliance and broadening of the tax base. An effective domestic resource mobilization strategy is urgently needed as reduction of expenditures, including public investment, in response to revenue underperformance may not be sustainable given the pressures to implement election promises (World Bank 2018).

Ghana’s energy sector is also in dire financial conditions that without a solution the sector will pose serious fiscal risks in the coming years. The sector is facing high costs from excess power capacity and natural gas supply, which are exacerbating the existing revenue gap. An Energy Sector Recovery Program approved by the Government in May 2019 provides an action plan to bring the sector back into improved financial situation in the coming years. However, the success of this plan in closing the revenue gaps of the energy sector enterprises cannot be guaranteed.

The biggest threat to Ghana’s economic recovery is that of a sharp tightening of global financial conditions, which would cause higher debt service and refinancing risks, as well as putting stress on vulnerable sovereign bond issuances and those with un-hedged dollar exposures. Reduced external financing would erode foreign exchange buffers and possibly put pressure on the exchange rate and inflation. Another threat whose likelihood of occurrence and expected impact are both rated high is fiscal loosening in the run-up to the 2020 elections. Political pressures to spend more and tax less are evident and Ghana has de facto entered pre-election campaign. This threat could result in further accumulation of payment arrears,  and thus increasing non-performing loans and straining public service provision. The resultant lack of confidence in the economy could trigger pressures on the exchange rate, affecting inflation, government balance sheet and debt sustainability (IMF, 2019). There is also the continuing weaknesses of the state-owned utility providers, which make the enterprises to incur significant losses which could add to government’s risk of debt distress and constrain growth. To mitigate these risks, an implementation of a credible medium term fiscal adjustment strategy that cuts spending and increases revenues, boosts investors’ confidence, builds forex buffers to enhance resilience, and adopts contingency measures in case financing conditions tighten further is needed. A credible strategy to tackle the energy sector inefficiencies and strengthens oversight of state-owned enterprises is also very necessary.

Ghana’s exposure to capital flight also remains high due to the large portion of public debt held by non-residents. Non-residents hold about half of Ghana’s domestic public debt in the local currency. A similar percentage of non-residents also hold foreign currency-denominated public debt. Against this background, there is a strong possibility of capital flight if these non-resident holders of the country’s debt find other attractive investments outside the country. Aside from the risk to capital flight, Ghana also appears vulnerable to investors’ changes of confidence and to fluctuations in the exchange rate. The country will have to face high financing costs on internal and external markets in the context of a strong US dollar and the rise in global bond yields (AFD, 2019). More effort is therefore critically needed to reduce the country’s public debt stock. Off-budget transactions - financial expenditures which are not factored into the budget - not only create fiscal rigidities but also difficulties in knowing the country’s true deficit and debt levels.

  • By Professor Newman Kwadwo Kusi

Executive Director, Institute for Fiscal Studies (IFS), Ghana