Wednesday, Sep 30

Elections and the Economy in the Midst of a Pandemic

Since Ghana adopted democracy in 1992, elections have been a mainstay feature in the country and on December 7, 2020, the country will once again head to the polls to elect a new leader who will steer its affairs over the next four years.

At the beginning of the year, one thing that was certain was that the country will elect a new leader this year but one thing that nobody envisaged was the COVID-19 pandemic which has brought economic activities all around the world to a standstill and eroded all the macro-economic gains that Ghana has made in the last three years.

The Ghanaian economy is in dire straits with public debt ballooning to GH¢258.37 billion and the budget deficit expected to widen to 11.4 percent of GDP by the end of 2020.

GDP growth is expected to slow down to 0.9 percent in the face of increasing government expenditure and shortfall in revenues.

In the midst of these disturbing fiscal situations is the December 2020 elections which puts further pressure on the government to spend more to attract more voters in a bid to retain power.

There is no doubt that elections have over the years affected the Ghanaian economy as voters see election years as periods to demand their share of national resources, which puts pressure on the government to sacrifice all the macro-economic gains it has achieved over the period and overspend.


                         Dr. Ebo Turkson, an Economist and Senior Lecturer/ Coordinator of the Economic Policy Management Programme at                                                                                      the Department of Economics, University of Ghana

Speaking in an interview with Dr. Ebo Turkson, an Economist and Senior Lecturer/ Coordinator of the Economic Policy Management Programme at the Department of Economics, University of Ghana, he agreed that elections have in the past affected the Ghanaian economy, stating that


Almost every four years, we have a situation where we do very well with our macro indicators as we do a lot of fiscal tightening and begin to clear the mess of election year overspending but, we come back to the fourth year, overspend and do the same thing over again.

He said the issues that normally come up in the country’s elections are the political economy issues, where voters are looking for what could be done for them directly (or otherwise) to have an immediate real impact on their livelihoods in order to give an assessment of the performance the economy and for them to make their preference of who to vote for.


That has been the kind of economic policies that we have pursued in election years where we have overspent our budget with the exception of 2004 or thereabout. We do so well after an election year especially in the second and third years and in the fourth year we sacrifice all the gains because it’s an election year.

Concerns of huge budget deficits in election years

Election years in Ghana have always been characterized by huge budget deficits, with the exception of 2004 when the country had just gone into a HIPC programme.

In the year 2000, the country recorded a budget deficit of 8.5 percent against a target of 6.9 percent.


In the 2008 election year, the country recorded one of its worst budget deficits of 11.5 percent against a target of 4 percent. The situation was not different in 2012 when the country recorded a budget deficit of 12 percent against a target of 6.7 percent.


In the 2016 election year, not even being under an International Monetary Fund’s (IMF) Extended Credit Facility programme could stop the country from overspending. Under the watch of the Bretton Woods institution, the country still missed its budget deficit target of 5.7 percent by recording a deficit of 10.3 percent.

This year, the situation was expected to be different as the government has passed the Fiscal Responsibility Law which has set a cap on the budget deficit not exceeding 5 percent of GDP and failure to follow this law will lead to the Finance Minister being removed from office.

It was, therefore, expected that the country will stay within this fiscal deficit target for the first time in many years in an election, then COVID-19 struck with its harsh fiscal impact, leading to the suspension of the fiscal rules for this year.

Corroborating the statement, Dr. Ebo Turkson, said “over the last two years, we have stayed within this target and the expectation when the last budget was read in November 2019 was that we were going to record a deficit of 4.7 per cent in 2020, then COVID-19 hits and when a pandemic like this happens, in almost every economy in the world, fiscal rules no longer work because the government has to intervene.


|“So, what is happening this year in terms of the expectation for the elections is much more compounded by the fact that, a pandemic has occurred and people have lost jobs, firms/enterprises have had a reduction in the demand for what they produce and sell, industries are not producing at the maximum capacity and this has had some dire consequences on incomes, so it has taken a strain on government fiscal policy in two directions.


“One; on its expenditure in terms of having to come up with interventions that are supposed to help the average Ghanaian to be able to withstand the pandemic and also on the revenue side; given that economic activities have declined it means that governmen revenue will also decline.”


The implementation of the 2020 Budget from Jan-June, as presented in the mid-year budget shows a lower revenue performance against the programmed target and higher expenditures compared to target, significantly influenced by the impact of the COVID-19 pandemic.

Total Revenue and Grants amounted to GH¢22 billion falling short of target by 26.0 percent, while Total Expenditures including arrears clearance amounted to GH¢46.35 billion, exceeding the target by 11.5 percent.

These developments for the period resulted in an overall fiscal deficit of 6.3 percent of GDP compared to a programmed deficit target of 3.1 percent of GDP.

Total Expenditure (including clearance of arrears) for the year is now estimated at GH¢97.7 billion, about 13.7 percent higher than the 2020 Budget estimate of GH¢86.0 billion. Total Revenue and Grants have also been revised to GH¢53.7 billion in 2020, representing a 20 percent decrease over the original 2020 Budget target of GH¢67.1 billion.

Dr. Turkson said before the beginning of the year, the expectation was that for the first time, the Fiscal Responsibility Act was going to constrain government’s spending in an election year and all Ghanaians were waiting to see that until the pandemic struck.

Addressing huge budget deficits in election years

The major cause of huge budget deficits in election years has got to do with the pressure that electorates put on the government in such periods. Electorates expect to receive freebies from the government in election years, see their roads tared and see lots of development works going on in their communities.

Dr. Turkson, therefore noted that to solve this problem, the electorate must be made to understand that a government cannot use just four years to solve all of their problems.


The electorate must know that a party cannot use just four years to make any major transformation and that rather, we should look at the future impact of what is going on now. If the electorate will become a little bit sophisticated to know that, yes things are difficult now, but we are ready to sacrifice to maintain all the macro-economic gains in order to attract more investors to expand production by creating jobs, we will be able to solve our problems and surmount our development challenges.”


Temptation to overspend

In the midst of the pandemic, the finance minister, Hon. Ken Ofori Atta went to Parliament to ask the house to suspend the fiscal rules for the 2020 year, a submission which was subsequently approved by Parliament.

As a result of the revisions to the country’s total expenditure and revenue for the year 2020 due to the pandemic, the country’s fiscal deficit target is now projected to widen to 11.4 percent, which is way above the 5 percent target.

With this year being an election year, many are wondering if the government would be tempted to overspend and even exceed the already high 11.4 per cent fiscal deficit target now that fiscal rules have been suspended.

Reacting to this, Dr. Turkson exclaimed that “I will be very surprised if the government does that because the government is well aware of the implications of that.

"Once we get over this pandemic and elections, the economy must recover as soon as possible and the recovery of the economy will depend on the extent to which the government keeps to the programmed deficit target."

When we revised the target for this year, we are looking at a deficit target of 11.4 percent because of the pandemic which is very high and has its own repercussions.

So, the government shouldn’t use this as a blank cheque to overspend. I will be very surprised if they don’t keep within the estimated 11.4 percent. We will need about two years or more to recover from the disruption caused by the pandemic. So, if we keep within our target then our recovery will be much faster than we even expect.”


Government’s relief programmes– Right or Wrong?

In the wake of the COVID-19 pandemic, we have seen the government roll out a lot of relief programmes to citizens, ranging from free water, subsidized electricity, free meals for students, and financial support to small and medium enterprises.

These decisions have left many scratching their heads, considering the difficult fiscal position and rising debt situation the country finds itself in. They argue that this was not the best time for the government to be giving out freebies.

Dr. Turkson, however, disagrees with this school of thought as he believes there were lots of people who have been severely affected by the pandemic which requires that the government steps in to support them.

For instance, if you have two parents who work in private schools and have been laid off because these schools have been closed due to the pandemic, you begin to wonder how they are going to feed their family. Those who work in the hospitality industry have been badly hit and I will support any government intervention that will try to help such disadvantaged households and firms to cope with the pandemic.”

With the country’s debt situation, he said, “this was not the time to talk about debt because in the face of a pandemic, you should even be thankful you have access to money we can borrow to close the financing gap.


“There is no point in keeping our debt low when people are struggling to make ends meet in such a difficult time; so I’m all for it. With our rising debt, what we need to do as a country is to sit down and clearly ask ourselves that in every cedi that we borrow to expend, are we being very efficient and forward looking with that expenditure and that is what is critical. Once the economy’s growth is shrinking, expenditure is increasing and revenues are declining even with the same amount of debt, the debt-to-GDP ratio will increase, but that should not be too much of a concern for now.


If you take the league table of countries that have the highest debt, Ghana is nowhere near the top thirty. A country like Japan has more debt than many countries but it is not poor so we should be asking: what went into the debt? Was it incurred to expand the productive base of the economy, was it incurred to contain an unforeseen occurrence like COVID-19?”


Politics and the economy– mutually unexclusive

While economics is concerned with studying efficient utilization of scarce resources and how policies can be used to influence the economy at both the micro and more often at the macro level, politics is the theory and practice of influencing people through the exercise of power. These two areas may look different on paper but there is a strong link between the two.

The Economics lecturer pointed out that there was a very close relationship between politics and economics, stating that “economist seek to inform policy on all the right things we have to do in the management of the economy but the politician will call the final shot.


“We have something we call the political economy of economic policy. The politician knows very well what the right policies are but the choice of these policies are very difficult to make because of its political cost. So, if you have a politician who is mindful of winning an election and at the same time also doing the right thing for the economy to grow, there is a balance but in our part of the world more than often the politics outweighs the economics.”


Thus, politicians make decisions that will help them stay in government, an action which comes at a cost to the well-being of the economy.


“Ideally, what should have happened is having a politician that is pursuing sound policies that the average Ghanaian will be happy about but in the dispensation where majority of the people cannot comprehend issues about what is good for the economy, they normally begin to ask questions like the economy is doing well but I am not feeling it in my pocket. So, people will prefer freebies and prefer seeing their roads tared even though it might not be necessary at that moment.


He further revealed that people would like to be given money as freebies during election periods, forgetting that the money the politician is giving out will feed into government expenditure (both directly and indirectly) which at the end of the year may cause a huge fiscal deficit which will lead to tightening later on and that is when they (the electorate) will feel the pinch.  "

“In Africa, it is difficult for the electorate to comprehend the impact of sound economic policies. So, you sometimes cannot blame the politician because to them the objective function is to win the election and that is what they will do (that is, overspend to satisfy the electorate to win their votes).”


Parallel Party Policies?


 The two main political parties in the country have different ideologies. While the NPP believes in capitalism which involves putting the private sector at the forefront, the NDC leans more to socialist development.

The economist, however, believes that although the two parties may have different ideologies, the policies they both pursue are not different from each other.


“I used to think some couple of years back that these two parties had different ideologies but I think that is not the case now. Their foundations could be based on different ideologies but I don’t think they still pursue those ideologies as at now. When you see them arguing over some policies, that this is my policy, then you tend to believe that they do not practice their ideologies as that school of thought would normally prescribe.


“They seem to be arguing over the same type of policies which shouldn’t be the case. The focus of the two parties has now been on private sector led social development and it seems that is the focus these days. Following from the economic reforms in the early 1980s we tended to call for minimal intervention of government, but now that state-led intervention of development is coming up lately (because of what happened in East Asia where they used the state led development paradigm to quickly develop their countries), our two major parties have shifted their focus.”


Development Plan disregarded?

A bane of the country’s development process since independence has been the practice where one party starts something and it’s voted out of power, another party comes in, abandons it and starts its own plan. Although, the 40-years development strategy was developed and commissioned to solve this menace, it has been difficult in getting the two main political parties to commit to this plan.

The Coordinator of the Economic Policy Management Programme at the Department of Economics, University of Ghana, believes the situation has even improved now, compared to historical antecedents.

“There were instances in the past where an elected government will totally cancel the intervention started by its predecessor and start something totally different. At times the initiatives are even the same but they will change the name.”

He said this was due to the fact that the country’s development path was driven by party manifestoes rather than a national development plan.


I think the parties have all lost it because it is the national development plan that should inform their manifestoes. If Ghana has a 40-years development plan, what are the immediate objectives of the plan? If that plan is there, what these two parties are supposed to tell us is which alternative they will use to deliver that objective, but that has not been the case.


“Over the years, one of the best policies that I have heard been pursued by a government of this country is the one district one factory (1D1F) programme. It is at the centre of the structural bottlenecks our economy faces and the fact that Ghana has not been able to develop to a level that we sort to do after independence is because of our failure to get this very important intervention right. The 1D1F is similar to the Import Substitution Industrialization plan that was pursued by Dr. Kwame Nkrumah, the only difference is that the 1D1F is private sector led while Nkrumah’s ISI was public sector led.


If pursued, the 1D1F policy among other things is expected to reduce the country’s dependence on imported goods which is one of the reasons why the local currency has not stabilized over a long period of time. So, if we are able to produce the import substitutes of equal or even higher quality, then there will be no need to import lots of things.”


Under the 1D1F policy, the country has seen one of the biggest car manufacturing companies in the world, VW, set up its assembling plant here in Ghana to sell to the Ghanaian market and also export to other African countries.

Dr. Turkson believes these were some of the interventions the country needs to speed up its development but unfortunately the policy that gave birth to this milestone was embedded in a party manifesto rather than a national development plan, which presents the risk of it being canceled when another government is voted into power.

“The fact that VW has come to Ghana and it’s producing here reduces the amount of forex that we send outside to import cars and we are going to export to other countries as well which will be export revenue for Ghana which will improve our trade balance and this is exactly what we need to stabilize our domestic currency and be able to maintain the macro stability to attract foreign investors to create jobs. This is the way the eastern Asian tigers went and if we get it right then we will be making remarkable progress but the unfortunate thing is, all of this is coming from a party manifesto."

If this was a national development plan, supposing there is a change in government, you expect the next government to continue with it. The planting for food and jobs is also another good policy which has led to growth in the agricultural sector but you find all of these policies embedded in party manifestoes and that is the bane of our politics and why Ghana has not been able to move forward. We should see institutions and policies as belonging to the country and not a party.”

Political stability yielded any dividend in economic development?

Political stability is considered as one of the major factors necessary to sustain economic growth. Over the years Ghana’s political stability has been one of the main attraction for Foreign Direct Investment into the country, with the World Bank and other notable institutions all indicating that Ghana remains one of the most attractive investment destinations in Africa due to its political stability.

A recent report by the Eurozone indicated that Ghana still remained a safe bet for investment despite the fact that elections were coming up in a few months’ time.

But, although the country has enjoyed political stability over a long period of time, it remains unknown how the country has been able to leverage this to quicken its economic development.

Commenting on this, Dr. Turkson said  “we have been able to change from one government to the other without any disruptions and that is good for us. This does not only bring in investment but also allows for the government and other economic actors to plan. Disruptions in politics can bring a huge cost especially when it leads to civil strife or unrest or wars.”


“Our political stability is putting us out there as the best showcase in Africa and as we go to the polls in December, I hope we will maintain this enviable status because this is what investors want to see and if we are able to continue this political stability over a long period of time, we will attract all the global giants into this country and this would ensure that our educated labour force will get jobs to do.”

He further said, although the country has not been able to leverage on this too much to enhance its economic development, it was however working for the country in terms of attracting investors, something which should excite the country.

Post-election and post-COVID Recovery strategies

In the midst of the pandemic, one thing that will be key is how various government’s roll out policies and measures to quicken their economic recoveries post the pandemic and Ghana is no exception.

With elections coming up soon too and the pandemic showing no signs of ending soon, Dr. Ebo Turkson said any party that would emerge victorious post-election and post-COVID should focus on three main things.


“Domestic resource mobilization is quiet key and we should make sure that we are able to equip our domestic resource mobilization agencies like the Ghana Revenue Authority (GRA) to be able to widen our tax net and also ensure we are able to increase tax revenue by being efficient. We should also focus on improving the capacity of the domestic resources mobilization agencies (both human resource and logistics) for them to be efficient at collecting our taxes and that is why I am happy that a whole lot of digitization is going on to ‘rope’ in as many people as possible into the tax net.

"We also need to accelerate our infrastructural development which is also key. If we are going to reduce the cost of doing business in the country and be an attractive investment destination, then we need to invest in infrastructure. We should also ensure that whatever policy that we are pursuing currently to reduce our dependence on imports and at the same time promote exports should continue, regardless of who wins the election.”

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.

WhatsApp Image 2020 07 06 at 3.55.22 PMDr. John Kwakye, Director of Research at the Institute of Economic Affairs (IEA)

Dr. Kwakye confirmed in his narration that pre-COVID, the Ghanaian 

“economy was doing quite well, with GDP growthrojected 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

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,” - Dr. Kwakye

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 IEADr. 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