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