Ghana’s resilient economic growth depends on government’s oil and gas sector strategy

Ghana’s resilient economic growth depends on government’s oil and gas sector strategy

Ghana’s economy had an impressive growth rate of 8.5% percent in 2017, the highest recorded in five years.

This rapid growth she noted was due to the recovery of the industry sector growth (17.7%), accounting for about 25.6% of GDP.

The remarkable growth of the industry sector was boosted by an 80.4% surge in production of oil and gas, a sharp reversal from the negative growth of 16.9% in 2016, as the Sankofa oil and gas field began production in May 2017.

The mining and quarrying sub-sector also recorded impressive growth, recovering from the negative growth rate of 7.6% to register a growth of 52.3%. Currently, the economy is largely driven by the services sector, specifically the financial sector.

The contribution of the industry to GDP growth increased due to the spike in oil production. With the support of commodities such as cocoa, gold, and oil, it is expected that growth will remain resilient, hovering around 8% over the next 3 years.

This will be on the backdrop of favorable global commodity price outlook, and anticipated increases in oil production of about 45% in 2018. Subsequently, the economic growth rate is expected to normalize at 5%-6% over the next few years with the normalization of growth in oil production over the period.

The prospects for the economy look good with determined efforts of the government to consolidate its fiscal stance to boost confidence in the economy leading to stability in the macroeconomy.

The boost in confidence resulted in government raising $2 billion sovereign bonds on the international financial market at cheaper interest rates compared to previous sovereign bonds issued.

Fiscal consolidation by the government is at a cost of development of some sectors of the economy such as agriculture. It is the expectation that high growth will result in inflows of foreign investments in the economy, the government will eventually refocus and develop these sectors that are lagging.

Prospects for economic growth are further enhanced by improvement in the supply of electric power, continued fiscal consolidation and stability of the domestic currency.

However, the private sector continues to face challenges with access to credit though there has been an increase in the credit to the private sector, the sector continues to be crowded out of the financial market.

The government must make frantic efforts to improve access to credit by the private sector, which is a major driver of growth, as well as reduce the debt service costs which will potentially reduce the cost of loanable funds for the private sector and provide stability in prices.

The general price level and interest rates have been on a downward trend and this is expected to continue in the near future partly due to prudent management of the economy and monetary policy by the Bank of Ghana.

The policy rate of the central bank has fallen by 750 basis points over the year, and with inflation expectations also declining, the Bank of Ghana will further adjust downwards its policy rate in order to reduce inflation further.

The downward trend of inflation is also partly the result of stability in the local currency against all the major currencies. Interestingly, this indicates that the downtrend will continue for the rest of 2018 unless something dramatic occurs in the economy.

In the country’s quest to reduce inflation, care must be taken not to drive potential investors away as some level of inflation attract investments, thus we need to have a fine balance to energy the needed high growth the country seeks.

A major risk facing the country’s ability to lower inflation is rising fuel prices which is likely to pass through to food price, as transportation cost rises. Overall, the budget balance since 2012 has shown a downward trend.

From about 10 percent budget deficit in 2012, provisional and forecasted figures stand at about 4.5 percent in 2018 with a probable further decline to about 4 percent in 2022. The downward trend is partly attributed to the IMF agreement and government’s will to bring down fiscal deficit.

The projected downward trend in budget deficit figures puts Ghana’s economic environment on positive and favorable limelight. This is because, the budget deficit has a vicious cycle effect that translates into the unfavorable outlook of other macroeconomic indicators such as inflation, interest rate, and exchange rate among others.

Hence, with a declining budget deficit, it is hoped that this will trigger a favorable projection for interest rates, inflation, exchange rates, and other macroeconomic variables. Notwithstanding this positive outlook, there are concerns about the possibility that the declining budget deficit trends will reverse in 2020 due to election-driven expenditures.

This poses a greater risk for investors because the possible increase in the budget deficit will result in uncertainty about the future directions of the various macroeconomic indicators with the possibility of eroding the benefits of macroeconomic stability that the country has choked over the past periods.

among others. Hence, with a declining budget deficit, it is hoped that this will trigger a favorable projection for interest rates, inflation, exchange rates, and other macroeconomic variables.

Notwithstanding this positive outlook, there are concerns about the possibility that the declining budget deficit trends will reverse in 2020 due to election-driven expenditures.

This poses a greater risk for investors because the possible increase in the budget deficit will result in uncertainty about the future directions of the various macroeconomic indicators with the possibility of eroding the benefits of macroeconomic stability that the country has choked over the past periods.

among others. Hence, with a declining budget deficit, it is hoped that this will trigger a favorable projection for interest rates, inflation, exchange rates, and other macroeconomic variables.

Notwithstanding this positive outlook, there are concerns about the possibility that the declining budget deficit trends will reverse in 2020 due to election-driven expenditures.

This poses a greater risk for investors because the possible increase in the budget deficit will result in uncertainty about the future directions of the various macroeconomic indicators with the possibility of eroding the benefits of macroeconomic stability that the country has choked over the past periods.

The decline in the budget deficit is also reflecting on the decline of the overall debt to GDP of the country. From a peak level of close to about 80 percent in 2016, the debt to GDP ratio is projected to decline to about 60 percent in 2022, suggesting short-term debt stability.

The short term debt stability provides some breathing space to the country as there will be an opportunity to harness the influx of dollars from exports into the economy. The debt stability has also offered the government and the central bank the opportunity to extend debt maturity.

This, unfortunately, is just transferring risk from short term periods to the long term with the possibility of the risk reverting to the government, especially when the government still takes on state-owned enterprises (SOEs) debts when these SOEs face any financial trouble.

Given that SOEs still constitute a greater proportion of government activities in Ghana, this situation poses a potential risk to the country through SOEs' possible contribution to increasing government debt structure.

The fiscal stance of any country remains a major risk indicator for investors. As a result, the Ghanaian government has been implementing very hash fiscal consolidation amidst IMF conditionality.

Though the harsh fiscal consolidation has been detrimental to economic growth, the country continues to implement it due to the risk associated with unfavorable fiscal imbalances.

However, to reverse the detrimental impact of the harsh fiscal consolidation on economic growth, the country has also been pursuing policies that will change the country’s economic structure in order to engineer growth.

This notwithstanding, there is the risk of fear that the government will steer away from these policies, especially when the country is approaching the election year and also with the completion of the IMF program. This fear is however allayed because the IMF still remains in the country to provide advisory services.

Another risk indicator is the volatility of a country’s currency. Using an index to capture currency volatility, Ghana is identified to have had a significant stabilized currency market regardless of commodity prices going down.

What helped Ghana remain or been keeping this stable currency is because oil prices went down and inflation went up, that is, the two prices that influence currency volatility worked in some opposite directions to keep the currency relatively stable.

The IMF support coupled with a tight monetary policy helped reversed the deteriorating currency and made it gain some value causing the currency to be stable.

The stable currency is expected to continue for some time mainly due to the favorable trade balance the country is experiencing. The trade balance has been in surplus indicating the country’s exports have now exceeded imports.

The current account deficit is improving from a recorded deficit in 2014 of about 12 percent – 14 percent, declining closer to being balanced. This favorable balance is an important factor for currency stabilization. The biggest risk here is the volatility in commodity prices with the potential fiscal slippages.

The Ghanaian economy is currently resilient, and it is expected to remain strong, however, there are some risks to the stability and the high growth rate. The economy is still largely dependent on revenue from commodities such as gold, cocoa and oil and hence any global shock to these commodities will result in eroding all the successes achieved.

The government must as a matter of urgency diversify its sources of revenue or the country keep the faith that the prices of these commodities remain unchanged on the international market.

However, assessing the world prices of these commodities, it does not look like the prices are going to take a downward turn, as a matter of fact, the oil price has reached its highest level since 2014, with Brent Crude oil futures at $75.7 per barrel as at May 2018. Also, oil management is critical for the stability and growth of the economy.

If the development of the oil and gas sector breeds corruption as in many African countries, the hopes and aspirations of the country can’t be realized. It is therefore critical for the government to provide a well-defined strategy and appropriately implement it.

Another challenge to the economy is the upcoming general elections of 2020. Over the years, governments have overspent their budget and this has the potential of eroding all macroeconomic achievement over the years.

It must be indicated that the current government has the track record of not overspending during an election year, however, the 2020 election remains a risk to the Ghanaian economy.