Ghana: Bracing For Contraction

With an election looming, Ghana’s economy grapples with a pandemic, falling oil revenues, a nagging fiscal deficit and the imperative to diversify.

This is an election year in Ghana: Citizens will go to the polls in December to elect a new president and members of Parliament. But this nation, one of Africa’s best economic performers, faces challenges extending beyond a political transition.

Ghana needs to find new sources of growth and economic diversification to sustain the momentum that has seen annual growth of over 6% for the past three years. The economy has already slowed, growing only 4.9% year-on-year in the first quarter, down from 7.9% in the last quarter of 2019. It was the slowest since the second quarter of 2016.

The Bank of Ghana has reduced its GDP forecast for the year to between 2% and 2.5%, down from the previously forecast 6.8%, owing to the Covid-19 pandemic. Others, such as the International Monetary Fund (IMF) and the World Bank, put growth for 2020 at 1.5%.

In an April 6 note, the IMF attributed the initial economic shock to “trade disruptions with China, a decline in commodity prices [including oil] and tightening financial conditions, even before the first confirmed case [of coronavirus infection] on March 12.”

“We did not plan for this unthinkable crisis, but we did prepare our economy well for tougher times,” President Nana Addo Akufo-Addo said on June 27, when the New Patriotic Party renominated him. Akufo-Addo will face John Mahama, candidate of the National Democratic Congress, for a third consecutive time.

After long years of exploration, Ghana joined the league of oil-producing countries about 10 years ago, boosting earnings and economic growth. Last year, it was one of the fastest-growing economies in the world, buoyed by double-digit growth in the petroleum sector. In 2018, oil receipts accounted for about 20% of Ghana’s foreign exchange earnings as the sector expanded 3.6%, and then a further 15.1% last year as oil prices rebounded from the 2014-2016 price crash. About $1 billion has flowed into the Ghana Petroleum Funds in the last three years, which Emeka Ucheaga, CEO and chief economist at equity research and investment advisory firm EUA Intelligence in Lagos, Nigeria, believes can support future growth of the economy.

All this now faces a stiff challenge following a further decline in global oil prices spurred by the Covid-19 disruptions. To e sure, Ghana has had to deal with similar troubles for some time; the long-term fall in oil prices beginning in 2014 has reduced its oil revenue by about half. But the worldwide drop in energy demand that followed the slowdown in economic activity in the first half of this year portends widening fiscal and current account deficits.

That’s a dramatic turnabout from less than a year ago. In a September 2019 note, the World Bank estimated Ghana’s current account surplus in the first half of 2019 to be 0.1% of GDP, “supported by favorable trade conditions of Ghana’s three main export commodities—oil, gold and cocoa.” That surplus, combined with significant inflows to the capital and financial accounts, resulted in an overall balance of payments surplus of nearly 2% of GDP. The country boosted its international reserves to more than $8.6 billion with the issuance of the $3 billion eurobond in March 2019.

Further Diversification Needed

Still, there were issues. In the first quarter of last year, the Ghanaian currency (the cedi) came under pressure due to high demand for foreign exchange. Although this receded, the cedi depreciated by 12.9% against the US dollar in the year ended December 2019, the Ministry of Finance noted at the end of July, and after a brief respite in the first quarter, again lost value in April, May and June.

“Ghana faces a stubborn fiscal deficit and the longer-term challenge of reducing the country’s reliance on a small number of exports,” says Murega Mungai, trading desk manager at AZA, Africa’s largest nonbank currency broker. “Fiscal and economic reforms should be top of the agenda in this election year in order to sustain the economy and minimize shocks that come with election periods.”

Ghana’s losses in oil revenues in the first quarter of this year were partially offset by a price surge in gold, however, says Ucheaga. As of August 7, 2020, gold rose to $12,079.90 an ounce, its highest level since 2011.

Ghana is among the few African countries that benefit from a diversified commodity export market. Before the advent of oil, Ghana’s traditional export basket was dominated by gold and cocoa, of which it is the world’s second-largest producer. Mungai believes further diversification would help the country achieve more-seamless revenue streams when the main sectors are hit. The government should focus its efforts on encouraging investors to put money into these other sectors through subsidies, rebates and other tools, he argues.

“There is an increasing need for diversity in the economy, as reliance on a few commodities leaves the country vulnerable to price declines as well as crop failure,” Mungai says. Deciding on what industry or industries Ghana should diversify into is a challenge, however. While gold may serve as a lifeline during the current crisis, given its attractiveness as a safe haven asset in times of financial stress, “there is a need for diversity of the economy from cocoa and gold.”

Ucheaga expects growth to come largely from agriculture, noting that the industrial sector will see declining growth. The services sector, he says, “will see the steepest decline in growth this year, as discretionary service offerings will see very little demand.”

Deficit Dilemmas

The government, however, must make sacrifices, Ucheaga says. As it did in 2019, he expects Ghana this year will reduce its investment in the Petroleum Holding Fund and increase its allocation to the Annual Budget Funding Amount, to make up for weaker government revenue.

“The savings lost today can always be recovered in the future, when oil prices fully recover and the budget deficit falls below 5% of GDP, which is the legal threshold in the country,” he adds.

“Lower oil revenue means weaker foreign exchange earnings, which will severely weaken the currency and cause the balance of payment surplus which Ghana enjoyed last year to come under threat,” says Ucheaga.

Higher government spending in response to the pandemic has “exacerbated the substantial drop in domestic revenue resulting from the pandemic and falling oil prices,” the Bank of Ghana said in its June Fiscal Developments Report. “Going forward, fiscal policy will largely depend on how these two reinforcing factors evolve. The expanding deficit and the primary deficit would exert pressure on the public debt stock, and alongside lower growth projections for 2020, may pose debt sustainability risks over the medium term.”

A wider deficit means the country would need to borrow more. The government has drawn up a 2020-2023 Medium-Term Debt Management Strategy (MTDS), aimed in part at achieving a proper mix of external and domestic resources. Its gross financing requirement in line with the MTDS for 2020 is estimated at 67.67 billion Ghanaian cedi ($11.73 billion). The net budget financing is 18.88 cedi, or 4.7% of GDP. This year, the government plans to issue or reopen medium- to long-term instruments—bonds maturing at two to 20 years (three-, five-, seven-, 10-, 15- and 20-year bonds)—and refinance some of its maturing treasury bills and bonds.

“The major problem of overborrowing from the domestic market is that this will crowd out the citizens from accessing funds from financial institutions, hence limiting capital to the public for more production, and stagnating the economy,” Mungai warns.

The government can absorb the debt, Ucheaga says, but removing subsidies could kick-start inflation. “Subsidies are best removed when the economy is stable,” he argues, “not when the economy is tanking. I believe the government will make the right decision to continue carrying the burden, which is both politically and economically right.”

One such area of subsidy is Akufo-Addo’s campaign promise made years ago to offer free high school education, later extended to include technical and vocational schools. While the program has started, full coverage and sustainability will be key.

“The government will have to keep carrying the subsidies, not just because it is an election year but because it is the most humane thing to do in this difficult year,” says Ucheaga.