Ghana Year in Review 2015

The economic outlook in Ghana is brightening, with GDP growth gaining momentum late in the year.

While weaker commodity prices and climbing inflation inhibited economic expansion for much of 2015, measures to stabilise prices and curb state spending appear to be having a moderating effect.

According to the latest data from the Ghana Statistical Service (GSS), issued at the end of September, GDP growth is now projected to reach 4.1% by the end of 2015, up from its July estimate of 3.5%.

Growth is expected to benefit from double-digit increases across several sectors. Industrial activity, for example, is expected to gain further momentum over the year, with the construction segment projected to post 30.6% year-on-year (y-o-y) growth, although the agricultural sector – a key export revenue earner – is poised to remain flat.

Lingering inflation

The revised figures are welcome news for West Africa’s second-largest economy, although they may also put increased pressure on inflation.

As activity has gathered pace, the Bank of Ghana (BoG) has sought to keep high inflation in check, raising its policy rate by 100 basis points (bps) to 26% in mid-November, the third such increase since the start of the year due to “imminent upside risks to the inflation outlook”.

As with many emerging markets, exogenous headwinds, such as the strengthening US dollar, have impacted Ghana’s growth trajectory. In particular, depreciation of the cedi – which had lost 12.6% of its value against the US dollar year-to-date as of end-November – has driven up the price of imports and raised prices throughout the economy.

The government has taken aggressive steps to mitigate price pressures over the past 12 months, albeit with mixed results. Despite a combined 500-bps interest rate hike over the year, inflation has remained well above the central bank’s target band of 8% plus or minus 2%. According to the GSS, headline y-o-y inflation stood at 17.4% in October, on par with levels recorded in August and September, though down marginally from the July peak of 17.9%.

Trade matters

While Ghana’s economy has been diversifying in recent years, 2015 saw weaker global demand for commodities, triggering a sharp decline in export earnings, with revenue down 23% y-o-y over the January-to-September period at $7.75bn. The dip in the price of gold, which accounts for roughly one-third of the country’s outbound trade, caused exports of the metal to fall by 21% y-o-y in terms of volume and 27.3% in terms of revenue.

Although lower hydrocarbons prices have helped to reduce import costs, which fell by 6.3% over the period, the trade deficit widened to $2.34bn on waning exports, up from $710.7m in the first nine months of 2014. By the end of the year, the deficit is expected to rise to $3.54bn, equivalent to 9.8% of GDP.

Restructuring under way

The external pressures have not affected Ghana’s long-term outlook for growth – with the country still benefitting from a wealth of natural resources, comparatively strong transport infrastructure and a robust financial sector – but it has underscored the government’s efforts to improve the public balance sheet.

Under a deal struck with the IMF in April, in return for a $918m extended credit facility, Ghana is looking to slow public spending and reduce the budget deficit, with some success.

Significant progress has been made in this direction, in part through curbing public sector wage increases, and the government is on track to reach its target fiscal deficit of 7.3% of GDP in 2015, down from 10.2% in 2014 and significantly lower than the high of 24.2% in 2008. The government will be looking to reduce this further, to 5.75%, in 2016.

In late 2015 ratings agency Moody’s issued a statement saying the government’s efforts to improve its fiscal position had exceeded expectations. Despite these achievements, the agency said risks to fiscal consolidation remain, citing both the high levels of investment expenditure needed to improve electricity generation capacity and the potential for increased spending ahead of the 2016 general elections.

Ghana’s fiscal position is likely to receive a further boost next year from new hydrocarbons production capacity coming on-line, with the offshore Tweneboa-Enyenra-Ntomme project due to begin producing by the third quarter of 2016. The site is expected to deliver around 60,000 barrels per day of oil and 60m standard cu feet of gas, according to media reports.

This new revenue stream could help the government reach its targeted growth rate of 5.4% next year. Looking ahead, inflation is expected to moderate to 10.1% by the end of 2016, suggesting a stronger outlook for the Ghanaian economy over the coming 12 months.