Ghana: Steadying the ship

A smooth transition from former President John Atta Mills, who unexpectedly passed away last month, to new President John Dramani Mahama will help reassure investors about the continued steady performance of the country’s economy, but mild pressure from short-term risks may necessitate some adept changes to monetary and fiscal policy.

President Mahama said on August 9 that his administration would look to strengthen partnerships with the private sector and create an environment in which enterprise and job creation could flourish. Mahama took office after the death of President Mills, who was seen by some as an architect of Ghana’s recent growth, and Mahama, previously Mills’ vice-president, looks set to continue his predecessor’s policies.

Ghana’s economy has been something of a success story in recent years, with growth stimulated by the rise of the oil industry . The country had the fastest turnaround in history from the discovery of oil to its extraction, from 2007 to 2010, and the exploitation of oil reserves and associated gas has created a stir internationally. The influx of investment has pushed growth to double-digit levels, reaching 13.5% in 2011, according to the IMF. Overall, Ghana finds itself in a fortunate position, given the increasing levels of international economic uncertainty.

According to Naoyuki Shinohara, the IMF’s deputy managing director and acting chair, “Ghana’s economic performance was strong in 2011 and medium-term growth prospects remain favourable. Short-term risks to macroeconomic stability, however, have risen”.

Perhaps foremost among these is the decline in Ghana’s currency, the cedi. The cedi fell approximately 30% against the US dollar in the first seven months of 2012. A number of factors are believed to have caused the striking depreciation, particularly the rapid increase of imports resulting from the country’s surging economic growth, which has led to importers buying and storing cash dollars to fund purchases from abroad.

This has helped fuel a negative multiplier effect: as long as the cedi is seen as unstable, traders will continue to use dollars. Kwabena Duffuor, the minister of finance and economic planning, pointed out that manipulations by exchange bureaus are also to blame, as they are disrupting the central bank’s efforts to stabilise the currency. The fall in the cedi has also stoked inflation, which is currently running at 19.1%, largely due to the rising costs of imports. To some extent, Ghana is a victim of its own success, as soaring prices are the result of investment flooding into the country.

However, moves by Mahama’s administration have indicated a willingness to deal with the country’s rising prices. “The authorities’ 2012 economic programme focuses appropriately on measures to preserve hard-won stabilisation gains,” said Shinohara.

The shift towards a tighter fiscal policy should be cushioned by the recent approval of $179m in IMF funding to Ghana. This was the final tranche of a $581m package agreed in July 2009. The cash is available under the IMF’s external credit facility mechanism, intended to support “economic programmes aimed at moving toward a stable and sustainable macroeconomic position, consistent with strong and durable poverty reduction and growth”.

If the IMF highlights the related goals of cooling inflation and tightening fiscal policy as priorities for the government, businesspeople would also like to see further improvements to the investment environment. The nurturing of local business could ease some of the supply bottlenecks in the economy currently contributing to inflation, while at the same time providing jobs for Ghana’s growing population.

A further sign of encouragement is the fact that Ghana does not lack in skilled and willing workers and entrepreneurs. And while attention has rightly focused on the hydrocarbons industry of late, other sectors are also of interest. Several business leaders have told OBG that increasing the access to financing for Ghanaian companies (particularly small and medium-sized enterprises) would help them to grow, thus allowing the grassroots economy to flourish. It would also open more opportunities for foreign investment in the country.

By almost any standards, Ghana has had a great deal of economic success in recent years. The cedi’s decline and rising inflation are clear symptoms of this success. The new president and his team have shown that they are aware of the risks that these symptoms entail and are prepared to tackle them, keeping firmly in mind that macroeconomic stability can help underpin long-term growth.