How reforms and the upcoming elections are impacting business sentiment in Ghana

Ghana has been the subject of much attention in 2019. In April the country successfully concluded a three-year credit deal with the IMF that aims to improve fiscal management and strengthen public finances. That same month saw the establishment of Google’s first Africa Artificial Intelligence lab in Ghana, and in July the capital city Accra was chosen to host the Africa Continental Free Trade Area (AfCFTA) secretariat.

Ghana’s economic performance has also come under the spotlight of international development and finance institutions, with the IMF identifying it as the world’s fastest-growing economy in April 2019. The institution has since revised its 2019 growth projection of 8.8% to 7.5% and gave the country a clean bill of health for its economic performance.

Financial services sector is the primary target for reforms

Much of these achievements are owed to efforts by the Ghanaian government to restore macroeconomic stability in recent years, with rigorous fiscal and financial reforms at the heart of these undertakings. Perhaps the most compelling adjustment is the clean-up under way since 2017 to strengthen the banking sector and rid it of undercapitalised entities and institutions engaged in excessive risk-taking. To date, the Bank of Ghana is said to have revoked the licences of some 420 institutions, including banks, microfinance corporations, savings and loans companies, and other non-bank institutions.

While the underlying goal was to restore confidence in the banking and financial services sector, the business community appears ambivalent, with 44% of the Ghana CEO Survey respondents characterising local sentiment surrounding the reform agenda as positive or very positive, and 43% characterising it as negative or very negative.

While some see the reform agenda as a much-needed measure to bring about long-term benefits, the other half see the challenges it could lead to in the short to medium term. We could also consider the impact it is likely to have on the state budget and, subsequently, the broader economy: the clean-up is estimated to have cost the government GHS12bn ($2.2bn) and, according to the IMF, another GHS4bn ($729m) will be needed to stabilise the sector. These measures will undoubtedly affect the availability of credit – particularly for small and medium-sized enterprises – considering that many of the institutions closed by the central bank were microfinance companies (347) and microcredit firms (39).

The financial clean-up forms part of a broader reform agenda that also includes reducing the budget deficit and bringing national debt under control. To that end, the government introduced a law in 2017 to ensure that the budget deficit is maintained below 5% of GDP, and embarked on an extensive fiscal reform agenda to decrease the debt burden. In 2015 Ghana’s debt-to-GDP ratio exceeded 70% – its highest level since the early 2000s. By July 2019 this had been brought down to less than 60%, according to a statement by Ken Ofori-Atta, the minister of finance.

These actions are expected to be further reinforced by the Fiscal Responsibility Act, which was introduced in early 2019 to monitor the performance of the government’s budget. The legislation also saw the establishment of sub-Saharan Africa’s first Fiscal Council, as well as the Financial Stability Council.

Holistic view for growth fuels optimism

In addition to monetary and fiscal restructuring, Ghana has introduced a number of targeted programmes to boost the performance of key sectors and promote economic diversification. These include its One District, One Factory initiative, which was launched in 2018 to build up further industrial capacity; the Planting for Food and Jobs programme, to ensure food security and boost agricultural value added; and its more recent “Year of Return” campaign to attract tourists and descendants of the African diaspora.

As efforts to bolster the Ghanaian economy continue to be carried out, the business community remains largely optimistic about near-term prospects. In Oxford Business Group’s third Ghana CEO Survey, 71% of participants have positive or very positive expectations of local business conditions in the coming 12 months, while 68% gauge the level of transparency for conducting business in Ghana relative to the region as high or very high (compared to 42% in Côte d’Ivoire and 29% in Nigeria).

However, when viewed against previous years’ results, our findings point to increased cautiousness among CEOs; 14% say their expectations of local business conditions are negative or very negative, up from 5% in 2018 and 4% in 2017. Furthermore, the number of respondents who are unlikely or very unlikely to make a significant capital investment in the coming 12 months increased from 14% in 2017 and 2018, to 24% in 2019. This shift is largely attributed to increased vigilance in light of the upcoming 2020 elections and the anticipated slowdown in business.

Continental trade deal to support diversification

The other challenge ahead is the need to sustain the diversification momentum to steer economic growth away from hydrocarbons and the destabilising effects brought by oil price fluctuations. As with our previous survey findings, volatility in commodity prices continues to be the main preoccupation of business leaders, with 45% viewing it as the top external event that could impact the economy in the short to medium term, followed by instability in neighbouring countries (13%), and weak infrastructure and transport networks (11%).

The latter will be particularly important in successfully seeing through the AfCFTA, which is the world’s largest trade area and is expected to boost intra-regional trade levels by 50% over five years. While 73% of participants have positive or very positive feelings about the impact of the AfCFTA on regional trade levels, most pointed to the need to address the many pressing obstacles to its implementation, among them infrastructure, which requires up to $170bn in investment annually across the continent, according to the African Development Bank.

In that regard, Ghana has made significant headway, particularly in terms of port development. Its main ports, Tema and Takoradi, have both received significant upgrades and extensions over the past few years and are expected to benefit from the AfCFTA. What is more, the country’s paperless port plan was introduced in 2017 and aims at automating key port processes, reducing clearance time and improving transparency.

The other challenge identified in the Ghana CEO Survey was access to credit, which 78% of respondents deem difficult or very difficult. While the ongoing financial reform could exacerbate this issue in the immediate term, Ghana’s current digitalisation drive brings with it the hope of effectively addressing the situation in the long run. The launch of mobile money interoperability last year, along with the ambition to introduce paperless and cashless government services in 2020, could go a long way in improving accountability and transparency.