Returning Ghana to growth through strong fundamentals

For several years Ghana was one of the leading lights of the “Africa rising” narrative, with double-digit growth rates that ranked at one point among the highest in the world. The discovery of oil, bumper crops of cocoa and an influx of new investment sustained a robust expansion of GDP.

However, the country’s economy has taken a stumble. While its fundamentals – including a developed private sector, transparent regulatory frameworks and a wealth of natural resources – remain attractive, short-term pressures have led to a downturn. GDP growth has fallen from 14% in 2011 to 4% in 2014 and 3.9% in 2015. External factors have contributed, including weakness in key exports like crude oil, gold and cocoa. A depreciating currency, high interest rates, elevated inflation and a ballooning fiscal deficit over the period have exacerbated the declines.

To address the structural problems in the economy and remove the most pressing obstacles to growth, in April 2015 Ghana and the IMF embarked on a three-year, $918m extended credit facility and fiscal consolidation programme aimed at restoring debt sustainability and macroeconomic stability. The programme has already brought measurable macroeconomic gains, but there is much to be done still. The exchange rate has levelled off, but high interest rates and mounting sovereign debt remain. Nevertheless, foreign investment is still pouring into certain sectors as investors recognise Ghana’s long-term economic potential and history of political stability.

Growth

According to government data, in 2015 the services sector led the charge with growth of 5.7%. It also expanded its position in the economy, accounting for 54.4% of GDP, up from 51.9% in 2014. The fastest-growing subsectors in services were health and social work, with growth of 15.5%, and information and communication, at 13.4%.

The other two primary sectors of the economy, agriculture and industry, also gained ground in 2015, expanding by 2.4% and 1.2%, respectively. In agriculture, 2015 estimates were well down on the 4.6% growth the sector saw in 2014. This reduced agriculture’s share of GDP from 21.5% to 20.3%. While growth in the industrial sector lagged behind that of agriculture, its share of the economy is greater, representing 26.6% of GDP in 2015. The leading subsector in industry was water and sewage, which grew by 21.5%. Non-oil GDP also expanded slightly in 2015, up 4.1%, compared to 3.9% in 2014. The non-oil portion of industrial GDP rebounded from a 0.3% decline in 2014 to 1.3% growth in 2015.

Balance Of Trade

Ghana is heavily reliant on the import of finished goods, and its exports primarily comprise raw goods, such as crude oil, gold and cocoa beans. Continued weaknesses in commodity markets have resulted in a widening trade deficit.

Ghana’s trade balance deteriorated considerably in 2015, chiefly due to weak oil and gold prices on international markets. The trade deficit widened from $1.38bn in 2014 to $3.93bn in 2015, while the value of merchandise exports fell by 21.6%. Although 2015 saw small increases in the value of timber and cocoa exports, these were not enough to counter the steep declines witnessed in the gold and oil markets.

Imports also eased, falling by 7.8% in 2015. Reduced oil imports accounted for much of this drop. Non-oil imports, however, rose by 4.7% in 2015, supported by growth in imports across all sectors of the economy, except consumption goods. Gold remained Ghana’s largest export, accounting for 31% of the total $10.36bn exported in 2015. Cocoa was next, representing 26.7% of exports. Crude oil, which was the second-largest export in 2014, accounted for 18.6% of total exports in 2015. The value of crude oil exports fell by 48%, from $3.73bn to $1.93bn.

During the first quarter of 2016 export receipts fell by 10.4% year-on-year, while imports grew by 0.4% over the same period. However, the overall current account deficit improved to 1.3% of GDP, due mainly to reduced outflows of services and increased inflows of private transfers. In the capital and financial account, higher foreign direct investment (FDI) inflows and lower short-term capital outflows led to a modest improvement. In total, the balance of payments improved, with the deficit during the first quarter of 2016 falling to $449m, from $849m one year prior. In 2014, the latest year for which statistics were available at time of press, Switzerland was the largest recipient of Ghana’s exports, importing 17%. Other top destinations were France (9.2%), India (7.7%), the Netherlands (7.6%), South Africa (6.4%) and Italy (6.4%). Chinese goods were the most imported, with 28% of the total in 2014. Other major originators of Ghanaian imports include the Netherlands (11%), the US (7.4%), Nigeria (6.4%) and India (4.5%).

FDI

The Bank of Ghana (BoG) reported that FDI fell by 11.5% in 2015 to $2.97bn, following a 4.1% rise in 2014. According to the Ghana Investment Promotion Centre, China is the largest source of FDI based on the number of registered projects in Ghana. The services sector – which includes mining, oil and gas, ICT and financial services – was the primary recipient of FDI in 2016, registering $1.3bn in new investments as of the third quarter. Manufacturing and construction were also major beneficiaries, attracting $327.8m and $231.7m, respectively, over the same period.

Employment

According to the International Labour Organisation, Ghana’s unemployment rate in 2013, the latest year for which data was available, was 5% for the entire labour force and 11% for workers of 15-24 years of age. The government does not publish regular employment data. Newman Kusi, executive director of the Institute for Fiscal Studies, told OBG, “I’m an economist in this country and even I don’t know the unemployment rate. But in Accra I see many young people selling water and chewing gum. It is a classic case of underemployment.”

While employment figures likely dipped in the years after 2013 due to the economic downturn, Ghana’s level of employment is nonetheless strong relative to the sub-region. As with most West African economies, much of the workforce is employed in the informal sector, which is often characterised by wage insecurity, a lack of opportunities for advancement and minimal government protections.

As a result, the Ministry of Finance and Economic Planning exempted education and health from the public sector hiring freeze that is a component of the fiscal consolidation programme, and it has begun encouraging vocational and technical training in key sectors, such as manufacturing and agriculture.

Inflation

The BoG sets its inflation target at 8% with a band of +/- 2%. Headline inflation increased steadily each quarter from 16.6% in March 2015 to a peak of 19.2% in March 2016. It fell to 16.7% in July 2016 before climbing to 16.9% in August and 17.2% in September. In October 2016 inflation then fell to 15.8%, according to the Ghana Statistical Service.

The central bank expects to reach its inflation target by mid-2017, barring unforeseen circumstances or major external shocks. A high monetary policy rate (MPR), continued currency stability, lower government spending and more reliable electricity provision are all expected to contribute to gradual easing in the consumer price index (CPI).

Upside risks to this forecast include the volatile components of food and energy. “We expect food prices to be the factor that is the problem within the inflation basket,” Kwame Baah-Nuakoh, senior vice-president for marketing, research and corporate affairs at The Royal Bank, told OBG. “This is the thing that the IMF and the World Bank cannot control. They can control fiscal deficit-induced inflation, but what happens if you have a poor harvest?”

Food prices have been rising since late 2014, and if the trend continues it could add resistance to easing inflation. Likewise, higher global oil prices could translate into higher petrol and energy prices for consumers. However, with Ghana’s oil exports set to rise in 2016 and into 2017, higher oil prices could support the cedi, which could lower inflation in other areas. While inflation remains far above the target set by the central bank, Abdul-Nashiru Issahaku, governor of the BoG, is confident that the CPI will resume its downward trajectory. “Inflation is currently out of the target band, but the bank is optimistic that the economy is on the edge of a prolonged disinflationary process,” he told OBG. “The bank has pursued tight monetary policy consistent with tight fiscal policy to rein in inflation and inflation expectations.”

Currency

A number of major currencies on the continent have been hit hard over the past year for a variety of reasons, with the rand, the naira, the Egyptian pound and the shilling all declining against major currencies. While the cedi was one of the worst-performing currencies in Africa in 2015, falling by 19.6% against the US dollar, it levelled off in the fourth quarter of 2015 and remained stable through the second quarter of 2016, as the economy stabilised and the accumulation of public debt plateaued. Although the falling local currency somewhat offset the negative impact of lower prices in its dollar-denominated exports, depreciation nevertheless took a toll on the import-dependent economy.

The cedi is free-floating, so there have been few major currency interventions by the BoG. This has led to a stable international reserve position and an average of 3.2 months of import cover, which is considered adequate by international standards.

Budget

Ghana has long struggled with fiscal deficits, although in recent years the shortfalls have begun to shrink. Alhassan Iddrisu, director and chief economics officer at the Ministry of Finance and Economic Planning, told OBG, “Our aim is to reduce the fiscal deficit from double digits in 2012 to very low single digits as part of our fiscal consolation efforts. In 2012 we registered a deficit of around 11.5% of GDP. We are implementing fiscal consolidation measures to bring the deficit down to levels within the range of 2-3% by 2019.” By the end of 2015, the year in which the IMF programme began, the deficit had fallen to 6.7% of GDP, below the government’s 7% target for the year. The government projects a 5.75% deficit for 2016. Like many frontier and emerging markets, Ghana has a history of expanding spending ahead of presidential elections, but in late 2016, shortly before the election, there were signs that it had successfully restrained this practice. While the government will need to make some difficult choices to meet its budget target by 2018, the government’s ability to achieve such dramatic deficit reductions in the face of declining commodity prices and the downturn in the global economy is encouraging.

Revenue

To help further bridge the gap, the government has instituted a number of new taxes. Parliament and the Ministry of Finance and Economic Planning have slowly instituted a new tax regime, following an overhaul of the Ghana Revenue Authority in 2009, which has led to an increase in the tax revenue-to-GDP ratio from approximately 12% in 2012 to 16.5% in 2015. The remaining challenge is extending taxation to the informal sector, which employs 41.9% of all labour and 77.7% of the labour force outside of agriculture. However, tax administration in Ghana, as in many other African markets, relies heavily on the small formal sector to support the broader economy. “The formal sector remains overtaxed because it is easier for the government to mobilise revenue from it,” John Defor, senior policy officer of the Association of Ghana Industries, told OBG (see analysis).

Public Debt

However, the steady increase in revenues is currently insufficient to cover the government’s annual outlays, which means it must turn to debt markets to source the remainder. This, in turn, has led to a minor rise in debt. “There are a number of financial management bills in Parliament now that would help restrain future governments from piling on debt. We are tightening things up so hopefully we won’t have this situation again,” Johnson Asiama, second deputy governor of the BoG, told OBG. “The level of public debt is really a concern for us.” Public debt as a percentage of GDP edged slightly higher in 2015, ending the year at 71.6% of GDP, compared to 70.2% of GDP in 2014. Debt levels are expected to remain steady through much of 2016 and then gradually decline as fiscal consolidation takes hold.

The proportion of the debt that was sourced domestically declined modestly to 40% in 2015 from 44% at the end of 2014. Continued movement in this direction could help to ease the upward pressure on domestic interest rates. The government has also issued a series of eurobonds with the purpose of refinancing existing debt and lengthening average maturity. It issued a $1bn, 12-year eurobond in 2014 and $1bn, 15-year eurobond in 2015, which was oversubscribed by more than 100%. The government is considering another similarly sized eurobond issue in 2016. A portion of the proceeds of the recent issues will go towards servicing its 2007 eurobond, which has a $750m bullet payment due in September 2017. More recent eurobonds have been issued with payment tranches rather than one-time payments upon full maturity of the bond. This practice sidesteps the fiscal burden often presented by bullet payments.

Central Bank Financing

As a condition of the IMF programme, the government ended its practice of obtaining deficit financing from the BoG. Previously, the central bank was permitted to fund fiscal deficits of up to 10% of government revenues. This practice of printing money to cover government shortfalls undermined the BoG’s inflation-targeting mandate and led Fitch Ratings to place a negative outlook on Ghana’s “B” rating in 2014.

In January 2016 the BoG began implementing its zero financing policy, and it has signed a memorandum of understanding to that effect with the Ministry of Finance and Economic Planning. To solidify that agreement and strengthen the BoG’s independence, its governor is seeking legislation prohibiting central bank financing of fiscal deficits. Based on international practices, ending such deficit financing is in Ghana’s long-term interest, but it remains to be seen whether the immediate impact of the resultant debt accumulation will outweigh the long-term benefits.

Interest Rates

The major role that the government has historically played in domestic financing has also had knock-on effects for broader headline growth. The subsequent rise in interest rates – in part a reflection of the high level of government borrowing on the local market – is one of the primary obstacles to economic growth in Ghana (see Banking chapter). Rising rates are not only a result of excessive domestic borrowing by the government: high inflation and a depreciating currency also play a part.

The benchmark MPR set by the BoG has risen to 25.5%, from a low of 12.5% in 2012. The 91-day Treasury bill rate, which can factor into the banking sector’s cost of funds, rose from 10.8% in January 2015 to 22.8% in June 2016. Elevated MPR and Treasury bill rates translate into higher lending rates to the private sector and contributed to high levels of non-performing loans in 2015. As a result, there is a limited flow of capital to the private sector, which has stifled growth and job creation throughout the economy. During the first quarter of 2016, private sector credit declined by 6.7% year-on-year in real terms, compared to a 17% expansion in the first quarter of 2015.

How long it will be before the economy begins to see material relief from high interest rates remains to be seen. “I think we have reached that inflection point for interest rates, and that further rate hikes will have little effect,” Sampson Akligoh, managing director at InvestCorp, told OBG. “I think interest rates will remain elevated over the next six months. This is largely due to public sector borrowing and the structure of public debt, which is increasingly dollar-denominated. This is quite problematic.” The market does not expect rates to move beyond current levels, but with the public debt burden unlikely to drop significantly in 2016, interest rates could remain high well into 2017. “I think inflation for Ghana should settle at 12% optimally, and I think that is the convergence level,” said Akligoh. “If you add a premium to it, then interest rates should be 15-16%. That is the long-term view I have if policy works well.”

Business Environment

To encourage development of the manufacturing sector, particularly outside of Accra, the general corporate tax rate of 25% has been reduced to 18.75% for manufacturing businesses located in regional capitals and to 12.5% for manufacturers elsewhere in the country.

The government has also announced plans to pursue an export-oriented growth agenda, via measures such as the legislation of March 2016 for the establishment of a quasi-governmental Ghana Export-Import (EXIM) Bank to support financing and insurance for international trade. Ghana’s three existing export promotion agencies will be folded into the new Ghana EXIM Bank to boost efficiency and capitalisation.

Ghana faces several challenges to attracting FDI beyond the oil and gas sector. Access to power is a concern for many businesses, with blackouts a frequent occurrence. Infrastructure outside of the power sector also poses a challenge to growth. Many areas outside of Accra lack the infrastructure necessary to accelerate growth, such as roads, water and broadband internet. Achieving its goals of reducing income disparity and bringing a greater percentage of the population into the formal economy will require a broadening of infrastructure investment throughout the country. Asiama told OBG, “Now that the government is working steadily to fix infrastructure and energy, we think it can only get better.”

Another hurdle is the land tenure system, which keeps land in the hands of families. Joe Tackie, CEO of the Ministry of Trade and Industry’s Private Sector Development Strategy II, told OBG, “One of the constraints is acquiring land. Land is an important factor of production. How domestic and foreign investors overcome this is something we need to address.”

Outlook

The Ghanaian economy is well positioned to accelerate growth, with several key factors likely to encourage expansion in the coming years. These include a more stable macroeconomic environment through the fiscal consolidation programme, a more favourable balance of trade buttressed by expanding oil exports and an increasingly sophisticated financial system, as evidenced by a soon-to-be-launched commodities exchange and increased integration with regional and international securities markets.

“Ghana is fortunate in having a number of effective trade policy tools, including the National Export Strategy and National Development Planning Commission, which include binding clauses for the government to adhere to,” James Tiigah, CEO of the Ghana Export Promotion Authority, told OBG.

Risks remain, however. High interest rates, inflation and public debt in the face of stubbornly low levels of private sector lending and insurance penetration will likely remain through 2017. Nonetheless, the government has demonstrated a commitment to undertaking the structural reforms that are necessary to bring down interest rates, stabilise the currency and get Ghana’s fiscal house in order in 2016. Further government progress in this regard would allow the banks and the private sector to more efficiently allocate capital to the most promising sectors of the economy.