Regulators in Ghana work to protect the economy against commodity price fluctuations

Ghana is the second-biggest producer of gold on the African continent, and the world’s second-largest cocoa producer. The country is also home to one of the largest discoveries of oil in recent decades, the production of which is providing the government with a useful revenue stream and driving growth in associated sectors. Nevertheless, the country faces considerable economic challenges: Ghana is heavily reliant on the export of commodities – gold, oil and cocoa – for foreign earnings, leaving it vulnerable to economic shocks when crops fail or prices fall.

The nation’s vulnerabilities have historically been exacerbated by the failure to build up capital buffers during boom years. As a result, Ghana has been compelled to turn to the IMF for a bailout 16 times since 1966, most recently with a $918m, three-year extended credit facility (ECF) approved in April 2015. The arrangement came with a structural adjustment programme aimed at restoring macroeconomic stability and sustaining growth, which continues to inform government economic policy to this day.

Accordingly, the strategic approach of the current government with regard to the nation’s economic development is centred on a fiscal adjustment programme that protects social and priority spending, a rebuilding of external buffers and a strengthening of the financial sector. In early 2018 President Nana Akufo-Addo announced at a press conference that the country’s reform efforts were yielding positive results, and that “the cornerstone of our government going forward is to remain committed to fiscal discipline so that never again will we go back to the IMF or any bailout of the sort.”

Fiscal Matters

The key themes emerging since the presentation of the current government’s first budget after taking office in 2017 are the restoration of fiscal discipline, the mobilisation of revenue and the tackling of rigidities that have limited the ability to effectively deploy funds in the past. The state has attempted to boost tax revenue by strengthening compliance measures and broadening the tax base. Structural rigidities in the budget, meanwhile, have been confronted through the introduction of a law capping earmarked funds to 25% of tax revenue.

The new government has also shown its willingness to reduce spending in response to falling revenue streams in its 2017 mid-year spending review, adjusting downwards expenditures on goods and services and capital outlays by 0.8% of GDP. Similarly, when domestic revenue did not meet expectations in the first seven months of 2018, the government reacted by cutting capital expenditure by 28.1% and making smaller cuts to interest payments and grants.

This policy has helped meet deficit targets, but has been met with concern by some economic observers. Ghana’s independent economic think tank, the Institute for Fiscal Policy, asserted in July 2017 that government spending cuts were inimical to the growth of both the national economy and long-term revenues. An IMF review of Ghana’s fiscal policy, meanwhile, commended the government’s expenditure restraint, but advised that future fiscal consolidation ought to focus on revenue mobilisation rather than spending cuts.

Debt Reduction

The end goal of the country’s fiscal reform, whether it takes the form of a cost-cutting or revenue-boosting approach, is the reduction of the fiscal deficit that has caused it to borrow heavily for more than a decade. This trend has seen the nation’s external debt expand from 10% of GDP in 2006 to 30% by 2013. As of March 2018 external obligations remained at this elevated level, standing at 31.4% of GDP, according to the Ministry of Finance. During this period the government also borrowed domestically, so that the total public debt-to-GDP ratio approached 70% in 2018, placing the country on the World Bank’s list of 18 African nations considered to have a high risk of debt distress (see analysis).

Looking Forward

The 2019 budget, released in November 2018, appears to have been formulated with these concerns in mind. The focus of the budget is firmly on investment in productive infrastructure, and therefore the government has adopted the expansionary stance necessary to bankroll the largescale projects and social initiatives that it hopes will reward the country with a return over the medium term. Consequently, the fiscal deficit for 2019 was set at 4.2% of GDP, leaving the country with a slightly larger budget gap than the 3.7% projected for 2018.

The new budget establishes a number of ambitious macroeconomic targets. The government expects GDP to grow at a rate of 7.6% for the year, compared to the 5.6% expected in 2018. Ghana’s rapidly expanding hydrocarbons sector will play an important part in this rise, but the government also has ambitions for the continued expansion of nonoil activities: the 2019 target for non-oil real GDP growth is 6.2%, against the 5.4% expected for 2018.

The 2019 national budget also marks the endphase of the most recent IMF programme. Speaking to local media in November 2018, Kojo Oppong-Nkrumah, the minister of information, outlined the government’s intention to conclude the ECF in a timely manner, stating, “The administration has in the first two years raced to correct spillages from set targets under the programme and is hopeful for a successful exit at the end of this year.”

Good Housekeeping

The ability to formulate a productive national budget has been strengthened by the government’s spending efficiency drive. Fiscal slippage has been a historically common occurrence in Ghana, particularly in times surrounding general elections. In the election year of 2016, for example, a breach of expenditure controls led to a missed overall deficit target, and around 2% of GDP being spent by the government outside the Ghana Integrated Financial Management Information System – an IT-based accounting and budgeting system for monitoring that monitors and manages all government financial movements.

The incoming administration has taken steps to cut public spending and remove the potential for future fiscal slippages through a number of measures. In late 2017 officials introduced the Ghana Treasury Single Account, a set of linked bank accounts through which the government tracks all its receipts and payments, thereby receiving a consolidated view of its cash resources. Regulators have also moved to enforce a Public Procurement Act that has been in legal force since 2003, but has not been fully adopted by all government entities. A more stringent application of the law has reduced instances of sole sourcing in government contracts, resulting in substantial savings gained from competitive tendering processes.

As of April 2018, the Public Procurement Authority (PPA) reported that only 290 of 1000 procurement entities had supplied procurement plans, as required by the act. In response, the PPA has introduced a software platform, interfaced with the budget, that makes it impossible for entities to receive budgetary allocations if they do not have procurement plans. Lastly, the 2016 Public Finance Management Act (PFMA), yet to be implemented as of January 2019, aims to legislate for fiscal responsibility, setting a cap on the budget deficit as well as limiting the debt-toGDP ratio any government can carry. It also outlines the creation of a Fiscal Responsibility Council that will monitor the government’s fiscal proposals to ensure that budgets remain within established limits.

In December 2018 the Parliament also passed the Budget Responsibility Act, aimed at promoting fiscal discipline and curbing election-year imbalances. However, critics claimed that it was largely repetitive of the PFMA, or in some instances reduced its effectiveness through modifications to the previous law.

Boosting Revenue

Of all the government’s fiscal goals, the effort to boost revenue has proven to be particularly elusive. The country faces a number of tax-related challenges, including the large informal sector, a high level of tax exemptions, pervasive tax evasion and a substantial number of incentives granted to extractive and free zone companies. Shortfalls in budgeted tax revenue have prompted the government to cut spending in order to meet its deficit targets, which has therefore made boosting revenue a key strategic priority. Pressure has also come from the IMF, which in March 2018 requested that the country take steps to boost revenues by at least 0.5% of GDP before the following month’s review of its $918m credit deal.

The 2019 budget contains a number of taxation measures that the government hopes will help it to meet its revenue projection for the year. The highest personal income tax rate has been reversed from 35% back to 30%, while the threshold for the highest rate has been revised upwards from incomes of GHS120,000 ($25,900) to GHS240,000 ($51,900) per year. While this might ordinarily result in a revenue decrease, the government believes that the measure will reduce tax avoidance and result in a broadening of the base. The government has also taken steps to close loopholes and lapses in the tax framework applied to the mining industry, including a proposal to take equity holdings in return for exemptions.

Fiscal Policy

A number of indirect policy measures support the state’s efforts to boost revenues. The government is speeding up the implementation of a number of automated systems that will reduce human involvement in tax administration, including the fiscal electronic devices system that facilitates real-time monitoring of value-added tax VAT). In addition, the paperless Cargo Tracking Note system, which came into effect in July 2018 and is aimed at increasing proper trade invoicing for all shipments to the country, is expected to increase compliance.

The Ministry of Finance has also outlined a number of general administrative measures aimed at increasing tax revenue and broadening the base. These include reform of the Ghana Revenue Authority and the increased delivery of tax ID numbers, which individual Ghanaians are able to obtain on the authority’s website. The government also intends to enhance revenue collection through the use of data from third parties, such as the National Identification Authority, and the reform of several tax exemptions that it considers disadvantageous, such as the framework applied to bonded warehouse goods.

Diversified Economy

Ghana’s efforts to broaden its tax base come with the advantage of a diversified economy. Oil has come to play a significant role in the country’s economic activities since the 2007 discovery of the deepwater oil and gas reserves in what later became the Jubilee field (see Energy chapter). As an increasingly significant hydrocarbons producing market, the fluctuations of global oil prices have had a marked effect on the nation’s economic trajectory: firming oil prices helped GDP grow by 8.1% in 2017, compared to the relatively modest 3.7% expansion of the year before, according to the central bank, the Bank of Ghana (BoG). At the end of the first quarter of 2018, the country’s economy at current prices, including oil, was worth GHS54.5bn ($11.8bn), up from GHS46.6bn (10.1bn) recorded during the same period in 2017.

In terms of sectoral distribution, the service sector claimed the largest share of real GDP during this time period, holding 60.6% of the total and growing by 5.2%. This expansion was driven by the rapidly expanding information and communications segment, which in the first quarter of 2018 grew by nearly 26% year-on-year, helping to offset contractions in finance and insurance, social and personal service activities, transport and storage, and hospitality of 7.9%, 1.7%, 1.7% and 0.45%, respectively.

A review of the financial services industry by the BoG in 2016 showed a significant decline in banking asset quality, while 211 of the more than 500 licensed microfinance companies operating in 2018 have either become non-operational or defined as distressed by the regulator (see Banking chapter).

The industrial sector, including oil, is the second biggest in terms of contribution to GDP, claiming 27.5% of the total, as of May 2018. Growth in the sector has been driven by mining and quarrying, which expanded by 28% over the first four months of 2018. However, reductions in capital expenditure by the government over recent budgets have led to slow growth, and in some quarters a contraction, such as in the production of construction materials. One of the central questions in regards to the sector going forward is the effect that Ghana’s more expansionary budget of 2019 will have on this trend.

Agriculture is Ghana’s third-largest sector, claiming nearly 12% of GDP in the first quarter of 2018. Recent growth has been driven by the livestock subgroup, while the fishing subgroup – historically a strong performer – contracted in early 2018 due to declining fish stock. Growth in the sector has been muted over the last decade, which many observers have attributed to the rise of the oil industry. According to a February 2018 report from the World Bank, agriculture accounted for as much as 31% of GDP in 2008, more than double its current level. When hydrocarbons production began in 2011, GDP growth rose rapidly by 14%, while GDP expansion in the agriculture sector was a mere 0.8%, marking the decline in the level of the sector’s economic contribution.

Strategy

With the IMF support programme coming to an end, leveraging Ghana’s broad economic base to build a sustainable economy is a central government concern. The 2019 budget therefore places significant emphasis on building productive infrastructure in order to reach this objective, and refers to a range of strategic initiatives that will support this development.

In 2018 the government approved an incentive package for the nation’s flagship plan for industrialisation, One District One Factory (1D1F). The initiative aims to transform the economy from one driven by commodities exports to one powered by industrialised value-added products, with private sector investment acting as a key catalyst. In August 2017 officials announced expectations that 51 districts would establish new enterprises under the 1D1F policy, creating 80,000 jobs by the end of that year. Other recently established incentives include tax holidays, and exemptions from duties and taxes on imported machinery, equipment and raw materials.

Entrepreneurship

The government has also emphasised establishing an enabling environment for entrepreneurship through programmes such as the National Entrepreneurship and Innovation Plan (NEIP). The initiative was launched in July 2017 with a seed capital of $10m, which is expected to increase to $100m as the programme develops. The first round of the NEIP provided training, business advisory services and technical support to 7000 participants. An invitation for applications for the second round was issued by the Ministry of Business Development in September 2018.

Other measures taken by the government to encourage entrepreneurship include increasing access to credit for micro and small enterprises, the launch of an online electronic registry of all business-related laws as well as instituting measures to attract foreign direct investment (FDI). There are also programmes to tackle socio-economic issues, such as uneven wealth distribution and a lack of opportunities for disadvantaged Ghanians, including the Poverty Eradication Programme, the Free Senior High School project and the Nation Builder’s Corps, which addresses graduate unemployment.

Foreign Investment

Officials are hoping to meet much of their private sector investment targets by drawing in money from outside of the country, making Ghana’s attractiveness as a destination for foreign capital a matter of considerable interest to planners. In the World Bank’s ease of doing business index, the country ranked 114th out of 190 countries in 2019, remaining in the same spot as 2018. While the nation’s score of 59.22 is above the sub-Saharan African average of 51.61, there is room for improvement in some areas. Ghana scores relatively well in fields such as obtaining credit, securing electricity and protecting minority investors, but lags behind other markets in terms of trading across borders, resolving insolvency and registering property.

Nevertheless, ample natural resources and an emerging middle class make the country an increasingly popular target for investment. Efforts to boost FDI are coordinated by the Ghana Investment Promotion Centre (GIPC), the agency mandated with creating an attractive incentive framework and establishing a “transparent, predictable and facilitating environment” for both domestic and foreign investors. In 2017 Ghana saw total investment of $6.19bn, with an FDI component of $4.91bn, nearly matching the FDI target of $5bn that the GIPC had set for the year. The agency directly booked $3.61bn itself, with the other principal facilitating agencies being the Ghana Free Zones Authority, the Minerals Commission and the Petroleum Commission. In terms of sources, China has emerged as the leading investor. In the fourth quarter of 2018 it was responsible for 13 projects in the country, compared to three each held by the UK, France, India and Mauritius. During the same period, China’s combined investment stood at $183.9m, followed by India and Iran, with $42m and $30m, respectively.

Recently, the government has taken further steps to improve the country’s investment climate, notably in January 2018, when electricity tariffs for non-residential power consumers were reduced by an average of 14%. In addition, the 2019 budget included a proposal to remove VAT from locally manufactured textiles for a three-year period in a bid to make the industry more competitive; tax incentives for the flagship 1D1F industrialisation programme; and tax-free solutions for fully electric vehicles. At the close of 2018 the Cabinet was also reviewing a long-anticipated public-private partnership bill that aims to improve the existing framework, in which the government joins forces with the private sector to develop projects (see analysis).

Trade

A sustained increase in private sector investment may help Ghana move away from its reliance on three commodities for the vast majority of its export earnings. The growth of the country’s oil industry has allowed it to narrow the annual trade deficit over recent years, and from 2016 onwards Ghana began to show intermittent quarterly trade surpluses. Since 2017 this positive trend has strengthened: a surplus of nearly $1.2bn, 2.51% of GDP, was recorded in 2017, and a provisional trade surplus of $584.5m in the first two months of 2018. This development has had a positive effect on Ghana’s current account, which temporarily moved into positive territory in the first quarter of 2018, as well as helping the country to maintain a broadly positive rate of foreign reserve growth since 2014.

Ghana’s total exports in 2017 increased to $13.8bn from $11.1bn in 2016, according to the Institute of Statistical, Social and Economic Research of the University of Ghana. Thanks to firming oil prices, crude oil exports in 2017 were more than double those in 2016, at $3.1bn compared to $1.3bn a year earlier. Weakening cocoa prices saw the value of cocoa exports decline slightly in 2017, from $1.92bn to $1.90bn. Gold remained Ghana’s biggest export earner for the year, with the total climbing from $4.9bn to $5.8bn. The country’s principal export destinations, meanwhile, were India, China, Switzerland, South Africa and the Netherlands.

Monetary Environment

Ghana’s plans to kickstart private sector activity face a significant challenge arising from the monetary environment. At the macro-level, a declining inflation rate in 2018 allowed the Bank of Ghana’s Monetary Policy Committee to loosen its monetary stance. The cumulative interest rate reduction it brought about in the first half of 2018 was 300 basis points, from 20% to 17%, which was in turn reflected in a decline of 278 basis points in the interbank rate, from 19.16% to 16.38%. Ordinarily this might be expected to translate into cheaper lending rates for Ghanaian businesses and individuals, but average lending rates declined by only 180 basis points to 27.5% from 29.3% over the six-month period. The decoupling of monetary policy from commercial lending rates is the result of the large number of non-performing loans in the banking industry, which hinder sector stability and reduce the ability of banks to perform their proper function as catalysts for economic growth. Consequently, lending to the private sector at the end of June 2018 grew by 5.7%, a considerably slower rate than the 15.1% recorded a year earlier.

Outlook

Regaining monetary policy as an effective economic tool and stabilising the banking sector will be key areas of the BoG’s focus in the short term. More broadly, Ghana’s biggest economic challenges arise from its 2019 departure from the IMF’s support framework. Developing the economy while staying within the government’s defined limits for fiscal deficits and external debt remain key challenges (see analysis). The government’s revised tax policies, however, are likely to strengthen revenue streams and reduce the need to cut expenditures to remain within the targeted fiscal deficit limit. The expansion of Ghana’s hydrocarbons industry is expected to drive GDP growth in the near term: the IMF foresees a GDP expansion of 6.3% in 2018, rising to 7.6% in 2019, before a gradual decline to 5.1% by 2023. This compares favourably to an anticipated global growth of 3.7% in 2019, falling to 3.6% in 2022 and 2023. Despite the broadly positive outlook, however, Ghana’s continued dependence on cocoa, gold and oil exports leaves it vulnerable to volatility in international commodity prices. The government’s longerterm plan to develop other areas of the economy, therefore, is crucial to eliminating this downside risk.