Ghana government to expand domestic industry to align with future growth

Ghanaian industry continues to display long-term growth potential across several sectors, including agro-processing, automobiles, pharmaceuticals and fast-moving consumer goods (FMCGs), among others. In the short term, while many firms are investing in boosting productivity to take advantage of existing opportunities, significant challenges, such as high utility rates, a weak currency and difficulties accessing credit are undermining business confidence.

Sector Performance

While Ghana’s manufacturers benefit from a range of comparative advantages, from rising domestic consumption to locally available raw materials, they have often had to overcome structural challenges, which in recent months have been exacerbated by external factors, including rising import volumes and slow growth.

According to the Ghana Statistical Service (GSS), industry performed below all other sectors in 2015, moving from 0.8% to 1% growth between 2014 and 2015, behind agriculture and services, which displayed respective growth rates of 2.5% and 5.2% in 2015, in constant prices. With an unchanged share of GDP, at 26.6%, industry generated GHS34.14bn ($8.8bn) in 2015, up from GHS28.76bn ($7.4bn) in 2014, in current market prices.

However, there are encouraging trends hidden in the sector’s overall performance. Manufacturing emerged as the second-fastest growing sector activity, overcoming negative 0.8% growth in 2014 to attain 2.2% growth in 2015. This was nearly matched by construction, which grew 2.1% in 2015, up from 0% in 2014. Elsewhere, growth in oil, mining and quarrying continued to slow, falling from 16.4% in 2012 to 3.2% in 2014 and negative 2.2% in 2015. Electricity also continued to decline, posting negative 10.2% growth in 2015, down from 0.3% growth in 2014.

Construction continued to provide the largest sector contribution to the economy, as registered by the GSS at basic prices, reaching 14.8% of GDP in 2015, up from 12.7% in 2014. Oil, mining and quarrying, which has recorded an increasingly diminishing share since 2012, when it peaked at 9.5%, and posted 5.4% growth in 2015, down from 8% in 2014. Manufacturing interrupted a declining trend initiated in 2011, growing from 4.9% in 2014 to 5.1% in 2015, while water and sewage, and electricity, increased both their shares, growing from 0.5% in 2014 to 0.7% in 2015 and from 0.4% in 2014 to 0.6% in 2015, respectively.

Amid these improvements in performance, trade has continued to be a challenge. The value of Ghanaian imports totaled $13.86bn in 2015, according to the International Trade Centre, down from $15.6bn in 2014, whereas exports amounted to $11.01bn in 2015, down from $13.31bn in 2014. Overall, the trade deficit widened from $2.29bn in 2014 to $2.85bn in 2015. Machinery and vehicles imports figured among the heftiest import categories, amounting to $2.47bn in 2015, that is, 17.8% of total imports that year, whereas exports were dominated by minerals, metals and cocoa, for $9bn, or 81% of total exports in 2015.

Business Confidence

While the decline in commodity prices and the subsequent economic slowdown in Ghana may help explain the sector’s lacklustre performance in recent years, there are other factors at play which, when combined, undermine short-term sector growth and business confidence.

The Association of Ghana Industries (AGI) holds a business barometer indicator, based on the organisation’s assessment of current economic conditions and perceptions, expressing the state of the business climate in one figure, with 100 as the base index. During the first quarter of 2016 the AGI registered a significant upturn in business confidence in the country, which was represented by an increase from 95.9 points to 101.9. In an analysis of this jump, the AGI reported that businesses sentiment had been given a significant boost by government efforts to ensure stability in power supply, alongside a relative improvement in currency depreciation and the macroeconomic environment. However, as the AGI cautioned at the time, a number of challenges persisted that undermine overall business confidence, including, in particular, the high cost of utility tariffs, a multiplicity of taxes, the challenges associated with accessing credit, and delayed payments.

In the second quarter of 2016 business confidence was down to 98.5, confirming the instability of the business environment evidenced over the past three years, as per AGI data. Despite previous improvements, the same set of challenges dominated this period, with varying importance depending on the sector and the size of companies.

Key Challenges

All companies surveyed by the AGI perceived the high cost of utilities as their top challenge, whereas currency depreciation – also viewed as a chief obstacle – varied in importance across company size. More specifically, large companies and African giants expressed concern for the influx of imported goods, which, according to the AGI, had not been the case up to then. Medium-sized firms, meanwhile, felt affected by the multiplicity of taxes, while small companies struggled with access to credit. Alternatively, the high cost of utilities also ran through all the sectors evaluated, whereas delayed payments and access to credit stood out as specific concerns in the construction industry, with currency depreciation and the multiplicity of taxes troubling manufacturing (see analysis).

The AGI also evaluates the employment situation in Ghana, which reportedly remained unchanged in the first and second quarters of 2016. A total of 57% of businesses surveyed by the authority in that period said that they intended to maintain their workforce levels during the following six months, with only 12% projecting job cuts if the current challenges persisted. However, manufacturing was expected to suffer more job losses compared to other sectors. Some of the most accurate available assessments of the potential impact of this on the employment rate can be found in the GSS “Ghana Living Standards Survey Round 6” (GLSS 6) report, published in August 2014, which found that 9.1% of employed people who are over 15 years of age work in manufacturing, that is, about 1.1m people out of a total 12.3m economically active individuals over 15 years old in Ghana.

Government Action

Industrial development is a particular area of focus in the government’s national development plans. As outlined in the Ghana Shared Growth and Development Agenda (GSGDA) II 2014-17, the government’s goal where industry is concerned is to accelerate technology-based industrialisation with strong links to agriculture and other natural resources, while at the same time addressing the various challenges facing the sector.

Such challenges include but are not limited to inadequate and obsolete technologies, relatively low productivity, weak agro-industrial linkages, inadequate and unreliable infrastructure, institutional bottlenecks, and limited access to long-term finance.

To this end, the government has deployed an industrial policy, which it implements through a variety of instruments, in particular the Industrial Sector Support Programme (ISSP), which ran from 2011 to 2015. Managed by the Ministry of Trade and Industry and coordinated through a cross-ministerial committee, the purpose of the ISSP was to formulate in-depth implementation plans and budgets for specific projects carried out as part of government policy, as well as a framework for monitoring and evaluating the works carried out. Objectives outlined under ISSP projects included ensuring the adequate supply of locally produced agricultural materials, the adoption of modern technology across industry and strengthening the skills of the workforce.

Two other ongoing government initiatives also have the potential to push industrial development forward further by strengthening local manufacturing and boosting non-traditional exports.

The first of these, the National Export Development Programme 2016-20, aims to diversify and increase revenues from non-traditional exports and the second, the Made in Ghana initiative, promotes homegrown businesses and entrepreneurship.

In addition to pro-industry policy, there have also been changes made to Ghana’s trade legislation in 2016 which should prove beneficial to domestic manufacturing and businesses. The Ghana Export-Import (EXIM) Bank Bill has given the government the authority to establish an EXIM bank, which will act as a go-between for national governments and exporters to issue export financing.

John Defor, senior policy officer of the AGI, told OBG, “The passage of the EXIM Bank Bill into law should improve the availability of financing in the industrial sector, namely as regards small and medium-sized enterprises.” The idea behind the EXIM Bank is for exporters to be given enough financial assistance and insurance to compete internationally. While such a move looks promising for weighting the economy more towards exports, in line with the government’s goals, Defor also said that there is still more that it can do to encourage the growth of local industry. “Further efforts can be made to target strategic sectors showing potential for growth, while also promoting local manufacturing, such as agro-processing, pharmaceuticals and textiles.”

Cement

According to local press reports, Ghana had an annual production capacity of about 9m tonnes of cement in 2016, while annual domestic cement consumption stood below 6m tonnes. Annual cement imports amounted to about 1m tonnes of cement. At the end of 2015 the Cement Manufacturers Association of Ghana (CMAG), which comprises a number of local companies, including Ghacem, Diamond Cement Ghana, Savannah Diamond Cement and Western Diamond Cement, reported a combined annual production capacity of 7.4m tonnes.

In recent years CMAG has repeatedly protested against the impact of cement imports on local production, calling on the government to adopt protective measures. In 2016 the government took action, placing a ceiling on cement imports. However, while interested in protecting the local industry, the government has also appeared eager to turn importers into producers, fostering greater competition in the local market (see analysis).

Despite the risk of a supply glut, some cement firms are embarking on expansion plans in 2016. One such company is Dangote Cement. Headquartered in Nigeria, and with operations in several African countries, Dangote is now working to establish a new grinding plant in Takoradi. The facility will have the capacity to handle 1.5m tonnes of clinker per year.

Steel Manufacturers

The top steel producers in the country are Sentuo Steel, which is partly held by Chinese actors and partly by the Ghanaian government and has an annual capacity of 25,000 tonnes; the Lebanese company United Steel, with capacity for 25,000 tonnes; Jordanian-owned Rider Steel, with 5000 tonnes; India’s Tema Steel, with 4500 tonnes; Chinese-owned Ferro Fabrik, with 4000 tonnes; and local firms Special Steels, with 3500 tonnes, and Western Castings, with 2000 tonnes.

Domestic steel factories are said to employ around 9000 workers, including 3000 direct workers in the mills and 6000 indirect workers, including scrap collectors, dealers and transporters, among others. In recent years some local producers have suffered from the pressure of cheap imports, power supply challenges, high utility tariffs and rising raw material and labour costs, as well as high financing costs. Over time, this situation has translated into a series of cost-cutting efforts, including staff layoffs. In 2016 the Steel Manufacturers Association of Ghana and the AGI petitioned authorities for supportive action.

However, despite the challenges some companies seem to be weathering the storm, taking the time to invest in boosting production capacity and improving productivity to satisfy both local and regional demand. Sentuo Steel, for instance, initiated the second development phase of its Tema wire coils and sections manufacturing facility in June 2015. Following a $53m investment, the company is expected to add 500,000 tonnes to its existing 300,000-tonne annual production capacity. The limited availability of scrap metal in Ghana has forced Sentuo Steel’s plant to work at 40% production capacity. To reach full capacity, following the completion of its expansion project, the company plans to import steel billets from Europe and the US, which is reportedly cheaper than buying scrap metal in Ghana.

In addition, in January 2016 a local steel company, Western Steel and Forging, also announced that it would be undertaking restructuring efforts to modernise its operations. This involved installing continuous casting machines, among other things. With this expansion programme, Western Steel was getting ready to move from a business that was essentially focused on the production of forge balls for the mining industry to a faster production of wire rods, binding wire, nails and other products.

Agro-Processing

Promoting the development of agro-processing in order to build a bridge between agriculture and industry is a government priority (see Agriculture chapter). As outlined in the GSGDA II 2014-17, Ghana’s focus is on supporting the growth of import-substitution industries in agro-processing.

Ghana is the second-largest global producer of cocoa beans, after Côte d’Ivoire, yet processes less than 30% of its total cocoa output. The government and the sector’s regulator reportedly wish to increase capacity and process 50% of the country’s cocoa output at home, but local grinders have been facing difficulties due to various factors, such as adverse weather conditions affecting the quality and supply of the cocoa bean crop. Grinding factories currently operating in Ghana include US-based Cargill, Singapore’s Olam, the French firm Touton, Switzerland’s Barry Callebaut and the local state-owned Cocoa Processing Company (CPC). In 2015 CPC processed 887 tonnes of cocoa beans, down from 5260 tonnes in 2014. Due to falling production, in January 2016 the company was forced to temporarily shut two of its three factories at Tema. However, an agreement announced the following July, which implied a commitment to process 25,000 tonnes of cocoa beans per year for Touton, signalled an important turning point for the processor. Coupled with two previously existing tolling arrangements to process 17,500 tonnes, this new commitment raised CPC’s annual processing operations up to around 42,500 tonnes between 2015 and 2020.

According to Edward Adjei Frimpong, columnist at The Business & Financial Times, there are also several other high-potential crops which Ghana can capitalise on with the development of agro-processing. “Despite existing challenges, a number of agro-processing industries are growing,” he told OBG. “There are opportunities for investment in a variety of fruits, such as mango, papaya and pineapple, as well as fish or other types of agricultural product processing, even if only with small margins.”

Now, to help boost local agri-business, the government has sought to attract private sector investment into the sector, putting forward incentives and support schemes, including tax holidays and exemptions on import duties over imported agricultural inputs such as machinery or equipment, and agro-inputs like fertilisers, pesticides and feed ingredients.

In addition, in October 2016 the Bank of Ghana deployed a scheme to facilitate access to finance in agri-business. Called the Ghana Incentive-Based Risk Sharing System for Agricultural Lending, the GHS100m ($25.8m) fund aims to reduce the level of risk for commercial banks offering agricultural financing. It is hoped the instrument will boost agriculture production, productivity and exports, increase foreign exchange earnings, support import substitution and promote overall economic growth.

Fmcg Growth & Trends

A growing young and urban population, rising middle class and greater disposable income has led to significant growth in the FMCG sector in recent years. While informal markets still dominate food retail, the emergence of modern retail spaces – such as the 27,000-sq-metre West Hill Mall and the mixed-use developments One Airport Square and The Octagon has helped facilitate the development of the FMCG sector.

Many international FMCG companies are already present in Ghana, including consumer goods producer Unilever, health care product manufacturer PZ Cussons and Denmark-based dairy and fruit-juice maker Fan Milk, and some firms have sought to employ local inputs in manufacturing. Diageo and SABM iller, for example, use cassava in the production of alcoholic beverages, as a way of reducing costs and offering cheaper products for the price-sensitive population. In addition, Accra Brewery, a subsidiary of SABM iller in Ghana, inaugurated a $100m project in February 2015, aimed at doubling production capacity in view of long-term growth prospects.

Furthermore, Distell Ghana, a joint venture between Distell of South Africa and Finatrade, which is a leading African agri-business operator, started extending its product line in April 2015, with the introduction of Hunter’s Dry Cider, following the opening of its bottling facility at Tema and initial production of two other beverages only one year before.

In the short term, though, the reality remains challenging. Consumer spending has suffered as a result of a slowdown in economic growth and rising inflation. When factoring in inflation at 2010 constant prices, household consumption expenditure declined from $29.7bn in 2014 to $28.9bn in 2015, according to the World Bank. In fact, consumer spending growth has been slowing down since 2013, when it displayed an annual growth rate of 10%, followed by 5.5% and negative 2.5% in 2014 and 2015, respectively.

While it is true that consumers still need to purchase essentials, diminishing consumer spending is negatively affecting some industries. Patrick ObengWontumi, business development executive at Bragha Group Ghana, told OBG, “Growth in the energy drinks sector has slowed down as a result of a combination of factors, including diminishing consumer spending in a difficult economic context, growing consumer health awareness and concerns and supply-side obstacles, such as high utility tariffs and labour costs.”

Textiles Production

In the 1960s, after national independence, the Ghanaian government supported the local textiles industry as part of its economic development plan, taking up stakes in a number of firms. In the 1980s Ghana had about 20 major companies in this sector, employing some 25,000 workers. Today, four companies are left, all of which are privately owned. Together, Akosombo Textiles, GTP, Printex and Ghana Textile Manufacturing Company employ under 3000 people.

In addition to cheap Asian imports impacting the domestic market, local companies have also had to fend off counterfeit goods, which are quick to reproduce original local designs, including trademarks, logos and labels, selling in local markets at a lower price and with lower-quality inputs. While an original Printex fabric will cost the consumer around GHS45 ($12), a pirated version of it reportedly sells for GHS25 ($6.43). According to local textile dealers, in this situation some genuine textile dealers have felt forced to sell pirated goods in order to shore up their sales. A market survey conducted by the local news outlet The Finder in 2016 indicated that pirated textiles had virtually taken over Makola Market, Accra’s renowned shopping district.

To address this situation, in July 2014 the government set up a taskforce aimed at seizing pirated textile goods. As of December 2015 the force had seized around 7000 garments, but its efforts have yet to make a serious dent in illegal imports.

Autos

While international second-hand cars dominate the auto market in Ghana, as the economic situation stabilises demographic factors, such as a growing middle-class and a young and urban population mean that this dynamic may begin to shift over the long term, giving rise to opportunities for investors looking to enter a new market. “The aftersales component for leasing companies, and auto sales more generally, in West Africa has significantly increased in terms of revenue importance,” Imad Ghorayeb, general manager, West Africa, of Japan Motors, told OBG. According to Ghorayeb, the internet in particular offers potential for car companies to grow the after-sales component of their businesses. “Promoting automobile service plans online is rare for most car dealerships and leasing companies in West Africa,” he told OBG. “This is understandable given the limited internet access in the region, but there is sizable potential there for corporate clients.”

In a positive move for the domestic auto-manufacturing industry, Kantanka Automobiles opened a new car assembly plant in Gomoa Mpota in November 2015 (see analysis). The company was expected to increase production up to 70 cars by January 2016.

Pharmaceuticals

The pharmaceuticals industry in Ghana began in the late 1950s, under the wing of government industrialisation support schemes. Drugs manufacturing received a boost in the early 1970s, when the State Pharmaceutical Corporation, a parastatal company, later named GIHOC Pharmaceuticals, installed a plant to initiate drug production at the highest international standards, a move which reportedly contributed to the general confidence expressed in Ghanaian pharmaceutical products today. The economic downturn in the late 1970s and early 1980s shook the industry, leading to operation retrenchments and the privatisation of state-owned business, including GIHOC Pharmaceuticals, which was sold to Phyto-Riker Pharmaceuticals.

Today, the Pharmaceutical Manufacturers Association of Ghana (PMAG), which serves as the industry association for local pharmaceutical producers, counts a total of 38 registered entities in the industry, of which 32 are members. The local industry supplies both domestic and regional needs, exporting to a number of countries in the West Africa region. Yet its production capacity, as reported by PMAG, is currently underused, at less than 55% on average, due to inadequate resources. Only 30% of the local market is covered by local production. The rest is imported, mainly from India and China.

More than 75% of the sector’s companies – including some of the largest – are locally owned, with three listed on the Ghana Stock Exchange: Starwin Products, Ayrton Drugs and PZ Cussons. According to Kwabena Asante Offei, executive secretary at PMAG, the top five pharmaceutical producers in Ghana are Ernest Chemists, Letap Pharmaceuticals, M&G Pharmaceuticals, Kinapharma and Ayrton Drugs.

Ghanaian pharmaceutical market revenue has doubled in the past two to three years, from $200m to $400m, according to Offei. To further capitalise on the industry’s potential, in 2016 the government announced a $26m grant for the development of pharmaceutical production capacities. The fund is aimed at tackling the lack of affordable financing, one of the key issues facing the industry (see analysis).

Outlook

Despite existing short-term challenges, Ghana continues to display significant growth potential. Ongoing support for exports and local manufacturing could contribute to reducing the country’s import bill, providing greater stability to the economy over time. “The AGI is campaigning to reduce the cost of doing business, as well as reduce tariffs and protect local industries,” Hayssam Fakhry, managing director of Interplast, told OBG. “Levelling the playing field for local manufacturers that want to be involved in the mining and agriculture sectors will remain a challenge for the government throughout 2016.”

So far, government support has been forthcoming, as evidenced through the provision of financial assistance to domestic manufacturers and exporters, and in the development of instruments to better control imports and avoid disruptive impacts in struggling local industries. Unleashing further growth potential will depend on the authorities’ success in tackling key challenges, including stabilising the currency, and ensuring affordable utility rates and access to credit.

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