Ghana moves to reinvigorate industry and overcome obstacles to growth

While Ghana boasts a wide array of long-term advantages for industrial producers, including access to a 300m-person regional market, raw material inputs ranging from metals to cocoa, and competitive labour costs, 2014 was nonetheless particularly challenging for the country’s industrial and manufacturing sector, in large part due to a declining currency, power shortages, limited credit and high overhead costs.

Ghana recorded GDP growth of 4% in 2014, according to the Ghana Statistical Service (GSS), continuing a slowdown from its peak of 14% in 2011 due to outside pressures, mainly the depreciation of the national currency, the cedi, and dumsor – the local term for load-shedding – which forced many industrial producers to rely heavily on expensive backup diesel generators. “Currency depreciation presents challenges for locally produced products that are aimed at the average Ghanaian,” Hayssam Fakhry, managing director of plastic pipes producer Interplast, told OBG. “Dollar prices of imported inputs, remains the same, but local prices increases and local wages and salaries do not rise proportionately.”

Under Pressure

In a press release in early May 2015, James Asare-Adjei, the president of the Association of Ghana Industries (AGI), wrote that “Businesses have been under severe pressure from the power crisis, cedi depreciation, high cost of credit and difficulty in getting bank credit, among others.” Rather than improving, he said, the association had watched with “serious concern the worsening business climate in Ghana since the beginning of the year”.

The benefits that Ghana’s economy has reaped from the country’s long-term stability has not been enough to offset, in the short term, the difficult situation those engaged in areas like the industrial sector have experienced with the ongoing currency and power issues. However, 2015 should mark a turnaround, with a new $918m IMF support package signed in February and increased power supplies due to come on-line throughout the remainder of the year. Improvements to its rankings in the World Bank’s “Doing Business” report also point to efforts by the authorities to reduce hurdles for industrial players, including in the areas of trading across borders and construction permits.

The Numbers

According to revised 2014 GDP estimates by the GSS, Ghana’s industrial sector experienced 0.9% growth over 2013 final estimates. This made it the slowest growing across the economy, with the rate declining from 6.6% in 2013 and 11% in 2012. Despite this, the sector continues to account for 28.4% of overall GDP, up from 27.8% in 2013 and 28% in 2012. Industrial output for 2014 was worth an estimated GHS30.55bn ($8.5bn), according to GSS figures. Oil, mining and quarrying industries accounted for GHS8.6bn ($2.4bn) of this total, with manufacturing worth an estimated GHS6.1bn ($1.7bn), up from GHS4.8bn ($1.3bn) in 2013. Construction made up roughly the other half of the total at GHS14.8bn ($4.1bn), up from GHS10.8bn ($3bn) in 2013.

However, when adjusted for inflation using 2006 constant prices, the manufacturing sector’s growth declined by 0.4% in 2014 and construction remained constant. The mining and quarrying subsector recorded the highest growth rate, of 3.2% for 2014, although that was down from 11.6% in 2013 and 16.4% in 2012, according to the GSS. Manufacturing accounted for 5.7% of national output, with oil, mining and quarrying worth 8%, down from 9.4% in 2013, and construction making up an estimated 13.7%.

External factors have affected mining growth rates. “Uncertainty related to the recent fall in gold prices has resulted in a delay on larger-scale investment from existing mining companies, which had a negative trickle-down effect on supplying companies,” Brian Taylor, CEO of Stellar Group, told OBG.”

Rankings

Despite a troubling year, Ghana remains one of the most attractive countries in the region in which to do business. According to the World Bank’s 2015 “Doing Business” rankings, Ghana was 70th out of 189 countries assessed, and way out ahead of other West African countries such as Côte d’ Ivoire (147), Togo (149), Burkina Faso (167) and Nigeria (170). In fact, the country was ranked fourth highest among sub-Saharan African countries, behind only Mauritius, South Africa and Rwanda. Ghana rose 24 places from its 2014 position in relation to dealing with construction permits (from 130 to 106), and moved one place higher for ease of trading across borders (from 121 to 120), though it fell from 30th to 36th place in relation to the ease of getting credit.

Confidence Question

Each quarter the AGI conducts a “Business Barometer” survey to assess the mood and confidence of the country’s business community. In the first quarter of 2015 the survey showed a drop in business confidence from 98 base points to 85 since the fourth quarter of 2014, with 100 being the base index. Only 18% of respondents thought that business performance was better than the previous quarter, with inadequate power supply, currency volatility, access to credit and delayed payments being the main sources of concern. “The dip in confidence reflects the worsening energy situation, particularly where timelines for improving or solving the current power supply, especially to industry, have not materialised and timelines continue to be extended,” wrote Asare-Adjei in the association’s May 2015 press release. The AGI thus urged the government to release its plans for resolving the energy crisis in order for to industries plan ahead.

According to local media, between January and May 2015 close to 15,000 industrial workers had been laid off, due in large part to the energy supply situation. In May 2015 Eleazer Nyaunu, Tema regional officer of the Industrial and Commercial Workers Union, told local press that an additional 5000 workers were at risk of losing their jobs between May and September 2015 unless the energy situation was rapidly resolved. However, in a sign that perhaps the worst has passed, with new power supplies due to come on-line and the government’s budget stabilising, AGI’s first-quarter 2015 “Business Barometer” report indicated that roughly 50% of respondents expected business performance to get better in the second quarter of 2015.

Exports

In 2013 Ghana launched a National Export Strategy and Development Programme aimed at increasing earnings from non-traditional exports from $2.3bn to $5bn annually by 2017. Non-traditional exports in Ghana include cocoa paste, canned tuna, cashew nuts, veneer and horticultural produce, which together account for around 17.5% of the country’s total export earnings. The programme is part of a larger push to reduce the overall trade deficit. In December 2014, according to Focus Economics, exports fell 23.2% year-on-year. As a result, the trade deficit worsened, totalling $320bn in December, compared with $140bn a year before.

Ghanaian exports are still dominated by primary commodities such as unrefined minerals, raw agricultural products and crude oil, which together contribute around 86% of the total amount, according to data from the Ghana Export Promotion Authority (GEPA). The EU remains the largest export destination for Ghana’s goods, accounting for around 44% of all exports in 2013, World Bank figures show. According to Ghana and EU Customs data, in 2013 Ghana’s exports to the EU were 35% higher than imports from the EU, at $4.6bn compared to $3.4bn, with petroleum exports accounting for $2.5bn and raw cocoa beans $1bn. John Andre, managing director of cocoa producer Barry Callebaut, told OBG, “There are of course some challenges to doing business in Ghana’s agriculture sector, but if someone has the will to get the job done, they will find great opportunities.”

Trade With Europe

In a move aimed at strengthening trade links, the EU-ECOWAS Economic Partnership Agreement (EPA) was ratified in 2014, giving products from ECOWAS – a 15-member group of West African nations formed in 1975 with the mandate of promoting economic integration – 100% duty free access to EU market. At the same time, the agreement gives 75% duty-free access for EU products entering ECOWAS markets. Some in Ghana and neighbouring countries have voiced their concern that the EPA will significantly damage parts of their local economies, notably manufacturing, but many feel that further integration into the global marketplace will ultimately aid countries like Ghana.

“The EPA has been extensively debated and there are still fears that it leaves industries too open to outside competition, but I think it will ultimately be of help and will support business,” John Defor, a policy research officer at the AGI, said. “We don’t have to be overly worried. The markets are already open, and opening more widely is neither here nor there.”

Regional Trade

Perhaps the biggest opportunity for Ghanaian exports, however, is in ECOWAS itself, yet there are challenges. Nigeria, which represents over half of the region’s population, is a diminishing export destination for Ghanaian goods, with exports to Nigeria declining from $394m in 2005 to $141m in 2013, according to UN COMTRADE data, following Nigeria’s import ban on 150 select products. However, GEPA has previously announced plans to establish a dedicated promotion office to oversee trade relations between the countries.

“Ghana is a secure country compared to many of its neighbours, and the region has many opportunities. We’ve started to focus on the neighbouring countries, all the countries around Ghana,” said Hassan Assani, factory manager at United Fabrication Company, a sister company of United Steel. “The currency depreciation is good for exporters,” he added. Yet challenges remain in regards to Ghana developing this role. Exporters in Ghana have to spend roughly 19 days on average to get their goods out of the country’s ports, compared to 11 days in a country such as Malaysia, according to World Bank’s 2015 “Doing Business” report. However, this is far better than import times for shipping containers, which the report estimates at an average 41 days.

Cement

GSS data shows the domestic construction sector was worth roughly GHS14.8bn ($4.1bn) in 2014, up from GHS10.85bn ($3bn) a year earlier. It accounted for 13.7% of national GDP, up from 12% in 2013, 11.5% in 2012 and just 5.7% in 2006, showing its growing role in the Ghanaian economy (see Construction chapter). In a November 2014 report looking at opportunities in infrastructure development in Africa, PwC anticipated that by 2025 Ghana would spend $1.6bn on its road system and $86m on rail networks (including stations and terminals).

The cement industry is a key player in the construction sector, and is dominated by three main companies, the largest of which is Ghana Cement Works (Ghacem), which was established in 1967 and enjoyed a national monopoly until the market was deregulated in 2000. Ghacem, now a subsidiary of German-based Heidelberg Cement, currently has a total production capacity of 4.2m tonnes of cement a year, after opening its latest facility, a €23m mill in the Western Region, in early 2015. The other major cement producers are Diamond Cement in Aflao and Savanna Diamond Cement in Buipe, both subsidiaries of Diamond Cement (WACEM).

The domestic cement industry is also currently dealing with an influx of imported cement, with local producers objecting to the rise in imported bagged cement. Nigerian cement producer Dangote Cement has operated in Ghana since 2010, importing and bagging bulk cement at its terminal in Tema and selling into the domestic market. Dangote announced in 2013 that it was aiming to export 1.8m tonnes per year to Ghana, using 50 trucks a day to transport the materials into the country.

In May 2015 the government directed the Tariffs Advisory Board to investigate the influx of imported bagged cement after local producers petitioned the Minister of Trade and Industry to put a stop to a practice that was adversely affecting local producers. At the time, George Dawson-Ahmoah, the chairman of the Ghana Cement Manufacturers Association, called for a ban on the importing of cement, according to local press reports, adding that local manufacturers had a surplus capacity of over 2m tonnes a year and could more than meet local demand.

Steel

Ghana’s steel manufacturing industry hit a total monthly capacity of 70,000 tonnes in 2013, following the arrival of Jordanian-owned Rider Steel, which added capacity of 5000 tonnes, and the expansion of Lebanese-owned United Steel, which increased its capacity to 25,000 tonnes a month. The other five firms in the segment are Sentuo Steel, a Chinese-Ghanaian joint venture established in 2011; Chinese-owned Ferro Fabrik; Indian-owned Tema Steel; and two wholly domestic-owned companies, Special Steels and Western Castings.

Optimism had been running high, following a scrap metal export ban put in place by the Ministry of Trade and Industry in March 2013 to try to revamp the steel sector and give a boost to local steel manufacturing companies; scrap metal serves as the main raw material for the steel industry. However, the ban is yet to have the desired effect, with local media reporting that large amounts of scrap metal exports are still leaving the country despite the ban.

Despite some leaks, the increased availability of steel inputs should help improve output, which in recent months has been a challenge. In July 2014 local media reported that for the first time in a decade and a half the country’s steel companies were meeting less than 30% of their production capacity due to the ongoing energy situation and difficulties in getting raw materials. “We are reliant on imports and this is a problem. Most of our raw materials come from overseas. The government is not doing enough to help local players,” Assani told OBG.

Meanwhile, Sentuo Steel, which is expected to increase its annual capacity from 300,000 tonnes to 650,000 tonnes in 2015, is seeking permission to create its own domestic scrap yard in which to take apart old ships for raw materials. “We already have an old vessel that we are scrapping in Takoradi,” George Andoh, board chairman of Sentuo Steel, told the press in October 2014. “We have about 10 old vessels ready to cut up today if we get the permission.”

Pharmaceuticals

At present, according to the Pharmaceutical Manufacturers Association of Ghana, domestic pharmaceuticals companies manufacture only 30% of the drugs the country uses in an average year, while 70% need to be imported. In October 2014 President John Dramani Mahama said the government was determined to help Ghanaian pharmaceuticals companies to become net exporters, and in its 2015 budget report the government said it planned to remove value-added tax (VAT) on locally produced pharmaceuticals and some of the raw materials used for the production of pharmaceuticals in order to support local industries. A 17.5% VAT on locally manufactured pharmaceuticals products had previously been put in place by the government in January 2014, effectively removing the price benefits that local producers had enjoyed until then.

Three domestic pharmaceuticals companies are receiving government support through the Export Trade, Agricultural and Industrial Development Fund, a governmental fund established in 2000 to provide financial resources and assistance for the development and promotion of exports. These are Ernest Chemists ($10m), Tobinco Pharmaceuticals ($6m) and Dannex Pharmaceuticals ($3m). All are seen as having products with strong export potential.

In May 2013 US Pharmacopeial Convention opened the Centre for Pharmaceutical Advancement and Training in Accra, with the aim of equipping the regulatory authorities in Ghana with the knowledge and skills to promote access to quality medicines. Outside of domestic producers, in March 2014 GlaxoSmithKline announced that it was planning to build five new drug-manufacturing facilities in sub-Saharan Africa as part of a $130m investment in the region, with Ghana one of the countries under review for the location of one of the operations.

Fast-Moving Consumer Goods

Increased purchasing power, combined with strong headline growth, has made Ghana an ever-more attractive market for consumer products, although the limited size of the market means potential investors also must weigh up the country’s ability to serve as a production hub for the broader region.

The country boasts a number of beverage producers, from soft drink bottlers to breweries (see analysis), but some of the largest new capital investments have come from personal products and food.

Unilever recently announced that it plans to turn Ghana into its regional hub, where goods can be manufactured and then shipped to countries in West Africa and the rest of the continent. In September 2014 Unilever inaugurated a new €4.4m factory which has the capacity to produce 40,000 tonnes of products a year, with the focus expected to be on brands such as Lux, Lifebuoy and Rexona. Nestlé Ghana also inaugurated four new production lines for powdered milk in October 2014, having invested some $11.3m over three years, with the aim of targeting both the domestic market and the nearby region.

Textiles

Once a leading industrial sector, textiles has seen a significant decline in recent years. Retail spending in Ghana is set to increase from $8bn in 2015 to $11bn by 2019, according to market research, thanks to rise of the middle class, which should bring plenty of domestic opportunities for textile manufacturers. However, local garment makers are struggling to overcome the price differentials offered by cheap imported goods (see analysis).

Refining

With new hydrocarbons resources and infrastructure coming on-line, there is increasing potential in the refining industry. State-owned Tema Oil Refinery is the country’s only such facility, and has a nameplate capacity of 45,000 barrels per day (bpd), though production has been far below capacity and at times completely halted in recent years. In early 2015 a plan was made public in which a joint venture with Saudi Arabia’s national oil company Saudi Aramco or PetroSaudi International would address the challenges at the refinery. As of June 2015, further details were unclear, but mid-month an official at the Ministry of Finance and Economic Planning told a seminar at the University of Ghana that discussions were in the final stage and included expanding capacity at the refinery to 60,000 bpd (see Energy chapter).

Finance

Access to finance has been a long-standing challenge for businesses operating in Ghana, though this is far from unique in emerging economies where loans are harder to come by and borrowing rates generally far higher (see Banking chapter). “Credit has always been a problem in Ghana, with the ‘Business Barometer’ survey placing it perpetually among the top three challenges for businesses in the country,” AGI’s Defor told OBG. “In Ghana we borrow at over 30%, whereas our peers borrow at below 20% or even single-digit rates. This doesn’t make us competitive.”

To help supply greater access to credit for Ghana’s small and medium-sized enterprises (SMEs), in May 2015 the European Investment Bank (EIB) announced that it was providing €10m to UniBank Ghana to support SMEs across the country. This offering follows similar sized programmes at Société Générale and Ecobank since the scheme’s launch in 2013. Speaking at the official signing, Isaia Romolo, senior loan officer at EIB, said the lending would support investments in agriculture, manufacturing, construction, transport, education and health care. Kate Quartey-Papafio, CEO of electrical cables firm Reroy Cables, told OBG, “While the country seeks foreign direct investment, it must work to improve and aid the local business community so it can flourish.”

Free Zones

Ghana operates free zones where manufacturers can benefit from a series of incentives and exemptions, including exemption from import duties on raw materials, tax breaks and repatriation allowances, as long as they meet certain export criteria, namely that 70% of what they produce be exported. Factories operating outside of the free zones are also eligible as long as they meet the requirements. In its 2015 budget the government said that the tax rate for free zone enterprises will be increased from 8% to 15% after the expiration of the 10-year tax holiday.

Established in 1995, the Ghana Free Zones Board (GFZB) is the free zone regulator. In 1996 the GFZB set up the Free Zones Programme, which is designed to promote processing and manufacturing of goods through the establishment of export processing zones (EPZs). Ghana has four free zones: Tema EPZ, Ashanti Technology Park, Sekondi EPZ and Shama EPZ. The 480-ha Tema EPZ offers investors facilities for manufacturing, services and commercial export activities, while sectors at Ashanti Technology Park include IT, cocoa processing, light and heavy industrial manufacturing, warehousing and logistics services, and biotechnology. The Shama EPZ is dedicated to the petrochemicals sector. According to the GFZB, the Sekondi EPZ is to be developed into an integrated industrial mineral processing zone.

Outlook

Ghana’s industries are going through a difficult period, but opportunities in the medium and long term the are good. The country is taking steps towards revitalising its struggling manufacturing industries, though firmer policies would support locally manufactured products to grow and successfully expand overseas. Export opportunities remain strong, with the EU partnership agreement likely to open up plenty of new markets. While challeng- es remain, there is optimism they can be overcome.