Better times ahead for Ghana’s economy

Accra, Ghana

This article is an excerpt from Quantum Global’s Q2 2017: Africa Investment Review.

Ghana’s economy has experienced robust growth over the past decade, making its success a case worth emulating by its regional peers. The overall rate of economic growth averaged about 5.9% a year between 2007 and 2009, and was even stronger between 2010 and 2013, averaging about 9.7%.

Industry was the main driver of overall growth with an annual average growth rate of about 13%, followed by services with 8.4% and agriculture with about 8%. The strong growth record enabled the country’s graduation to lower-middle-income status in 2010. Ghana’s democratic attributes are as robust as its economic growth, and by improving policies and institutions, successive governments have been able to build an attractive business climate that is conducive to growth.

Nevertheless, the economy has been showing some signs of stress since 2013. Indeed, real GDP growth has slowed from 7% in 2013 to 4% in 2014, 3.9% in 2015 and 3.6% in 2016. The main factors of this slowdown of the economy are essentially structural. Continuing fiscal deficits have pushed public debt to over 70% of GDP trapping the country in a cycle of debt service and borrowing. A three-year power crisis involving power rationing has put a drag on the private sector’s productivity and competitiveness. In addition, the deceleration of economic growth is explained by a significant external sector deficit and low world prices for the country’s gold, cocoa and oil exports.

The medium-term prospects point towards a recovery of economic growth to 6.3% in 2017 and 7% in 2018. Growth will be supported by the anchoring of fiscal discipline through a broadening of the tax base, elimination of wasteful expenditures, prudent debt management strategies, complementary monetary policy, rising oil production and an anticipated gradual increase in commodity prices.

Macroeconomic policy

The Ghanaian economy is characterised by large fiscal and external imbalances. The fiscal deficit rose to 9% of GDP in 2016, fuelled by a large public sector wage bill, interest costs and subsidies.

As a result, public debt increased significantly (rising above 70% of GDP in 2016). The increase in consumption expenditure has increased demand-pull inflationary pressures. Price increases were also fuelled by international capital inflows in the oil sector, and portfolio inflows that were attracted by high interest rates on domestic bonds. As prices rose, the currency began to appreciate in real terms. Fiscal deficits, a high debt level, rapid price inflation and currency overvaluation were the ingredients of an imminent crisis. Then, in 2013, the price of gold collapsed and Ghana’s exports lost significant value. With the terms of trade deteriorating quickly, the current account deficit widened to 11.9% of GDP in 2013 before narrowing to 7.5% of GDP in 2015 and 6.2% of GDP in 2016. Fiscal consolidation is being implemented by the new government in an attempt to reduce the fiscal deficit, as agreed with the IMF under on Extended Credit Facility arrangement.

On the expenditure side, some measures have been introduced in order to control the wage bill. On the revenue side, the government has announced several tax-related initiatives aimed at boosting revenue, including tax administration reforms, new tax measures including a 2.5% increase in value added tax (VAT), a special petroleum tax, and improvement in tax collection.

The monetary policy mandate of the Ghanaian central bank is to ensure price stability through low inflation, and indirectly to support broader economic objectives such as economic growth and employment. Monetary policy has been tight amid an inflation rate that has been far above the Bank of Ghana’s target of 8%. Indeed, the benchmark interest rate averaged 17.92% from 2002 until 2017, reaching a record high of 27.50% in March of 2003 and a record low of 12.50% in December of 2006. Inflation stood at 17.1% in 2015 and has been on a slight downward trend, reaching 15.4% on average in 2016. Inflation is expected to ease further towards the medium-term target of 8%. Monetary policy has been instrumental in mitigating inflationary pressures. In the context of the slowdown in inflation, the central bank has started lowering its policy rate, cutting it by 200 basis points to 23.5% in March, the second cut since 2011.

Economic and political governance

Under successive governments, reforms have been implemented in order to create the key ingredients conducive to private sector development. These include reforms aimed at improving the productivity and the competiveness of the private sector. However, it turns out that the environment for doing business has not recorded significant improvements.

Ghana’s performance with respect to both its position on the Global Competitiveness Index and the Ease of Doing Business rankings has remained largely stagnant, especially in 2012 and 2013. Key challenges currently facing Ghana’s competitiveness include an unfavourable macroeconomic environment, low levels of industry-specific skills, an absence of basic economic infrastructure, uncompetitive operational costs, limited access to long-term financing and a high cost of credit, a regressive tax regime, labour market inefficiencies, and the low productivity occasioned by limited ICT infrastructure. For instance, in 2015 Ghana’s private sector was confronted by an energy crisis and power rationing, as well as utility price increases that undermined productivity.

On the macroeconomic policy front, exchange rate volatility, a multiplicity of taxes, limited access to credit and the high cost of credit were heavy burdens that put a drag on overall competitiveness. Ghana’s top personal income and corporate tax rates are 25%. Other taxes include VAT, a national health insurance levy, and a capital gains tax. The overall tax burden equals 17.2% of GDP

Additional structural shortcomings militating against progress in the private sector’s development include the regulatory framework and the rule of law. A cumbersome bureaucracy continues to discourage potential entrepreneurs. The judicial system lacks sound effectiveness and government integrity and corruption remains unchecked by reform measures that are not enforced effectively. Ghana has low scores and rankings on the World Bank’s Index of Economic Freedom.

The Government of Ghana has taken several measures aimed at reducing structural bottlenecks for setting up and doing business. These measures include reducing the number of days it takes to register a limited liability company and the number of days spent on resolving commercial disputes in the courts. As a result, the country’s ranking on the World Bank’s Doing Business Index has improved from 112 in 2014, to 111 in 2015, to 108 in 2016. Ghana scored 3.68 points out of 7 on the World Economic Forum’s Global Competitiveness Index 2016-2017. The Competitiveness Index in Ghana averaged 3.63 points between 2009 and 2017, reaching an all-time high of 3.79 points in 2013 and a record low of 3.44 points in 2010.

The financial sector in Ghana has undergone restructuring and transformation, and the supervisory framework is relatively strong. Bank credit to the private sector has increased, and capital markets are developing. The sector was rated as fairly developed by the 2014-2015 Global Competiveness Report, with Ghana ranking 67th of 148 countries.

A larger fiscal deficit and persistent government borrowing to finance the deficit led to higher interest rates, which in turn raised the cost of borrowing for Ghanaian businesses. Efforts by the central bank to rein in both inflation and the depreciation by raising interest rates and tightening financial requirements of banks also appear to have worsened the situation, as lending rates to businesses increased further.

Dr Lacina Balma is an economic modeller at Quantum Global Research Lab.