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Ghana’s economy battling ‘malevolent forces’, says president

4 Mins read

Ghana’s economy battling ‘malevolent forces’, says president

Ghana’s currency has been one of the world’s worst performing against the dollar this year, inflation is at a 21-year high of 40 per cent and debt servicing is expected to take up 47 per cent of revenue in 2022, a reversal of fortune for a country once hailed as an economic success.
“We are in a crisis,” Nana Akufo-Addo, Ghana’s president, warned in a speech last month, before the latest in a string of protests demanding his resignation.
“I do not exaggerate when I say so. I cannot find an example in history when so many malevolent forces have come together at the same time.”
While Ghana’s economy expanded at an average 6 per cent gross domestic product growth annually between 2000 and 2019, this year — battered by the Covid-19 pandemic and the fallout of Russia’s invasion of Ukraine — it is forecast to grow by 3.5 per cent(opens a new window). Although Akufo-Addo insists it can still meet its debt repayments, it has started talks with the IMF to receive a loan of as much as $3bn.
Many African economies have been hit hard by a global rise in food and energy prices caused by the war in Ukraine just as they were beginning to recover from Covid. The US Federal Reserve’s tightening monetary policy has led to a strong dollar, raising the cost of goods in import-heavy economies.
In Ghana, this has been exacerbated by the cedi’s fall by more than 50 per cent against the dollar in 2022, the worst performance of the 148 currencies in a Bloomberg tracker. This drop came even as its central bank increased interest rates by 1,100 basis points to 24.5 per cent over the past year.
A mound of cocoa beans
Ghana’s overreliance on commodity exports such as cocoa makes it vulnerable to external events that cause foreign currency crunches and an economic downturn © Ange Aboa/Reuters
Ghana may have been dealt a blow by Covid and Russia’s war, but its problems run deeper, said John Asafu-Adjaye of the Accra-based think-tank African Center for Economic Transformation (ACET).
The economy’s overreliance on commodity exports — mainly gold, cocoa and oil — makes it vulnerable to external events that cause foreign currency crunches and an economic downturn.
“Not all the blame can be put on the current government,” said Asafu-Adjaye. “Ghana has not been able to diversify its economy. The structure of the economy has remained the same since independence.”
Before the pandemic, Ghana’s debt as a percentage of GDP was 62.7 per cent. That has now ballooned to 84.2 per cent, according to IMF data, as it borrowed heavily to shield its economy during the pandemic, racking up a deficit of 15.2 per cent. The average fiscal deficit in low-income developing countries was about 5 per cent of GDP.
At the end of the first half of 2022, Ghana’s public debt was $28.1bn(opens a new window). With debt servicing expected to take up 47 per cent(opens a new window) of revenue this year, there were now concerns over “the government’s ability to repay its debt”, said Asafu-Adjaye of the ACET, pointing to the decision of the three big rating agencies to downgrade Ghana to junk status.
The growth of the past two decades was bankrolled by loans, said Bright Simons, vice-president of think-tank Imani, with debt relief in the early 2000s paving the way for the government to issue Eurobonds in each of the past nine years. Debt relief and the anticipation of a windfall following oil discovery in 2007 led to “fiscal looseness”, he said. Money was spent on a national healthcare scheme, free education was expanded to include secondary school students and what Simons described as a “dramatic increase in the wage bill” of the public sector.
“When Ghana got debt relief, a lot of the restraint that the global aid system normally imposes when you’re getting money from the IMF, World Bank and donor partners was removed. But Ghana did not implement strong enough domestic checks and balances to keep the government in check from overspending,” he said.
Frank Gill, Emea sovereign specialist at S&P, said that “fiscal policy has historically been driven by the electoral calendar. In the run-up to past elections, there has been a loosening of fiscal policy and that has tended to push up public debt well before the shock of the global pandemic.”
Ghana’s extensive borrowing and spending have not been matched by a commensurate increase in revenue. It collects just 11.3 per cent of taxes as a percentage of GDP, below the African average of 16.6 per cent.
With Ghana struggling to raise money on global markets this year, the government has taken on domestic loans with interest rates as high as 32 per cent. Accra turned to the IMF in July, seeking $3bn over three years, a political blow for the president after months of resistance by finance minister Ken Ofori-Atta that Ghana, a “proud nation”, would not seek assistance from the Washington-based lender.
“Ghana needs a credible IMF programme in order to increase confidence in the economy,” said Simons. Analysts said the IMF would seek “fiscal discipline” from Ghana that would include spending cuts.
Akufo-Addo has set ambitious targets for Ghana to “restore and sustain debt sustainability” and increase tax collected as a percentage of GDP to as much as 20 per cent. But the president faces more immediate concerns. As inflation continues to rise, opposition MPs in parliament are demanding the sacking of Ofori-Atta. This week the president dismissed junior finance minister Charles Adu Boahen over alleged financial misconduct.
“Maybe the country should have been more cautious and shouldn’t have gone in as far or fast as it did,” Asafu-Adjaye said of Ghana’s woes. “At the time, it seemed like a good idea and the money was available.”
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