With Ghana facing both current account and budget deficits, and the Cedi losing reasonable ground against dollar, hope seems all but lost
When the catchphrase ‘Africa rising’ first came out, Ghana was undeniably the poster boy for Africa’s new found success. Now, however, the West African nation is grappling with a slew of problems, least of which is not the Cedi’s sustained freefall against the dollar.
Ghana’s economic growth exceeded 9 percent in 2011 but fell to an estimated 4.2 percent last year, according to the International Monetary Fund (IMF). The Cedi is arguably the biggest victim of Ghana’s economic nosedive. Last year, the currency’s value declined by more than 30 percent against the dollar and is expected to continue losing ground for the remainder of this year. The government is also struggling to match investments in the power sector with the country’s growing energy demand, deepening an already alarming energy crisis.
How did it get so bad so quick?
Ghana is an export-driven economy that is primarily dependent on cocoa, gold and oil. So when commodity and oil prices soared in 2011, what naturally followed was an increase in export revenue and a resultant economic boom. Commodity and oil prices have, however, steadily declined and most analysts are in consensus that both the commodity and oil markets are at the bottom of their cycles. This has left Ghana in a precarious economic position.
It is tempting to fully attribute Ghana’s economic slowdown to the slump in commodity and oil prices. After all, slower economic growth as a result of lower commodity prices is not isolated to Ghana. Both the IMF and World Bank expect growth in the broader Sub-Saharan African (SSA) region to slow as a result of low prices for oil and commodities. World Bank expects SSA’s growth to slow from 4.5 percent in 2014 to 4.0 percent in 2015, while the IMF trimmed its outlook from 5.8 percent to 4.9 percent.
But putting the blame entirely on a downturn in the commodity and oil markets would be a gross misrepresentation of the true situation in Ghana. What is happening in Ghana is that the country’s leadership read too much into the ‘Africa rising’ rhetoric. Instead of prudently spending the windfall from high commodity prices on high impact projects such as expansion of power capacity, the government disproportionately increased public wages for ‘deserving’ technocrats. The government also ravenously piled up on debt, plausibly imagining that high revenues from oil and other commodities would indefinitely sustain its borrowing. This has led to an unhealthy buildup of debt.
Source: Financial Times
Now that revenue from commodities and oil has sharply declined, Ghana’s fiscal indiscipline is rearing its ugly end. High government spending, specifically in the form of an inflated wage bill, coupled with low revenue, has deepened the budget deficit. The country is desperately looking for a way to resolve its deteriorating fiscal position.
Turning to bailouts
The Ghanaian government petitioned the IMF in 2014 for a possible bailout. After several months of extended negotiations, the IMF and Ghana have been able to hammer out a deal. Ghana will receive a $918 million bailout package provided it meets conditions set out by the IMF.
One of the actions that the IMF demands is that Ghana cut back public sector spending, specifically the wage bill. This is welcome, considering that Ghana’s spending over the years has risen primarily as a result of sharp increases in wages. However, beyond that, some of the IMF’s demands may put Ghana in a difficult position. The IMF, for instance, demands that Ghana increase tax collection. Since Ghana’s main economic sectors are mining and oil and gas, it is likely that most of the tax increments will hit these already ailing sectors, potentially disrupting future investments in the sectors.
The IMF is, however, not willing to make any compromises on its stance on the reforms. “Forceful and sustained implementation of the program will be essential to address Ghana’s macroeconomic imbalances and enhance investor confidence in view of downside risks,” said Min Zhu, the IMF’s deputy managing director, in a statement.
With the IMF unwilling to relent, it appears things in Ghana may get a lot harder before they get better. Unsurprisingly, things always get worse before they get better—that’s if they get better—when dealing with the IMF’s so-called bailout packages. Greece serves up the best example. The austerity measures that accompanied its IMF bailout package led to high unemployment figures and exacerbated economic and political distress in the country. In fact, the IMF later admitted that it had failed to realize the damage that austerity would do to Greece.
The IMF’s conditional loans have already started stirring opposition from within Ghana and some influential personalities have urged the government to adopt alternative world views. Daniel N. Kotei, a retired Diplomat and international relations expert, has asked Ghana to join the Asian Infrastructure Investment Bank (AIB), saying that the new China-led bank offers better terms than IMF.
Dr. Kotei believes AIB will focus on important projects such as rehabilitating Akosombo dam
South Africa and Egypt are the initial African members of AIB, which is being touted as a rival to US-backed World Bank and IMF. Dr. Kotei argues that AIB will help Ghana solve its more pressing challenges like repairing the Akosombo Dam, completing the Bui Dam project and constructing a new dam at Yapei in the country’s northern region. This, he explained, would expand power supply and help curb power shortages, which are currently crippling manufacturing and leading to job losses
Admittedly, the AIB seems like a better alternative to IMF, particularly because its focus seems to be directed towards infrastructure, an area that Ghana needs urgent help. But this is just according to Dr. Kotei and other AIB proponents. The bank still has no track record. More importantly, both AIB and IMF are not charitable organizations and their help does not come absent a price tag.
If Ghana truly wants recovery and continued growth, it should look beyond the IMFs of this world and adopt a more sustainable approach to development. A good starting point would be to promptly remedy the power crisis. Around 3,000 people have already been laid off as a result of the cuts, and as many as 5,000 workers could lose their jobs by September if the situation does not improve, Ghana’s Chamber of Commerce and Industry cautioned in April.
The power cuts are a direct threat to formal employment and need to be addressed in order to grow the formal sector of the economy. Despite what has been said about the informal sector and entrepreneurship, a formal sector and formal jobs will always remain a key component of any healthy economy. Unlike the informal sector or start-ups, a formal sector provides a reliable and predictable tax base for government. Without this tax base, the government becomes heavily reliant on natural resources, which is one of the reasons Ghana is in this mess to begin with.