Ghana, once the fastest growing economy in the world, is facing one of the most difficult economic moments in history, which can be likened to the 1983 turmoil.
While the government has constantly attributed the current situation to the lingering effects of COVID-19 as well as the Russia-Ukraine war, others believe it is as a result of wrong policy choices of the ruling government.
The wholesale implementation of the free Senior High School policy, commitment of funds into the building of a national cathedral, unplanned implementation of the one district one factory and the planting for food and jobs initiatives are the most reasons cited by these critics.
Yet, another school of thought attributes the situation to weak foundation of the economy which is mostly dependent on the exports of primary products with little or without value addition, coupled with huge reliance on im- ported commodities.
The average annual import bill of Ghana is estimated at USD10 billion, Finance Minister, Ken Ofori-Atta, disclosed during a briefing at the floor of parliament on November 24, 2022.
Although pinpointing the exact factors that have pushed the economy so deep into prolonged hardships is as difficult as the cur- rent situation itself, but one thing that is certain is that, the role of external factors cannot be ignored.
Currently, global financing conditions remain tight due to rising interest rates, stronger US dollar, and risk aversion for emerging market economies’ assets. The prevailing high interest rates due to past policy rate hikes are still transmitting to financing costs.
Also, the stronger US dollar in recent months amid higher treasury yields and increased demand has triggered renewed currency pressures, especially in emerging markets and developing economies.
The pressure on the local currency, the Cedi, is still high although much better compared to the beginning of the year when it depreciated sharply on account of the uncertainties at the end of 2022, associated with the launch of the Domestic Debt Exchange Pro- gram (DDEP).
Data from the Bank of Ghana showed that the Ghana cedi depreciated by 20.6 percent in January 2023, and has remained generally stable since then, with a cumulative depreciation of 2.5 percent between February and September 18, 2023.
The relative stability in the foreign exchange market reflected improved foreign exchange supply, including IMF flows, Bank of Ghana’s Domestic Gold Purchase Program, and purchases of repatriated export proceeds from mining companies and oil and gas producers, which amounted to US$1.9 billion as at End-August 2023.
Additionally, the Central Bank’s FX forward auctions for Bulk Oil Distribution Companies may have played a role in removing the unsystematic conduct in the market and contributed to the exchange rate stability. Latest BoG Business Confidence Index in August 2023 showed positive sentiments about industry prospects due to improving consumer demand and the relative stability in the local currency. Also, Ghana’s Purchasing Managers’ Index (PMI) for August 2023 increased for the sixth successive month, pointing to a sustained improvement in business activity.
Growth Remains Sluggish
After escaping a recession by the skin of its teeth, Ghana’s economy rebounded from 0.5 percent in 2020 to 5.1% in 2021. Growth momentum in the West African nation was however, interrupted by large capital outflows and policy tightening in advanced economies which placed significant pressure on the exchange rate, and together with monetary financing of the budget deficit, resulted in high inflation. Consequently, growth declined to 3.1 percent at the end of 2022.
In 2023, economic growth was relatively strong in the first half. The latest data re- leased by the Ghana Statistical Service shows real GDP growth at 3.2 percent in the second quarter of 2023, marginally down from 3.3 percent in the first quarter. The second quarter growth was also lower compared with 3.5 percent recorded in the same period of 2022.
The observed growth outturn in Q2, 2023 was largely driven by the services and agriculture sectors, which grew by 6.3 percent and 6.0 percent, respectively. However, one worrying trend observed is the performance of industry which is touted as the most important if the country is poised of reducing its current youth (15-24) unemployment rate of 32.8 percent.
The industry sector contracted by 1.9 percent in the second quarter of 2023. Recent trends in Bank of Ghana’s high frequency real sector indicators also pointed to a sustained turnaround in economic activity.
The updated real Composite Index of Economic Activity (CIEA) contracted at a slower pace by 2.8 percent year-on-year in July 2023, indicating a slight improvement from a contraction of 3.1 percent in June 2023 and 3.7 percent in May 2023.
The main indicators that contributed to the slight recovery in the Index during the period were industrial consumption of electricity, private sector contributions to Social Security, and tourist arrivals. Credit to the private sector, cement sales, and port activity, however, slowed down over the period.
The IMF expects growth to decline to 1.2 percent in 2023, the lowest in the past three years, before picking up to 2.7 percent in 2024. In line with this projection, Ghana is expected to put up an average performance in 2023 with its GDP growth rate falling below the SSA regional average of 3.3 percent.
Inflation Gradually Easing, Still Above SSA Average
Inflation in Ghana remains one of the highest in the Sub-Saharan African (SSA) region. Data from the IMF showed an End-year inflation of 31.9 percent in 2022, higher than the SSA aver- age of 14.5 percent in 2022. It was also way above the average of 9.4 percent for middle-income countries in the sub-region. In 2023, inflation is projected to remain high at 42.2 percent, 26.4 percentage points higher than the SSA regional average of 15.8 percent before easing to 23.2 percent in 2024.
Latest statistics from the Ghana Statistical Ser- vice (GSS) in September 2023 indicated a fall in headline inflation to 38.1 percent from 40.1 percent recorded in August 2023. After consecutive upward trends since May 2023, headline inflation declined for the second month in a row in September although
month-on-month inflation between August 2023 and September 2023 went up to 1.9 per- cent from -0.2 percent between July and August 2023.
The observed decline in inflation was broad-based, with a stronger easing of food price pressures and the sustained easing of non-food price pressures observed in recent months. Food inflation declined sharply from 51.9 percent in August 2023 to 49.4 percent in September. Non-food inflation also declined further to 29.3 percent in September, from 30.9 percent in August.
Since 2016, Food inflation remains significantly above the national headline inflation, suggesting that food is the major driver of inflation in the country. Luckily, the sharp increase in food, non-food and headline inflation from the second quarter of 2021, is gradually showing some noticeable decline as depicted in the image below.
Prices of Petroleum products Stable but Unacceptable
Another important element of the cost of living basket is expenditure on fuel or fuel prices. A trend analysis of data from the Bank of Ghana showed that fuel prices rose consistently from the second quarter of 2020 till the end of 2022. Fortunately, there is an observed downwards trend in the indicative petrol and diesel price with customers experiencing some stability in ex-pump petroleum prices.
Meanwhile, latest confidence surveys con- ducted in August 2023 by the Bank of Ghana revealed that the Consumer Confidence Index dipped due to the utility tariff adjustments and recent increases in ex-pump petroleum prices. This suggests that though prices of petroleum products are relatively stable, they remain significantly high for the average Ghanaian when compared to the pre-COVID period.
More Ghanaians To Fall Into Poverty
According to the World Bank, the “inter- national poverty” rate is estimated at 27% in 2022, an increase of 2.2% points since 2021. However, the high inflation, coupled with the high youth unemployment rate, has pushed many Ghanaians into poverty, which has worsened in recent times. As such, more Ghanaian households have been under pressure from this high inflation and slowing economic growth.
Poverty is projected to worsen between now and 2025, increasing to nearly 34% by 2025. Notwithstanding its considerable inflation, the country’s daily minimum wage has only increased by 10% (from GHS13.53 in 2022 to GHS14.88 in 2023) which is in- sufficient considering the pace of inflation.
Navigating The Muddy Waters
Though inflation is gradually easing, which may build consumer confidence, government finances remain weak despite securing a three-year IMF Extended Credit Facility (ECF) of about $3 billion. Government expenditure continues to grow, exceeding the targets every quarter.
According to the World Bank, the 2022 fiscal deficit was well above target at 11.8 percent while public debt rose from 79.6 percent in 2021 to over 90 percent of GDP in 2022, as debt service-to-revenue reached 117.6 percent.
Moving forward, the government needs to tighten its belt in terms of spending, ensuring some fiscal discipline especially as the election year nears. Political will is very much needed to fight corruption which continually rob the country close to US$3 billion annually, according to Ghana Integrity Initiative (GII) and also fight against illegal mining that destroys the country’s forests and put food production at a major risk.
Additionally, efforts to improve revenue collection must be strengthened through widening the tax net to include informal sector workers instead of continually introducing new taxes. Non-performing tax handles must be scarpered as they remain “nuisance taxes” which continue to stifle business growth and erode consumer demand.
Key risk areas that require the immediate attention of the government include possible financial sector stress following the implementation of the DDEP; contingent liabilities in the energy and cocoa sector; domestic policy slippages with the 2024 elections being a particular risk; delays in external debt restructuring; commodity price and other external shocks; and sharper-than-expected monetary policy tightening in advanced economies.
The Bank of Ghana must be vigilant in monitoring inflationary trends and their impacts before embarking on further monetary tightening which may further increase inflationary pressures and weaken business sentiments with its repercussions on job creation.