Ghana Economic Outlook

Ghana Economic Outlook

Economic performance and prospects

Economic growth fell from 14% in 2011 at the onset of oil production to 3.5% in 2016, the lowest in two decades. The economy recovered in 2017, growing an estimated 6.3%, spurred by recovery in nonoil sectors, lower inflation, and new hydrocarbon wells (the Tweneboa, Enyenra, Ntomme, and Sankofa oil and gas fields). Over the medium term, economic growth is expected to accelerate to 8.5% in 2018 and then moderate at 6.2% in 2019 as the budget and current account deficits narrow amid lower inflation and falling interest rates.

Macroeconomic evolution

Weak economic growth squeezed by tight monetary policy and lower oil production in 2016 have led to a decline in government revenues. Budget performance is expected to improve after the budget deficit drop from 8.9% of GDP in 2016 to 4.7% in 2017. Higher oil production and tightly controlled expenditures are likely to boost revenues. Improvements in tax collection and falling inflation and interest rates will facilitate economic activity. Revenue mobilization and efficiency measures will continue to be key factors in budget implementation. Inflation continued to gradually drop from a peak of 19.2% in January 2016 to 12.2% in September 2017. The Bank of Ghana reduced its policy rate from 25.5% to 21%, the fourth consecutive cut since November 2016. Exchange rates remained stable compared with 2014 and 2015, with a cumulative yearly depreciation of 4.7% against the U.S. dollar as of August 2017. Ghana is at a high risk of debt distress as the debt-to-GDP ratio remains high at 73.3% in December 2016, down from 68% in June 2017. Debt sustainability remains a priority for the government’s fiscal consolidation program.

Tailwinds

The smooth transfer of political administration following the December 2016 elections strengthened Ghana’s democratic credentials. The promotion of private sector– led growth provides a key platform for reviving the nonoil sectors, as well as for links to stimulate manufacturing. Restoring and maintaining a sustainable fiscal and macroeconomic environment, improving the business-enabling environment while strengthening the electricity supply, and ensuring the energy sector’s financial viability are requisite to enhanced productivity. The resolution of the production challenges of the Jubilee oil well and the September 2017 landmark ruling of the 2015 International Tribunal for the Law of the Sea on the boundary dispute between Côte d’Ivoire and Ghana in favor of Ghana pave the way for renewed drilling and exploration of oil and gas and offer the potential for new oil investment.

Headwinds

The wide budget overrun in 2016 calls for expanding Ghana’s tax base, which is relatively low, with a tax-to-GDP ratio of about 16%. Revenue mobilization remains key in achieving the country’s plans for a sustainable fiscal consolidation path while managing debt sustainability and funding of development objectives. Addressing the financial sustainability of state-owned energy enterprises is crucial to the financial health of the energy sector, as well as the banking sector, whose nonperforming loans rose sharply to 21.2% in June 2017. The increased minimum capital requirement of commercial and rural and community banks paves the way to consolidate and improve the health of the banking sector. The Bank of Ghana has taken steps to restore stability to the sector by requesting a recapitalization plan from banks with capital shortfalls, in addition to the implementation of collateral requirements and the development of an Emergency Liquidity Assistance plan.

·         Source: African Economic Outlook (AEO) 2018

Ghana sits on the Atlantic Ocean facing south and borders Togo, Cote d'Ivoire, and Burkina Faso. It has a population of about 28 million (2016). In the past two decades, it has taken major strides toward democracy under a multi-party system, with its independent judiciary winning public trust. Ghana consistently ranks in the top three countries in Africa for freedom of speech and press freedom, with strong broadcast media in particular and radio the medium with the greatest reach. Factors like these provide Ghana with solid social capital.

In December 2016, Nana Dankwa Akufo-Addo of the opposition New Patriotic Party was elected President in a peaceful election. Akufo-Addo and his vice-president, Mahumdu Bawumia, were sworn-in in January 2017, and a cabinet and ministers-of-state appointed. The size of their victory clears the way for them to carry out their political agenda, but significant economic challenges remain. The goodwill the government has earned is not inexhaustible; many Ghanaians are watching how it delivers on its promises in its first year. It started with free senior high school education, and President Akufo-Addo has pledged to reduce Ghana's budget deficit and cut waste in all sectors of public life.

Recent Economic Developments

Ghana’s economic performance improved in the first half of 2017, after substantial fiscal slippage in 2016. The fiscal deficit for the first half of 2017 was 2.7% of GDP—on track to meet its target of 3.5% of GDP.  Revenues underperformed and were 14.9% below their target, but the government cut both its recurrent and capital expenditure to keep its fiscal consolidation program on track. This underperformance was to be reversed in the second half of 2017 as policies, announced in March, took effect. These were supported by the World Bank through technical assistance to the Ghana Revenue Authority. Ghana's total debt had increased from $29.2 billion (73.1% of GDP) at the end of 2016, to $31.7 billion (68.1% of GDP) in 2017, reflecting a slowdown in the rate of external debt accumulation, as well as higher GDP growth. 

Ghana’s economy expanded for the third, successive quarter in March 2017, to 6.6% up from 4.4% the previous year. The industry sector recorded the highest growth of 11.5%, compared to 1.8% in 2016, with significant contributions of this from mining and petroleum. The agriculture sector grew by 7.6%, up from 5% the previous year, driven by good performances in the crops, fisheries, and cocoa sub-sectors. However, growth in the services sector slowed to 3.7% from 6.6%, due to slower growth in information, communication, and finance. Non-oil growth slowed to 3.9% from 6.3% in the same period of 2016.

The inflation rate continued to moderate itself, allowing the central bank to reduce its policy rate. Headline year-on-year inflation was 12.3% in August, a slight uptick from 11.9% in July but continuing a decreasing trend overall since September 2016. This created room for monetary policy easing and the Bank of Ghana cut the policy rate by a cumulative 450 basis points to 21.5% in July. Consequently, the 91-day Treasury-bill rate fell from 16.81% in December 2016 to 12.10% in June 2017; and the rates on the 182-day Treasury-bill rate moved from 18.5% to 13.28% over the same period. Thus, broad money expanded by 23.7% in the first five months of 2017, up from 16.8% in 2016. Outstanding credit to the private sector grew by 16.2% in May 2017, against 10.1% for the same period in 2016.

The external sector further improved as the cedi continued to stabilize and the reserve buffer expanded. The June 2017 trade balance turned out a surplus of $1.43 billion, equivalent to 3.1% of GDP from a deficit of 3.3% the previous year. This was attributed to export earnings, especially from gold, cocoa, and oil. After a sharp decline in the value of the cedi in January (due to demand caused by seasonal factors), pressure has eased with improved liquidity and increased reserves. Gross International Reserves went up from $4.9 billion, equivalent to 2.7 months of imports, at the end of December 2016, to $5.9 billion in June 2017, equivalent to 3.4 months of imports.

Ghana’s near term economic prospects are good but challenges remain. Overall GDP is projected to rebound to 6.1% in 2017. The rebound is expected to be driven primarily by an increase in oil production. Also, goldoutput will likely remain high and cocoa production is expected to grow to above 900,000 tons. However, non-oil growth is expected to slow to 4.3%. Inflation is expected to fall within its target range of 6-10% by 2018, allowing for more monetary policy easing and lower interest rates to spur private investment.

The fiscal deficit target of 6.3% of GDP for 2017 is expected to be met. In addition, if met, the targeted 2.5 percentage points primary balance adjustment, could help reduce the debt stock from 73.4% to 70.5% by December 2017. Considering that Ghana is already placed at high risk of suffering debt distress, any further fiscal slippage could have a significant adverse impact on the debt dynamics. Ghana still faces high financing costs in both the domestic and external markets.

Ghana’s economic performance over the medium term lies in its ability to regain and sustain its economic stabilization program through a return to fiscal consolidation. The Ghanaian authorities have expressed their commitment to embark on a steep path of fiscal consolidation; their half-year fiscal performance is evidence of this.

Ghana is also likely to continue to face high domestic and external financing costs as its debt expands and global interest rates rises. In addition, the government faces other major challenges: high youth unemployment; ongoing delays in the resolution of debt incurred by energy state-owned enterprises; and the high cost of electricity and need to match capacity and demand for its supply.