Ghana's J Curve

The Ghanaian economy is slowing, and its deceleration is fairly broad-based. According to data presented by chief statistician Professor Annim, GDP growth in Q1 2022 was 3.3% year-on-year compared to 7.0% for Q4 2021. Information and Communication was the best performing sector in Q4 2021 and Q1 2022 alike, but again, the growth rate has almost halved. Looking further ahead, Ghana stands to gain from structural factors such as the diversification of its export base, formalisation of the economy and international connectivity.

Significance – Macro pressures advance

The economy grew at 0.5% in 2020 and 5.4% in 2021, according to government estimates. However, the outlook for 2022 is undermined by pressure on household spending from the highest rates of inflation and currency depreciation reported in West Africa, as well as constrained government expenditure and private sector investment. Although prices of Ghana’s principal exports – cocoa[1], gold and especially oil – are all improved as against a year ago, the country is experiencing strong capital outflows. International reserves fell from 4.3 months import cover in December 2021 to 3.7 months at end-April 2022, and the exchange rate (GHS/USD) fell by 22% between December and May 2022 alone.

Access to international capital, is therefore a critical issue for the country. But concerns about Ghanaian public financial management (as well as the growth outlook) make the difficult environment for emerging market debt particularly acute for Ghana. The government is adamant that it will not go to the IMF, while domestic interest groups like the Trade Unions Congress (TUC) have demanded that it stick to this tack. Alternative, ‘home-grown’ measures, include a tax on digital transactions (e-levy) introduced in May 2022[2], which authorities hope will raise substantial revenues and boost confidence in policy making.

There will be other implications. Consumer price inflation has increased from 13.6% in January to 27.6% in May, and implementation of the levy may add further pressure. To anchor expectations, the Bank of Ghana increased its policy rate from 17% to 19%, a more dramatic increase than any other central bank authority in the subregion. Staff will meet again in July[3] and while the real policy rate is still negative, increasing it to the same extent a second time is difficult in the context of slowing GDP growth. In addition to its inflation target, the Bank of Ghana has a mandate to promote economic growth.

Outlook – Never let a crisis go to waste

In the short-term at least, central government is constrained in its ability to introduce the sort of subsidies in demand at street level. Its fiscal deficit is above target for the period and public debt is an estimated 76% of GDP. In this setting, the authorities must focus on righting internal and external balances and attracting capital. In March, Finance Minister Ken Ofori Atta published plans to conclude an up to USD2 billion external financing arrangement and review policy on foreign exchange retention. The first part is underway – the minister is seeking parliamentary approval for USD1 billion syndicated loan[4]. But published changes to foreign exchange retention policy are pending, while access to forex has become difficult for some critical actors in recent weeks e.g., the bulk oil distribution companies.

Beyond its current travails, Ghana’s economic forecast benefits from projected demand for at least two of its three principal exports – oil and gold – while ceteris paribus, currency devaluation raises the competitiveness of production locally. At the same time, Ghana’s current digitisation policies create impetus for a more formalised economy. The cash disadvantages that led to electronic transactions jumping from USD13 billion to USD44 billion between 2016 and 2020 still exist, while (a) in order to avoid application of the e-levy on salary payments and bills, businesses must register with the Ghana Revenue Authority, and (b) from 1 July, financial institutions will be obliged to use the Ghana Card to register account holders.

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[1] However, the 2021-22 crop is expected to fall below the 2020-21 crop by 15% or more.

[2] Charged at 1.5% of transactions above GHS100 (USD12.80) per day

[3] Meeting on 20-22 July, press release on 25 July.

[4] https://www.bloomberg.com/news/articles/2022-06-11/ghana-gets-1-billion-pledge-from-banks-to-spur-finances