Ghana Year in Review 2014

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Although room for fiscal manoeuvring has shrunk in Ghana in recent months, the government’s subsequent efforts to tighten spending and boost revenues is being welcomed by investors and lenders. Cuts to public expenditures and lower oil income will likely further slow growth in 2015, but strong output from the agriculture industry and improving performance from service sectors should help ensure a favourable medium-term outlook.

Belt tightening

Ghana has been one of Africa’s outstanding performers in recent years, with strong GDP growth, a wave of FDI, revamped tax regimes and improved data collection. However the country’s weaknesses were exposed in 2014 as commodity prices dropped, helping to widen the budget deficit and put pressure on the currency.

While GDP growth is expected to come in at around 6.9% for 2014, according to official forecasts, it will likely decline to 3.9% in 2015. The figure, though still robust compared to advanced economies, is a far cry from the heady days of 2011, when Ghana experienced 14.4% growth on the back of its fledgling oil industry.

The biggest challenges have been fiscal in nature. The 2015 budget – unveiled by the minister of finance, Seth Terkper, in November – aims to cut the fiscal deficit to 6.5% of GDP in 2015 down from a projected 9.6% in 2014, through measures including a 17.5% petroleum tax and the extension of a temporary hiring freeze for public sector workers, with the exception of those in the health or education sectors.

The current budgetary deficit is far lower than what it was several years earlier, when the shortfall often ranged in the double digits, but high current spending during the bull years has left the Ghanaian government re-balancing the budget at a time when growth is slowing.

Structural reform strings attached

The country has already sold a $1bn Eurobond at a rate of 8.125% in September 2014 to help address the deficit – an issuance that was three times oversubscribed – but is also working to secure a loan deal from the IMF. To this end, discussions are already under way to cut public wages, on which the government spent in excess of 70% of its tax revenue in 2012 and more than half in 2014.

The government’s budgetary measures have been welcomed by the IMF thus far. In November Joël Toujas-Bernaté, head of an IMF mission to Ghana, lauded the country’s commitment to cutting the budget deficit to 3.5% of GDP by 2017, adding that other proposed measures – such reductions in energy subsidies – would also be beneficial.

However, ratings agency Fitch predicted the IMF deal would probably not be concluded until April. As of December, sovereign group director, Carmen Altenkirch, projected a fiscal deficit of 8% of GDP in 2015, categorising the government target as “exceptionally ambitious” and echoing concerns about the difficulty of raising government revenues in the midst of an economic slowdown.

Fitch has also warned that the cedi could come under further pressure in early 2015 if an IMF deal is still not in sight. The currency’s steep fall in 2014 – down roughly 40% against the dollar – made it the world’s worst performing currency that year. This in turn has pushed up inflation, as imports have become more expensive.

Sweet relief

However, the cocoa sector may prove to be a ray of sunshine amidst this gloomy backdrop. In October the government announced a near 63% increase in the price paid to farmers for the crop. The move is likely to boost production in the world’s second-largest cocoa exporting nation, while the higher price promises to help farmers make investments in new equipment and technology to increase yields.

Cocoa beans account for more than 20% of Ghana’s export earnings – further bolstered by recent market price increases triggered by the Ebola outbreak in the region. The sector received another boost in September in the form of a $1.7bn financing deal for COCOBOD, the state’s marketing agency and watchdog, to purchase this season’s cocoa crop, which is expected to top 1m tonnes.

On the bright side

The country’s service sectors are seeing strong growth as well. Ghana’s banking sector performed well in 2014 despite the economic slowdown, with credit expanding and non-performing loans under control.  While banking penetration remains fairly low – due in part low to lending rates among small and medium-sized enterprises and less affluent households – it is likely to witness continued growth in the coming years.

Tourism is also flourishing, with the decline of the cedi making Ghana an even more affordable destination for foreigners. The World Tourism & Travel Council, a global industry body, has said the sector’s direct contribution to GDP could increase by 9.7% in 2014, up from an estimated 2.4% of GDP in 2013. This growth in tourism has led to a wave of investments in upmarket hotels and resorts, targeting business travellers in particular.

Connectivity is also expected to grow. In July South African Airlines (SAA) announced plans to set up a hub in Accra to feed into its broader aerial network. Accra’s location in the heart of West Africa, its relative political stability and the ongoing reform of the civil aviation sector make it an attractive locale for SAA.

While 2015 will be a slower year for the Ghanaian economy, replete with significant downside risks, an IMF deal would do much to boost investor confidence, rein in bond yields and bolster reform efforts in the run-up to the 2016 elections. Furthermore, a variety of sectors – ranging from tourism to banking – could continue to enjoy robust growth.

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