Despite real difficulties, the country has made major strides and is in a better position to clear hurdles

A few years ago, Ghana’s economy was one of the fastest growing in the world, with GDP growth rates stretching above 14%. Recent oil discoveries, combined with sustained prices for cocoa and gold, led to an influx of capital and boosted activity in a range of sectors, from telecoms to construction. Although Ghana’s economy is still growing apace – GDP was up 6.7% in the first quarter of 2014 year-on-year and mid- to long-term fundamentals remain very attractive – the euphoria is beginning to mellow.

The short-term view looks fairly positive: improved oil output, cheaper power generation and higher cocoa production have all helped to keep investors bullish. But there has been a noticeable change from the unconstrained optimism of recent years. Ghana has missed fiscal deficit targets that, if lower than five years ago, are nonetheless creeping upwards, and the country is beset by rising inflation and a weak currency. As a result, in August 2014, after half a decade of impressive growth, the government entered negotiations with the IMF for fiscal relief.

Speaking to OBG, Mona Helen K Quartey, deputy minister of finance, said, “The government has prioritised expanding the tax base while improving the efficiency of the existing tax base. Measures being implemented to expand the tax base include reviewing exemptions, reviewing free zones regime, developing schemes to rope in the informal sector through tax stamps, and introducing point-of-sale devices." The mood in the country, once seen as Africa’s star economy, has changed considerably. “Not long ago there was a lot of optimism, but recent conditions have raised a lot of concerns,” said Henri Telli, an in-country economist for Ghana at the UK-based International Growth Centre. Nevertheless, while Ghana is in a difficult position at the moment, its problems are seen as manageable, and the expectation is that the proposed IMF assistance package will help improve the country’s competitiveness on the global market without any undue disruptions.

Rollercoaster Years

In the three decades following independence in 1957, the economy’s performance was volatile. The early years were marked by a tendency towards grand projects, such as the Akosombo Dam, and towards state intervention in the markets, including price controls, expropriation and rationing – all of which helped drive high inflation, lower output and more corruption. Ghana went from being the richest country in sub-Saharan Africa at independence, with per capita GDP equal to South Korea’s, to constantly fending off collapse. GDP suffered numerous down periods and a couple of outright crashes, dropping by 12.4% in 1975 and again by 6.9% in 1982. Income per head, meanwhile, fell by roughly half from peak to trough.

In the early 1980s, after an IMF-backed Economic Recovery Programme (ERP), the country made a comeback. Firms were privatised, public spending trimmed, markets liberalised and the cedi floated. GDP growth entered positive territory in 1984 and has been there ever since. Between 1984 and 2013, growth averaged 5.67%, peaking at 15% in 2011.


In recent years, such headway has been underlined by a GDP rebasing in 2010, which saw the valuation of the economy rise by roughly 60%. As a result, in July 2011 the country graduated to lower-middle-income status, which the World Bank defines as having a per capita income between $1006 and $3975. The combination of oil revenues, swift economic growth and rebasing of its GDP has added some $500 to Ghana’s per capita figure.

Its economic makeup has also changed significantly. In 2009, 49.2% of GDP came from services, 19% from industry and 31.8% from agriculture, according to the Bank of Ghana (BoG). While agriculture has since grown in absolute terms, its share of the economy has shrunk, to 22% by 2013. This is mainly due to the expansion of industry, which grew to 28.6% of GDP driven by a rise in oil production from practically nothing in 2009 to 8.1% in 2013.


Oil was struck in 2007 in the Jubilee field, some 60 km offshore from the Ghana coast. Production began three years later, in 2010, hitting 80,000 barrels per day (bpd) in 2012 and estimated at about 100,000 bpd in 2014. Standard Chartered believes the country could be a net exporter in 2014, and in March of that year, for the first time, Ghana’s exports of crude oil were greater than its imports of oil and gas, according to the BoG.

Other key commodities are gold, the country’s largest export, and cocoa beans and cocoa products, which were number three after oil, followed by timber, manganese, bauxite and diamonds.

Despite abundant resources, the country has had chronic trade deficits, with only a few short periods of surplus, the last in 1982. As a portion of GDP, this peaked at 19.5% in 2008, driven largely by costly imports for the hydrocarbons sector, which had to build up infrastructure from scratch. The current account balance has also fared poorly, quadrupling in dollar terms since 2005, though rising just 1% since then because of strong GDP growth.

Foreign Direct Investment (FDI)

Investment inflow from foreigners has held up well. While BoG data show that FDI was down almost 20% in 2013, this has otherwise held relatively steady for three years running, and was up in the first quarter of 2014 compared to the same period in 2013. The total FDI stock is now nearly $20bn, almost double the figure in 2010, with $83m in outward FDI and $10.08bn in inward FDI, according to the UN Conference on Trade and Development. This rise was driven by heavy spending in the extractive sectors. The Ghana Investment Promotion Centre estimates FDI for 2013 at $3.95bn, above the BoG estimate but below its own figure of $4.90bn in 2012. For the fourth quarter of 2013, the centre said $702.94m had been invested, up from $524.71m a year earlier, with the biggest chunks going towards manufacturing (48.08%) and general trading (31.25%).

Business Climate

In something of a rarity for many “frontier” markets in Africa and the Middle East, where state intervention and foreign shareholding requirements are common, Ghana’s economy is relatively free. According to the US State Department’s 2013 statement on the investment climate, only a few sectors have outright bans on foreign participation – such as small taxi companies, beauty salons and lotteries – and the country has “no overall economic or industrial strategy that discriminates against foreign-owned businesses”. The same statement for 2014 reiterated the country’s positive approach to dealing with foreign firms. While the report did express some concern regarding stricter local content regulations in the petrochemicals sector, the general climate, it said, was favourable for foreign investors. Among the conditions highlighted were a stable and predictable political environment, a free-floating exchange rate, guaranteed repatriation of investor profits, and legal protections against expropriation and nationalisation.

In the World Economic Forum’s “Global Competitiveness Report 2013-14” Ghana ranked 114th out of 148 countries, a fall from 103rd out of 144 in 2012-13 and equal to its rank in 2011-12. However, the country did improve in a number of indicators: for technological readiness, it jumped from 108th to 99th; for efficiency enhancers, from 95th to 87th; and for financial market development, from 59th to 52nd. There was also improvement in its ranking for innovation, placing 64th from 95th the previous year.

The World Bank’s “2014 Doing Business” survey put Ghana at 67th overall, 128th for ease of starting a business and 109th for cross-border trade. In the 2014 “index of economic freedom” put out by the Heritage Foundation, a US-based think tank, Ghana placed 66th globally and 5th among the 46 countries of sub-Saharan Africa.

The index showed improvement in seven of the 10 areas measured, with only some cause for concern in the categories of corruption and monetary freedom, largely due to insufficient protection of property rights and other legal weaknesses.

Fiscal Health

Ghana is not immune to some of the woes that have afflicted many African economies in recent years – particularly in fiscal health. Still, the country has seen a dramatic improvement in its balance sheet from the previous decade, when deficits were in the mid-teens. Since then, spending increases have been more moderate, while reforms to revenue collection – such as overhauling the tax authority and reducing recurrent expenses like oil subsidies – have had some salutary effects.

“The tax-to-GDP ratio has increased from 13.7% in 2010 to 17.4% in 2013, mainly on account of improvements in tax collection and administration,” Quartey told OBG. “Some of the previous tax reforms include the introduction of value-added tax (VAT) to replace sales tax, the integration of revenue agencies into one (the Ghana Revenue Authority), and the automation of domestic tax.”

It was partly for these reasons that, when Ghana launched its first eurobond in 2007, appetite was fairly strong. This momentum slowed as 2014 neared. In October 2013 Fitch, a rating agency, downgraded Ghana’s score for international and local bond issues from B+ to B. The country ceiling was likewise lowered. Largely because of the deficit, Ghana has had a negative outlook with Fitch since early 2013. Expectations had been that, after the country’s fiscal deficit soared from 4% in 2011 to 11.8% in 2012, it would be able to bring that number down sharply. In 2013, however, it was still at 10.8%, despite a target of 9%. On the upside, Fitch noted that Ghana had managed to cut fuel subsidies, which would take substantial pressure off the budget: in May 2013 the government scrapped the subsidy, which costed GHS1bn ($318.2m) in 2012 and GHS2.4bn ($914.88m) in 2013, but then reintroduced parts of it in April 2014 before removing it partially again in July. However, Fitch also said, though the state had lagged in fully implementing its fiscal consolidation strategy in 2013, “the decision to sharply increase utility tariffs and scrap the fuel subsidy reduces the risk of an overrun in the coming fiscal years”.

Moody’s followed in June 2014, downgrading Ghana’s sovereign rating from B1 to B2, with a negative outlook. The reasons it gave for this were high indebtedness – public debt was at 55.7% in 2013 and would hit 65% by the end of 2015 – and high fiscal deficits, which it said will be hard to get under control given the country’s high interest rates and arrears.

Some of Moody’s metrics suggest fiscal imbalance. In 2013 Ghana’s interest payments amounted to 23% of its revenues, up from 14% in 2012 – landing its “fiscal stress” score in the 95th percentile of all sovereigns rated by the agency. In first-quarter 2014 nearly half of public debt was domestic – one-third of it short-term – making interest payments expensive. “Ghana's situation will worsen if we do not take bold actions to remedy the situation now,” said Nana Osei Bonsu, CEO of the Private Enterprise Federation. The deficit has remained stubbornly high, due to lower-than-expected revenues and grants, combined with a higher wage bill and interest costs, according to the BoG. The bank’s governor, Kofi Wampah, said domestic revenue in 2013 was GHS18.7bn ($7.13bn) against a budgeted GHS21.3bn ($8.12bn), while tax revenue came in at GHS14.3bn ($5.45bn) against an expected GHS17.1bn ($6.52bn). The lower tax revenues, Wampah noted, were attributable to decreased imports, lower commodity prices and less business activity in the first half of 2013. This was due in part to the lack of energy – itself a result of electricity load-shedding and cuts to Nigerian gas imports from the West African Gas Pipeline. The wages bill for 2013 came in at GHS8.1bn ($3.09bn) against a budgeted GHS7.5bn ($2.86bn), accounting for almost 64% of tax revenue.

In an effort to boost state revenues, the country has raised and extended its VAT. The new 17.5% rate, which is 2.5 percentage points higher, went into effect in January 2014. Some activities that were previously exempted from VAT are now subject to it: Seth Terkper, the minister for finance and economic planning, told local press in April 2014 that the tax will apply to many businesses that were previously operating outside of the tax net, such as those that make or supply pharmaceuticals other than at the retail stage, and domestic airlines, among many others. The intent is to lift revenue and help narrow the budget deficit. The 2014 increase follows a separate VAT hike from 12.5% to 15% in 2013.

Bread & Cutter

Public sector wages have been a sticking point for government, and the country has long struggled to pay its civil servants. Under the ERP in the early 1980s, salaries largely kept in line with inflation and productivity. In 1992, however, the government agreed to a major pay increase for nurses, and a large wage disparity between civil servants and private sector workers began to emerge.

To address this, in 1997 the government introduced a new civil servant grade and wage system known as the Ghana Universal Salary Structure, but the programme was inconsistently applied. Departments that did apply it found themselves burdened with high costs for human resources.

To create a more balanced approach, the Fair Wages and Salaries Commission carried out an evaluation, surveying over 5000 employees at nearly 2000 workplaces. The resulting new system, introduced in January 2010 and known as the Single Spine Salary Structure (SSSS), rationalised pay for all public workers and placed them within a harmonised framework with 25 grades and 189 pay points.

Under the SSSS, wages are to rise slowly but steadily, and offer more transparency over the long term. In the short term, however, costs are expected to increase. In 2008 the wage bill was below GHS2bn ($762.4m); in 2013, by some estimates, this reached GHS11bn ($4.19bn). The country’s 600,000 civil servants now cost the state some 70% of tax revenues, up from about 30% before the new system.

The establishment of pay grades for professions such as teaching, pharmacology and medicine have also led to strikes. Civil servants in Ghana are entitled to a number of benefits, such as allowances, commissions and premiums, and these are negotiated separately by each group.

The impact on the economy is significant. With the wage bill consuming such a large percentage of the government’s revenue, other sectors are being crowded out, especially key areas such as infrastructure, said Augustine Fosu, a fellow at the Institute of Statistics, Social and Economic Research, in October 2013. Wages in other areas, too, have been rising rapidly: the minimum wage increased 17% in 2010, 20% in 2011, 20% in 2012, 17% in 2013, and 14.5% in 2014. The Trade Union Congress, which staged a strike in 2013 and held protests in 2014, had been asking for a 20% increase in 2014. Some opposition parties, however, have pushed back, countering that unions should be working toward economic stability rather than higher wages.

Indeed, to address these issues, the government has sought to strengthen control and oversight of the wage process, both in terms of negotiations and commitments, which should yield some beneficial results. Quartey listed a number of measures that have been rolled out in recent years, including “a negotiated 10% cost-of-living allowance effective in May 2014, in lieu of increased base pay; a moratorium on public sector wage increases throughout 2014; a continuation of the net freeze on employment in the public service, excluding education and health; and new payroll audits and electronic salary payment vouchers”.

Fighting Inflation

Long a bugbear for West African economies given their high level of importation and reliance on commodity exports for foreign currency earnings, inflation has also begun to tick upwards in Ghana. Official statistics put the annual increase in the consumer price index at 15.3% in August 2014, up 0.6 percentage points from the previous month and the third month in 2014 that it remained above 15%. This is far lower than the average rate of 28.9% between 1965 and 2013 – indeed, it hit 123% in 1983 and 33% as recently as 2011 – but in recent years the inflation rate has moderated, coming in at 8.7% in 2011 and 9.2% in 2012.

The limited fiscal space has constrained the authorities’ ability to address inflation. With revenues lower and challenges arising in issuing longer-maturity bonds – two auctions for five-year and seven-year notes were cancelled in early 2014 – the entire budget deficit was funded in the first quarter of 2014 by selling sovereign bonds equal to the shortfall, according to the BoG. This means the inflation rate could rise further. The twin deficits and monetisation of the budget shortfall have also affected the local currency. In the year to August 2014, the cedi lost 45% of its value, making it at certain times the worst-performing currency in the world.

Currency Measures

However, the government has sought to roll out a number of measures to prop up the value of the cedi. In early 2014 it issued new rules requiring that all transactions in the country be conducted in local currency. This included banning the issuance of cheque books in foreign currency, capping withdrawals of foreign currency at $10,000 per transaction and limiting over-the-counter withdrawals to those needing money for travel. In addition, it tightened up documentation rules and required all exporters to deposit the proceeds of overseas sales into a bank account within 60 days and to convert those deposits into the local currency within five days after that.

The impact of the new rules, which came into effect in early February 2014, has thus far been muted. In June 2014 – as rate spreads widened, informal activity picked up and concerns arose of a slowdown in foreign currency deposits – the controls were eased. The IMF had stated that the measures would be ineffective unless the country first resolved its macro-economic imbalances.

The most serious consequences of the stricter rules were that they created more concern about the strength of the cedi. This reduced the amount of capital flowing into the country, leading the authorities to tweak regulations in new ways.

“The aim is to make it easier for people to transact business while still protecting our currency,” Wampah told Reuters in June 2014. “We have been monitoring and listening to people’s concerns. It is on account of this that we are reviewing.”

To address some of these concerns, the BoG subsequently revised its rules. It permitted over-the-counter withdrawals up to $1000 and raised the cap on overseas transfers to $50,000. Exporters will no longer have to deposit their earnings in local banks within 60 days, will be able to follow the terms of their contract, and may keep 60% of their export receipts in a foreign currency account. However, many of these measures were rescinded in August 2014 (see Banking chapter).

A number of other practical steps have been taken to stabilise the economy, including raising interest rates. The central bank increased its monetary policy rate from 16% to 19% over the first eight months of 2014 – the rate had been as low as 12.5% in 2011. The hope is that higher rates will help stabilise the cedi and bring down inflation, although it may also have a slowing effect on growth.

Donor Eligibility

On the advice of the IMF and the World Bank, in 2010 Ghana rebased its GDP figures. As the new data provided was more accurate, this was largely responsible for the country’s new status as a lower-middle-income country.

Although the role of donor aid is limited in Ghana, this re-evaluation has curbed the country’s ability to tap concessional loans and grants, thus limiting its access to debt financing. The International Development Association (IDA), for example, which distributes the World Bank’s soft loans, qualifies countries using a threshold of $1175 per capita GDP. Nations that exceed this for three years in a row are graduated from the programme, concessional terms are withdrawn and funding is cut off altogether. The IDA’s concessional borrowing terms are generous – a 40-year payback period, a 10-year grace period and a low interest rate. Those countries which are in the most distress receive mostly grants.

After graduating from the IDA programme, countries have access to other lending via the International Bank for Reconstruction and Development (IBRD). These “hard” loans come with a shorter grace period and a higher rate. Since 1990 some 36 countries have graduated from IDA to IBRD loans, though eight of them have since reverted.

Ghana will also no longer qualify for certain forms of debt relief. In 2002, the World Bank and IMF together organised a package of around $3.5bn under the Heavily Indebted Poor Countries initiative; in 2005 the IMF wrote off $381m under the Multilateral Debt Relief Initiative. Other organisations that provide loans, including the African Development Bank (AfDB) and the Millennium Challenge Corporation, distribute funds according to parameters similar to those of the World Bank. Between 2005 and 2010, Ghana borrowed an annual average of $268m from the IDA, $158m from the UK, $115m from the US, $108m from the EU, $106m from the Netherlands and $95m from the AfDB.

Such lending may lessen in the future. The EU has said it will end budget support to Ghana in 2014, and the donor community at large has already withheld an estimated $700m of support over 2013-14 out of concern that the country was not properly managing its accounts. According to Terkper, donors started by holding back $200m of support in early 2013, when news of a larger-than-expected budget deficit came through and the size of the wages bill became apparent. In all, donors released only 35% of the GHS1.26bn ($480.31m) expected in 2013, the finance minister said. According to other reports, the EU held back some €64m of budget support in 2013, but has promised to deliver €120m in 2014. The hope is that Ghana can reduce its dependence on donor funding and look instead to more commercial sources. If successful, this should actually increase the flow of money: while the IBRD programme is more expensive, countries that graduate into it are considered more creditworthy and thus better candidates for other types of loans.

Commercial Debt

However important the country’s status change, the impact on its ability to access debt is likely to be modest. Ghana has in recent years been able to tap international debt markets and more generally to stoke higher volumes of inbound capital. The bond markets are one example: in 2009 the country sold $750m of 10-year bonds in an oversubscribed issue, making it the first African nation to emerge from restructuring to tap foreign capital markets. In 2013 it sold another $750m of 10-year bonds, using a third of this to pay back some of the earlier bond. The government mulled another issuance of $1.5bn in late 2013, having announced plans for a second round of this size in 2014. In September 2014 Ghana sold its third eurobond, a $1bn issuance with a 12-year maturity and a coupon rate of 8.125%. The revenue from this went towards budget programmes and stabilising the cedi.


Despite this success, in August 2014 the government opted to request financial assistance from the IMF. By early 2014, it had only 2.7 months of import cover. Unsurprisingly, resistance has been strong, but Ghana is in a fairly sound position to negotiate, as it enters the process with steady economic growth and rising oil production. More likely, Ghana is seeking IMF assistance to help restore confidence so it can again tap international capital markets. In August 2014, the government began talking once more about raising $1.5bn in another bond issue, even as it received IMF support. Furthermore, the country is not facing hyperinflation, has not defaulted and its debt-to-GDP ratio is still manageable. This opens up the possibility for a two-pronged approach to stabilisation: a eurobond in the short term and an IMF programme for the longer term.

While IMF assistance may mean stricter fiscal discipline, it will also offer immediate relief and increased stabilisation for the cedi. This in turn will reduce inflationary pressures and encourage both local and international investors.

Successfully managed, such a scheme could put the country on a virtuous cycle, with gains leading to investments and a more stable economy. “The government should not be promoting investment opportunities. It should be building institutions that will attract investors,” Prince William Attipe, CEO of New Max Group, told OBG.


For Ghana, the year 2014 will be crucial. The great fiscal test it now faces may decide its course for the next decade. At the same time, it is entering the aid process well-positioned to manage it effectively and come out strong. Business people and long-time residents say that, at the end of the day, Ghana remains a sound place to invest and establish operations: it is safe, people are optimistic, conflict is low and relations with other countries are good. “The things that attract people to Ghana are still the same,” said Ayesha Hakeem, managing director of African Connections, a consulting firm.

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The Report: Ghana 2014

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