Ghana looks to overcome drop in energy prices

The Ghanaian economy is strongly correlated to global commodities such as cocoa, gold and oil, which are the three main sources of income and foreign currency. Price swings for these three resources, increased spending on domestic public sector wages, an electricity shortage and other external factors have combined to slow the pace of development in recent years, leading to a depreciating currency and a budget shortfall.

The short-term challenges have overshadowed a more encouraging long-term development narrative, which features major new income streams as the oil sector grows and a strategy to speed up the pace of infrastructure development. A second productive oilfield will contribute to revenue starting in 2016 and more new production is in the cards (see Energy chapter). In the meantime, the government has responded to the current situation by seeking help from the IMF, on the back of a successful eurobond issue in the third quarter of 2014.

The next big event on the horizon is the 2016 national election, which may lead to some fiscal loosening, but expectations overall will be anchored by a three-year programme, in concert with the IMF, that will last until 2017. The fund lent the country $914m on concessionary terms and worked with Ghana to develop the reforms that are being implemented now. The government’s strategy currently focuses on three specific goals: improving institutions and governance; boosting exports of raw materials; and further developing industry by using natural resources as a starting point for domestic supply chains. While raw exports will remain an important feature of the Ghanaian economy, adding value to local natural resources has also been prioritised.

Size & Scope

In recent years Ghana has been one of the stars of the “Africa Rising” trend – which highlights the rapid growth and development in a number of the continent’s markets – and is one of the three primary economies of the West African region, along with Nigeria and Côte d’ Ivoire. While final full-year statistics for 2014 were not yet available as of mid-2015, provisional data from the Ghana Statistical Service (GSS) put GDP for the year at GHS112.6bn ($31.2bn), indicating 4% growth year-on-year. Non-oil GDP amounted to GHS104.8bn ($29.1bn). The services sector was responsible for 49.6% of economic expansion, with agriculture at 22% and industry at 28.4%, including the energy sector. The 4% growth rate was lower than what the government expected, as well as being the slowest since 2009, according to Seth Terkper, the head of the Ministry of Finance and Economic Planning (MFEP), whose budget in November 2014 estimated expansion of 6.9%.

Continued Growth

GDP growth peaked in 2011 at 15%, as the first full year of oil production provided a one-time boost, but has otherwise ranged between 4% and 8.8% since 2008. Two new offshore oil and gas fields are expected to begin production by 2016, which may lead to slight acceleration in the coming year as well. According to the MFEP’s projections, GDP growth from energy will come in at 2% of GDP in 2016 and 4.1% in 2017, helping the country to reach overall rates of 6.9% and 9.6%, respectively, in those two years. For 2015 the ministry has forecast growth of 3.9%, more bullish than the IMF’s expectation of 3.5%, while for 2016 the IMF estimates expansion of 6.4%.

One variable that will likely impact growth projections will be the rebasing of GDP. The GSS is planning to use 2016 as the base year for calculations and is preparing for this exercise with a business survey and agricultural census to provide up-to-date data. According to the GSS, agriculture, ICT and mining are expected to be the three sectors that have the biggest gaps between estimated activity and real activity. Ghana last rebased its economy in 2010, using 2006 as a base year, which boosted GDP by 60%. Despite this upswing, a combination of higher public wages, electricity scarcity and other factors have more recently acted as a drag on the currency, the cedi, which fell 21% in the first five months of 2015 to a record low of GHS4.1050:$1 (see analysis).


According to World Bank data, the poverty rate in Ghana has fell from 31.9% in 2006 to 24.2% in 2013, and progress toward the Millennium Development Goals has been encouraging. Ghana was the first country in Africa to reduce extreme poverty by half, reaching this target in 2006, well ahead of the 2015 deadline.

“The country has outperformed regional peers in reducing poverty and improving social indicators,” the IMF stated in an April 2015 report describing the loan and the three-year reform plan being put into place. However, Ghana’s economic story is a tale of two regions, as most of the benefits of growth over the past two decades have focused on the southern part of the country. Between 1992 and 2006 the number of people living in poverty dropped by 2.5m in the south, but rose by 900,000 in the arid north, according to the MFEP.

Foreign Investors

Ghana ranked fourth on the continent in terms of foreign direct investment (FDI) in 2013, according to a report published in 2014 by EY, the accounting and consultancy firm. The report found that from 2007 to 2013, as the Ghanaian oil sector grew, FDI increased at a compound annual growth rate exceeding 50%, making it the fastest-rising destination for foreign investment on the continent. According to the World Bank, FDI reached $3.3bn in 2013. Foreign investors are also typically the biggest taxpayers in the country, including key extraction industry partners such as Tullow Oil and Gold Fields, the largest producers in energy and gold mining, respectively.

Foreign portfolio investment has also increased, in particular since the domestic debt market was opened up to outside participants in 2006, according to the IMF. Non-resident holdings of domestic debt rose in 2014, with total domestic debt reaching GHS5.97bn ($1.7bn) at the year’s end, with 34.6% held by foreigners, according to the Bank of Ghana (BoG). That was up from GHS5.7bn ($1.6bn) in 2013, with 26.7% owned by foreign investors (see analysis). The biggest foreign institutional holder of Ghanaian government debt is Franklin Templeton, the US asset manager. It held roughly $1.1bn of Ghanaian government bonds as of January 2015, which is more than a 10th of what was outstanding at the time, according to Bloomberg data.

Business Environment

Thanks in part to its long-term stability, the country fares well in a growing number of global rankings and indices. Ghana placed 70th out of 189 countries on the World Bank’s 2015 “Doing Business” index, topped in the sub-Saharan African region by only Mauritius, South Africa and Rwanda. Within the crucial resources sector its legal framework and regulatory regime is considered among the best on the continent, and it ranked 15th overall out of the 58 countries selected for the Natural Resource Governance Institute’s 2013 “Resource Governance Index”, the most recent version of the ranking.

Shorter-term international indicators are less positive, however, with the country’s credit ratings being a good example. The most recent cut to its sovereign credit rating came in March 2015, when Moody’s lowered its rating to “B3”, six levels below investment grade, and provided a negative outlook, meaning that more downgrades are possible. The move was the second downgrade from Moody’s in less than a year, with the ratings agency citing concerns related to an extended period of low oil prices. In October 2014 Standard & Poor’s cut Ghana’s rating to the same level of six below investment grade, or “B-” in its system. The rating agency expressed concerns over fiscal strength.

However, Ghana does offer a very open economy, with few areas closed to foreign participation. Restricted segments are typically aimed at ensuring employment opportunities for Ghanaians at the lower end of the income scale, rather than protecting large-scale industries from foreign competition. Activities closed off to outside investment include operating small-scale taxi and car fleets, lotteries, beauty salons and barbershops, retailing pharmaceuticals and small-scale trading, according to the 2014 Investment Climate Statement from the US State Department.

2015 Budget

When Terkper proposed Ghana’s 2015 budget to parliament in November 2014, he warned that a revision would be likely as falling oil prices would make revenue targets from the energy sector unrealistic. That prediction turned out to be accurate, and Terkper returned to parliament in March 2015 with an update that oil revenue was expected to drop by some 64.4% from GHS4.2bn ($1.2bn) to GHS1.5bn ($416.3m). Managing a shortfall is a perennial challenge for Ghana’s policymakers. Expenditure exceeded revenue by 4% in 2011, according IMF data, and the impact of a hike in public sector wages helped that figure to jump to 11.6% in 2012. The figure was at 10.4% in 2013, according to the fund. However, the government did manage to reduce its deficit spending to an estimated 9.4% in 2014. Under the IMF programme for the 2015-17 period the target is to achieve annual drops to 7.5%, 5.8% and 3.7%.

Terkper’s adjusted budget also included domestic financing of GHS6.4bn ($1.8bn) and foreign financing of GHS3bn ($832.5m). Of that total the state plans to source GHS1.7bn ($471.8m) through the 2015 eurobond sale (see Capital Markets chapter). While spending was cut across the board, the decision was made to increase deficit spending to 7.5% from the 6.5% outlined in the original budget proposed in November 2014. Terkper added that three state agencies would not be included in the budget and allowed to retain the income they generate to fund their operations, namely, the Energy Commission, the Environmental Protection Agency and the Driver and Vehicle Licensing Authority. Another nine agencies are expected to be shortlisted for the same treatment in coming years.

Donor funding from some sources, including the EU, has dried up over objections to wage increases and in particular the problem of “ghost workers” – employees listed on the payroll but not working. In 2013 and 2014, for example, the EU declined to transfer $700m in pledged support. Ghana has made an effort to combat the problem, including by digitising payroll processes, and an expected recovery in donor-funding levels in 2015 should help to reverse the trend of rising deficit spending.


One of the major challenges in terms of spending came in 2010 with a decision to implement a new compensation system for state employees that turned out to be one of the main contributors to the current situation. The Single Spine Salary Structure (SSSS) was an attempt to harmonise wages across various public entities, featuring 25 pay grades. However, the result was a significant jump in current spending, which increased the deficit risk for the government given its dependency on commodity export revenues.

The average annual wage increase between 2010 and 2013 was 15%, according to the MFEP. The ratio of wages to tax revenue soared from 30% before the SSSS was introduced to 73%, according to MFEP figures. The cost of salaried government workers can often be a fiscal concern in developing countries, and other sub-Saharan African nations, including Kenya and Zambia, are also facing this challenge. Ghana has since reversed the trend, with the MFEP reporting a 53% wages-to-taxes ratio as of April 2015, but more work remains to be done if the country is to reduce the wage bill to a level considered sustainable. The state and IMF set a target of 35% by 2017, chiefly through an end to salary increases outside cost-of-living adjustments and new hires. The hiring freeze applies to all areas, save for health care and education.


Revenue in the first three quarters of 2014 amounted to some GHS17.67bn ($4.9bn), just shy of the government’s target of GHS18.41bn ($5.1bn). Based on the first three quarters of 2015, the shortfall for the year is expected to be 3.6% of the goal, which was set at GHS24.84bn ($6.9bn). The Ghana Revenue Authority (GRA) reported full-year data for tax collection at GHS17.07bn ($4.7bn), 3% lower than the target of GHS17.61bn ($4.9bn).

Increasing tax revenue has also been a government priority, with multiple strategies considered and implemented. The GRA has adopted several reforms to improve collections, including monitoring imports through the Total Revenue Integration System, which links the GRA electronically to the Ghana Customs Management System to better monitor imports. “Widening the tax net is something everybody is talking about, but the problem is how to do it,” said Moses Agyeman, senior economist at the Private Enterprise Foundation. “One problem is that the GRA needs more staff.”

Wider Net

Another area the GRA is looking to is small-scale mining. This segment accounted for 34% of gold production in 2013, but up to now has not been taxed. It is a large group of small enterprises, often made up of just one or two people, so taxing them could be difficult, but the government’s Precious Minerals Marketing Company estimates another GHS500m ($138.8m) in annual revenue could be raised. The government has also introduced tax raises and new levies to boost revenue. The new 17.5% rate for value-added tax went into effect in January 2014, after a previous hike from 12.5% to 15% in 2013.

Of the three main revenue generators in Ghana – cocoa, mining and energy – each have their own set structures and rules for taxation. Cocoa revenue is routed through the Ghana Cocoa Board, which buys output from domestic traders and sells it to international buyers. Mining revenues largely comprise corporate taxes, at 55% of the total in 2013, and mineral royalties at 45%, according to data from a report by the Extractive Industries Transparency Initiative. Small shares amounting to less than 1% in total come from dividends, licensing, ground rent and other mining-related sources. Mineral royalties are divided between several bodies, with the national government taking 80%, and local bodies and dedicated development funds receiving the balance. Ghana has also established the Minerals Development Fund, which is designed as a transparency tool to publicise the use of revenues, in particular by local governments, including district assemblies and traditional tribal administrations. Governments at the sub-national level have been opening dedicated bank accounts for mining revenues, and the Mining Commission has developed policy guidelines for their use.

Oil Revenues

Revenue from oil and gas is apportioned according to the Petroleum Revenue Management Act (PRMA) of 2011, which was developed based on Norway’s approach (see Energy chapter). The law dedicates 70% of revenue to the government for general spending. The Heritage Fund receives 9% of the total and is the equivalent of Ghana’s sovereign wealth fund, meant for long-term investment and spending for future generations. The Stabilisation Fund gets 21% of the total and is designed as a budget support when oil prices drop. The state plans to withdraw GHS487.2m ($135.2m) to help make up for the drop in oil revenue in 2015, according to Terkper. Ghana had amassed more than $590m in the fund between 2011 and 2014, Terkper noted in his March 2015 update. The PRMA has influence over budgeting by setting rules for estimating oil income. The law stipulates that for budgeting purposes the oil price assumption is a seven-year moving average, and that requirement was one reason why a budget adjustment was necessary in March 2015. Both the government and the IMF have agreed that the PRMA should be amended to allow the MFEP more leeway in making oil price assumptions if market indicators show large-scale changes in prices.


Most of the state’s debts were written off in 2005 under the Heavily Indebted Poor Countries Initiative. Debt forgiveness was important because it gave Ghana the ability to borrow with a clean balance sheet. The first of three eurobonds – long-term debt denominated in dollars and sold internationally through underwriters – was issued in 2007, and in total Ghana raised $2.75bn this way. The 2010 rebasing of GDP helped even more, as the more-detailed counting of activity boosted the size of the economy by 60%, propelling it from a lower-income country to middle-income status.

During the September 2014 eurobond, Ghana aimed to sell $1bn and received $2.9bn in offers. The coupon rate of 8.125% indicated rising costs, however, reflecting growing debts and uncertainty, and the knocks to Ghana’s sovereign credit rating. Another eurobond is expected in 2015, and would be a further indication of investor sentiment. Ghana is aiming to reduce its debt burden, which in 2014 stood at 67.6% of GDP, having risen from 42.6% in 2011. It is projected to increase to 69.6% in 2015, according to the IMF, and then drop to 67.5% in 2016 and 62.6% in 2017. At the end of the first quarter of 2015, BoG figures put it at 65.3%.


With Ghana in the midst of stabilising its economy, fiscal policy and currency, the balance of 2015 is likely to feature a focus on short-term concerns. The next major milepost is likely to be the 2016 election, given the past trend of spending increases as a national vote looms. Avoiding that could go a long way toward preserving the fiscal recovery trend now in development, as well as helping to regain the confidence of investors. Once past the election, and with new oil and gas income streaming into the Treasury, the focus could return to medium- and long-term goals. More talk of building infrastructure and creating economic diversity would be a positive signal that the country has recovered from a troublesome time and is again able to work toward its vision for the future.

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The Report: Ghana 2016

Economy chapter from The Report: Ghana 2016

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