Buoyed by the onset of oil production and accompanying capital inflows at end-2010, Ghana’s economy grew faster than any other in the world in 2011, and while the pace looks set to moderate somewhat on the back of reduced export demand and more modest commodity revenues, its upward trajectory continues.
The economy has transformed significantly from only a few years ago, shaped not only by the start of hydrocarbons production but also by a number of encouraging trends, including a rising per capita income, increased capital spending, higher commodity prices, an improved government fiscus and a reformed GDP measure. Nonetheless, it remains heavily reliant on its traditional engines – commodities – with gold, cocoa and now oil still constituting the majority of exports and revenues. Efforts at diversification have made limited progress so far, but with gas production set to improve access to local feedstock and lower energy prices, there is scope for a sizeable boost in secondary output, especially if the government is able to capitalise on its push to strengthen educational indicators and overhaul industrial policy.
GDP: Ghana’s GDP grew by 14.4% in 2011 in real terms, the highest rate of GDP growth recorded worldwide that year. Growth was driven in large part by the start of commercial production at the country’s Jubilee oilfield in December 2010, though non-oil GDP growth was also strong, at 8%. The IMF is currently forecasting GDP growth of 8.8% in 2012.
According to Bank of Ghana (BoG) figures, services were the largest element of the economy in 2010, making up 51.4% of GDP. “Demand for services is growing fast, in particular housing, construction and financial services,” Sebastian Dessus, the lead economist at the World Bank’s mission in Ghana, told OBG. Next in line was agriculture, with 29.9% of GDP – though it accounts for a much larger share of employment, at around 55% – followed by the industrial sector, at 18.6%.
While the contribution of services and agriculture to overall GDP has been variable over the past five years, that of industry has been steadily falling from 20.8% in 2006. Within the industrial segment, manufacturing has been in rapid relative decline, dropping from 10.2% of GDP in 2006 to 6.8% in 2010. The development of manufacturing and industry has been stymied by problems such as unreliable electricity and water supplies, the high cost of finance, and issues surrounding land tenure and rights. “Ghana has not seen the expected move from an agrarian economy to an industrialised one, which is a big problem in terms of generating employment,” said J K Kwakye, a senior economist at the Ghana Institute of Economic Affairs. “The country is deindustrialising at a time when it should be setting up industries to add value to primary products.”
REBASED ECONOMY: Ghana finished rebasing its economy in 2010 after four years of overhauling GDP measures. (The UN recommends that countries do so every 10 years, although Ghana had not done this since 1993 and was using an old UN methodology). As a result, it failed to capture large swathes of new GDP contributors, including services. The results of the move showed that national income was 65% higher than previously thought, moving the country into the World Bank’s lower-middle-income category, with important implications for issues such as aid. The IMF put GDP per capita at about $1500 for 2011, significantly above where it had stood prior to the rebasing.
TRADE: The total value of exports in 2011 was $12.79bn, significantly up from $7.96bn in 2010, according to BoG data. This was largely thanks to crude oil exports, which began in 2011. While the volume was lower than expected due to technical hiccoughs, it still reached $2.78bn for the year as a whole. Price hikes of other commodities, especially gold, also boosted revenues. Imports stood at $15.97bn, also up strongly from $10.77bn in 2010, giving rise to a trade deficit of $3.18bn. The current account deficit stood at 10% of GDP in 2011, according to IMF figures, up from 7.3% the previous year, though the IMF forecasts it to decline to 6.9% in 2012. BoG figures put it at $3.68bn, up from $2.65bn in 2010.
Gold has held on to the top export spot, despite the recent start of oil sales. Gold export revenues increased by 29% in 2011, to $4.92bn, thanks to price rises of around 30%, which more than made up for a fall of 6% in output as some firms undertook expansion and maintenance projects at the expense of upholding or increasing production levels. Gold accounted for 38% of total export revenues – down from nearly half in previous years as a result of the shifting export mix – and 90% of total mining activity. Gold exports during the first three months of 2012 stood at roughly $1.5bn.
Next in line in terms of export value after gold, sales of cocoa beans and cocoa products accounted for 22.4% of exports in 2011, at $2.87bn. In 2011 Ghana temporarily edged out neighbouring Côte d’Ivoire as the world’s biggest cocoa producer, and while 2012 may be more modest, cocoa exports have been growing rapidly in recent years: in 2011 exports were up 29% on 2010 figures of $2.22bn and were approaching triple the value of $1.1bn of exports in 2007. Just behind cocoa in terms of export value came oil, with foreign sales of $2.78bn in 2011, or 21.7% of total exports.
PARTNERS: Ghana’s export destinations are varied, although the EU is its most important trade partner, accounting for a 27.4% share of the country’s total trade in 2010. The EU was also responsible for 23.4% of all Ghanaian imports (though this figure has been steadily falling in recent years, having stood at 28.3% in 2007) and 38.7% of all Ghanaian exports (a figure that has also been declining, from 44% in 2007).
Ghanaian imports from the EU stood at €2.91bn in 2011, up 35.5% on 2010’s figure of €2.15bn. Machinery and transport equipment were the most important EU exports to Ghana in 2011, accounting for a combined 36% of the total, followed by fuels and mining products (21.2%), and agricultural products (13.9%).
Ghanaian exports to the EU stood at €3.46bn in 2011, more than double the total of €1.46bn in 2010, due to the beginning of oil exports and commodity price rises. The Netherlands, a major buyer of cocoa, was Ghana’s main European export destination in 2011, accounting for 9.4% of all Ghanaian exports. Fuels and mining products, followed by agricultural products, made up virtually all of Ghana’s exports to the EU in 2011, at 49.9% and 47.7%, respectively.
However, in a reflection of the country’s attempt to bolster bilateral volumes with non-traditional markets, the next three trade destinations are spread across three continents: Europe is followed in importance by China (13%), Nigeria (9.9%) and the US (7.8%). China’s importance as a trade partner has been steadily rising, mainly as an exporter to Ghana (in 2010 it accounted for 16.7% of Ghanaian imports, versus 2.5% of Ghanaian exports). Nigeria’s importance as a trading partner is also primarily based on exports to Ghana (in particular oil products). Nigeria was the third-largest exporter to Ghana in 2010, accounting for 12.8% of total Ghanaian imports, while ranking only 13th among Ghanaian export markets (with 1.6% of total exports). The US, by contrast, is both a major import and export partner, accounting for 8.5% of Ghanaian imports (ranking it fourth overall) and 5.7% of Ghanaian exports (ranking it second, behind the EU) in 2010.
MARKET ACCESS: The EU provides 100% duty-free access to exports (other than arms) from what it classifies as African, Caribbean and Pacific (ACP) group countries, including Ghana. However, this trade regime has experienced problems at the World Trade Organisation (WTO) as most such countries, again, including Ghana, have not opened up their economies to the EU to a similar extent, and the EU does not extend such privileges to other countries. Under WTO rules, such preferential treatment is regarded as discriminatory, and a WTO waiver that allowed the EU to provide preferential access to ACP-group countries expired in 2007. This was supposed to allow time for a free-trade agreement (FTA) being negotiated between the EU and Economic Community Of West African State (ECOWAS), of which Ghana is a member, to come into being; however, negotiations on the FTA have yet to be finalised, with several countries in the region reluctant to liberalise their trade regimes with the EU to an extent that would be acceptable to the WTO.
To get around the problem as regards Ghana, the EU negotiated a separate bilateral economic partnership agreement with the country in 2008 that liberalises access to 80% of EU imports, which would be compatible with WTO rules. However, the Ghanaian government did not sign the treaty. While it previously said it planned to do so in 2011, this has yet to occur, and its ratification seems unlikely to take place before the elections later in 2012 because the government is under pressure from some protected industries and unions not to sign. The government has also pushed for compensation from the EU for revenues it would lose by removing some tariffs, but the EU argues that an independent study has shown that the benefits from liberalisation would outweigh the losses by 2025.
“At the moment, the bloc continues to provide duty free access to Ghanaian goods, but the continuation of the regime is subject to legal uncertainty as it could be challenged at the WTO,” said David Domes, the head of economic and trade for the EU delegation to Ghana. A successful challenge would push the EU to downgrade Ghana from the duty-free access regime to a generalised system of preference (GSP) trade regime, which is less attractive and includes some tariffs. This could have a major impact on several industries. “For example, Ghana currently exports about €100m of tuna to the EU annually,” Domes said. “Under the GSP, tuna imports are taxed at 24%, which could have a serious adverse effect on exports.”
EXCHANGE RATE: Ghana maintains a floating exchange rate regime. As of early July 2012 the cedi had depreciated by over 17% against the dollar since the start of the year, standing at 1.95 to the dollar, compared to 1.5 a year earlier – one of the most volatile swings on the continent. Concerns over potential hikes in government spending, exacerbating inflation, ahead of the general elections due to take place in December are thought to partially explain the fall. Though maintaining a healthy balance sheet has been a key focus for the ruling National Democratic Congress party, the country has a history of out-of-control spending in the run-up to elections, including the 2008 elections, when government expenditure pushed the fiscal deficit to 24% of GDP.
However, other factors may also lie behind the currency’s recent weakening. “The international financial crisis has led to depreciation in many emerging market currencies,” said Gilbert Hie, the managing director of SG-SSB Bank. “Ghana’s level of external debt has risen.” Others argue that bouts of exchange rate volatility are inevitable due to structural factors. “Ghana is always at risk from depreciation rather than appreciation,” John Gorlorwulu, a mission economist at the US Agency for International Development (USAID) Ghana, told OBG. “The persistent trade deficit is threat to a stable and strong cedi. Even after the start of oil production, Ghana continues to run large trade deficits. The result of this is that the demand for foreign exchange exceeds the supply from exports. Hence, there is a constant need for additional sources of foreign exchange.”
MEASURES: The BoG has taken a number of measures in an attempt to halt the currency’s recent slide, including raising its policy rate by a percentage point to 14.5% in April 2012 and again by a further 50 basis points in June, to 15%, as well as other steps such as reintroducing short-term (30-, 60- and 270-day) treasury bills, requiring banks to hold reserves for domestic and foreign deposits in cedis only and obliging banks to provide full cedi cover for vostro balances.
The depreciation has had a significant effect on reserves. Gross international reserves stood at $5.38bn at the end of 2011, or around 3.3 months’ worth of imports. This marked a substantial increase, from $4.72bn at the end of 2010 and $2.03bn in 2008. However, by June 2012 reserves had declined to $4.3bn, or 2.5 months of import cover, prompting the IMF to warn that the depreciation of the cedi had led to reserve cover falling “below comfortable levels”.
INFLATION & MONETARY POLICY: Inflation has been variable over the past decade, but in general it has been on a downwards course, falling from about 40% in 2000 to 11% in 2006, before rising back up to 18% in 2008 and then dropping again to less than 9% in 2010 and 2011, according to IMF data. Inflation has been on the up in 2012, albeit remaining low by Ghanaian historical standards. Year-on-year (y-o-y) inflation stood at 9.4% in June 2012, the fourth month it had risen consecutively, according to figures from the Ghana Statistical Service; producer prices in May grew by 18%. Again the depreciation of the cedi has played a significant role, with cost rises of imported goods such as fuel putting upwards pressure on prices.
The BoG’s decision to hike its policy rate in response to the cedi depreciation represents a short-term reversal of longer-term success in reducing interest rates, which have long been a barrier to stronger growth in the private sector. Commercial lending rates in excess of 20% have dramatically hindered access to finance for both individuals and businesses alike, dampening spending. In fact, the policy rate had previously been on a downward trajectory, dropping from 18.5% at the start of 2009 to 12.5% at end-2011. This decline, however, meant that a change of course was needed and in May 2012 the IMF advised the country to pursue an even tighter monetary policy to tackle inflation.
FDI: Ghana was the third-largest recipient of foreign investment in Africa in 2011, according to the UN Conference on Trade and Development (UNCTAD) World Investment Report 2012, behind Nigeria and South Africa, at a total foreign direct investment (FDI) of around $3.2bn. This accounted for 20% of total FDI inflows to West Africa and was up significantly from $2.5bn the previous year, when Ghana was the seventh most important FDI destination in Africa. It was a vast improvement over the $636m five years earlier. According to UNCTAD, the oil sector has been a major driver of FDI in recent years. Ghana ranked 16th worldwide in UNCTAD’s 2012 FDI attraction index, which is based on FDI inflows over the previous three years. Total FDI stock in Ghana stood at an estimated $12.3bn in 2010, up from $1.6bn a decade earlier.
The FDI component of projects registered by the Ghana Investment Promotion Council (GIPC) in the first quarter of 2012 stood at $980m up 178% on the same period in 2011. According to GIPC figures, the UK was the largest investor in Ghana for the period between 1994 and 2011, with total British FDI standing at $4.93bn, followed by South Korea on $4.83bn (though this includes $2.5bn from STX Engineering, whose house-building project with the government collapsed at the end of 2011) and the US in third place on $2.56bn.
GOVERNMENT FINANCE: Improving revenue collection has long been a focus for Ghana, which has dramatically cleaned up its fiscal matters over the past decade. Outstanding domestic debt has been tackled and the deficit narrowed, and long-term reforms, including wage reform and pension overhauls, will help ensure a rosy outlook for the future. Government revenue stood at an estimated 20.1% of GDP in 2011, according to IMF figures, up from 16.6% of GDP the previous year, while government expenditure made up 24.4% of GDP, up slightly from 23.9% in 2010. As a result of the increased revenues, government net borrowing fell to 4.3% of GDP in 2011, down from 7.2% in 2010.
According to BoG figures, total government revenue and grants was GHS12.85bn ($7.62bn) in 2011, up 46% from GHS8.81bn ($5.22bn) in 2011. Of these revenues, GHS9.78bn ($5.8bn), or 76% of total income, came from tax, of which income and property taxes accounted for almost half. Tax revenue, which has traditionally been a weak spot for the country – with collection levels among the lowest on the continent – was up from GHS6.5bn ($3.85bn) in 2010. Grants accounted for GHS1.17bn ($693.69m) of revenue, while non-tax revenue stood at GHS1.82bn ($1.08bn), up from GHS1.23bn ($729.27m) in 2010, GHS870m ($515.82m) in 2009 and GHS434m ($257.32m) in 2008. Government expenditure stood at GHS13.38bn ($7.93bn), up from GHS11.53bn ($6.84bn) in 2010, of which GHS9.7bn ($5.75bn), or 72%, went to recurrent expenses and GHS3.67bn ($2.18bn) went to capital expenditure.
Such growth continued in early 2012. Tax revenue grew to GHS2.7bn ($1.6bn) in the first three months of the year, up 45.8% on the same period in 2011. Total revenue, including grants, was GHS3.5bn ($2.08bn), up 25% y-o-y, while expenditure was GHS4.2bn ($2.49bn). “The fiscal situation has improved; however, there is always a risk of slipping back,” the World Bank’s Dessus told OBG. “This is partly due to politics, but also because of structural factors such as utilities subsidies.”
PRAISE: The IMF in a 2012 review of Ghana’s performance under its extended credit facility programme praised the government, stating that its performance under the IMF programme had “improved significantly”, and noting “great strides in boosting tax revenues and repaying arrears”. The government has been clearing arrears built up by the previous administration since the 2008 election. Such arrears fell from GHS2.16bn ($1.28bn) in 2010 to GHS747m ($442.9m) the following year. It is set to clear all arrears by early 2013.
Civil service salary rises have traditionally been a major factor in putting pressure on the budget. “The civil service has expanded massively to meet the Millennium Development Goals (MDG), including into rural areas. Unions are also very influential in the civil service, and over the past 10 years, salaries have increased at least 10% annually in real terms,” said Dessus, noting there is also a high rate of absenteeism. “Previously there were constant negotiations over 18 different salary bills, with no group wanting to be left behind.”
In order to address this, the government has put in place a new public pay structure, the Single Spine Salary Structure, so as to rationalise civil service wages, and began moving civil servants over to it in 2010. As of mid-2012, 99% of civil service staff had migrated to the new system. The reform is expected to reduce the wage bill; however, its implementation has been costly, at around GHS990m ($586.97m), and was accompanied by a pay rise agreement of 18%, increasing pressure on public finances in the short term. However, some of this should be made up for by savings of GHS512m ($303.56m) from a payroll and pensions audit.
DEBT: Government net debt fell to 41% of GDP in 2011, from 42.9% the year before (though this was up significantly, from 32.7% in 2009) – roughly in line with some of the healthiest balance sheets on the continent, such as those of South Africa. Government domestic debt was GHS11.84bn ($7.02bn) as of December 2011, of which the banking system held GHS7bn ($4.15bn), or 59%. Just under half (47%) of domestic government debt, or GHS5.6bn ($3.32bn), consisted of mid-term bonds with maturities of two to five years. Short-term instruments made up GHS4.35bn ($2.58bn), or 36.7% worth of debt and the remainder – GHS1.89bn ($1.12bn), or 16% – consisted of long-term instruments.
However, external debt has been rising rapidly and reached $7.6bn at end-2011, up 21% from a year earlier. The bulk of this – $3.89bn, or 51% of the total – was owed to multilateral creditors, including $482m to the IMF. The institution in July 2012 released the last disbursement under its three-year extended credit facility (ECF) with Ghana, worth $179m (out of a total of $581m under the ECF). Of the remaining foreign debt, $2.71bn was owed to multilateral creditors, including $1.83bn of Paris Club debt, and $985m to commercial creditors. External debt had fallen to $2.1bn in 2006 after the country participated in a multilateral debt reduction initiative, under which it received $3.5bn worth of relief from the World Bank and IMF, but has grown rapidly since then as the government has run deficits that it has had to partly finance from abroad.
CHINESE LOANS: China, meanwhile, is becoming an important lender to Ghana. In 2010 the former president of Ghana, John Atta Mills, signed a framework agreement for $13bn worth of loan deals, including a $3bn master facility agreement (MFA) from the Chinese Development Bank (CDB) to fund the development of energy infrastructure, agriculture and other sectors. The loan deal requires that 60% of contracts awarded under it are given to Chinese firms; a stipulation that has attracted criticism from the main opposition party the New Patriotic Party (NPP). The NPP has said it will renegotiate the terms of the loan if it wins the 2012 parliamentary and presidential elections.
In April 2012 Ghana and the CDB signed a $1bn lending agreement under the MFA, $850m of which will go the construction of the Western Gas Corridor Infrastructure Project, which will see gas from the Jubilee field piped via a 45-km pipeline to be built onshore and then on to a generating facility in the town of Bonyere.
SUBSIDIES: As a myriad of protests across the continent have consistently shown, ensuring affordable prices for key goods and services can be a sensitive subject. In recent years, utility and energy subsidies have been an important factor in the economy, sometimes amounting to as much as 3-4% of GDP. Unsurprisingly, calls to strengthen the government’s fiscal position, alongside concerns over broader market distortions, have focused significant criticism on subsidy practices. In May 2012 the IMF called on the government to put an end to fuel subsidy payments, which it has described as “costly and poorly targeted”, and which it said cost the state some GHS60m ($35.57m) a month. According to the head of the IMF mission to Ghana, Christina Daseking, the subsidies only benefitted the wealthy. “A large proportion of the subsidies currently in effect go to large multinationals,” said Dessus, who also pointed out that subsidies make managing the budget more difficult, as the country’s large dependence on hydroelectricity, which is vulnerable to climactic fluctuations, make power generation costs highly volatile.
The government has taken steps towards reducing subsidies, but these have been uneven and susceptible to reversals. Electricity tariffs are now reviewed on a quarterly basis, and in September 2011 the Public Utilities Regulatory Commission raised tariffs for electricity and water to cost-recovery levels – though there is no guarantee that they will stay there. The government then cut fuel subsidies in December 2011; however, it agreed to reinstate them in February the following year in response to threats by unions to strike. The government has put in place a hedging scheme involving the purchase of options on petroleum products to try to recover subsidies for fuel, but these did not fully cover the cost of subsidies in the second half of 2011 and accounted for some of the additional spending the government announced in its supplementary budget for 2012 (see analysis). The government has also said it will raise petroleum prices to cost-recovery levels – something that is crucial for maintaining a number of public institutions, including the Tema Oil Refinery.
FOREIGN ASSISTANCE: Much of the foreign aid is concentrated in the underdeveloped north, where poverty rates remain significantly higher than in the south. The US is one of the country’s major donors and its first Millennium Challenge compact with Ghana was completed in February 2012. The $547m programme was aimed at tackling poverty through raising the incomes of farmers by helping them boost production, improving infrastructure to facilitate the transport of crops to market and raising rural living standards. Work is under way to establish a second compact, which will focus on the power sector. It is due to be signed in 2013 or 2014.
The EU is another major donor, and has committed €373.6m of assistance to Ghana for the period between 2008 and 2013, of which €175m (48%) is going directly to government budget support. Most of the rest is focused on improving transport infrastructure (21%) and improving governance (26%). EU member states also provide support on a bilateral basis; the UK, for example, is to spend an average of £94m annually on aid to the country up until 2015. However, according to David Domes, the head of the EU delegation to Ghana’s economic and trade section, the bloc as a whole is likely to reduce aid in the coming years given the country’s middle-income status and the fact it has started to export oil. This reduction is also due in part to the global economic slowdown.
POVERTY & REGIONAL INEQUALITY: As part of its MDGs Ghana aimed to halve poverty from 1990 to 2015. The goal has likely already been met, though this will only be confirmed once the results of the latest five-yearly household survey are released (the survey was due to take place in 2010, but as of May 2012 the results had yet to be published).
“The poverty rate in Ghana has fallen a lot in recent years, to around 24.5%. However, most improvements have been in the south,” Dessus told OBG. “The north remains very poor and its economy is characterised by almost complete economic stagnation.” The poverty rate in the northern regions is about 60%, well over double that of the south. Census figures suggest that while the number of people living in poverty in the south fell by around 1.5m between 1990 and 2005, this figure rose by some 1m people in the north, primarily due to population growth rather than people becoming poorer.
To tackle the north-south divide the government launched an initiative called the Savannah Accelerated Development Authority (SADA) in 2010. However, the project is still in early days and funding has so far proven less than what was initially pledged. SADA’s aims include doubling residents’ income in the north by 2020 and cutting poverty levels in the northern Savannah ecological belt to under 20% within five years.
OUTLOOK: GDP growth in 2011 was fuelled by the beginning of oil production and is unlikely to reach similar heights again in the coming few years. Nevertheless expanding production at the Jubilee field should help support continued strong GDP growth.
Economic diversification will remain among the country’s key challenges in the medium term, with economic growth and stability set to remain partly dependent on the fortune of international commodity prices.