Since its return to multi-party system more than two decades ago, Ghana has made major strides towards consolidating its democratic achievements. Its judiciary has proved to be independent and has generally gained the trust of Ghanaians. The Ghanaian Parliament is vibrant, and despite inherent challenges and the dominance of the two leading political parties, has created the avenue for debate and vigorous legislative activity. The National Democratic Party (NDC) which won the first two successive elections since Ghana's return to civilian rule (1993), lost to the New Patriotic Party (NPP), which also ruled for two terms before losing to the NDC, now into the third year of its second term in office.
Ghana is constantly ranking among the top three in Africa for freedom of the press and freedom of speech. The broadcast media is the strongest, with radio being the most far reaching medium of communication. While all these put Ghana in an enviable political position, and provides it with formidable social capital, Ghana's economic course over the past couple of years raises many concerns.
The main threat to the ruling National Democratic Congress (NDC) is discontent at the rate of improvement in living standards and an ongoing energy crisis. The opposition New Patriotic Party (NPP) led demonstrations on February 18th against the government's handling of an ongoing energy crisis.
On July 24, 2014, the Trades Union Congress of Ghana organized a nation-wide demonstration and issued an ultimatum to Government to take immediate action to, among other things, address the perceived widespread corruption and halt the depreciation of the national currency – cedi, and the rising cost of living.
On press freedom, Ghana progressed from 30th position 22 out of 1809 countries and 2nd in Africa according to the ‘Reporters Without Borders’ 2015 Press Freedom Index report. Ghana also retained its 2013 ranking of 7th out of 52 countries on the Mo Ibrahim Index, increasing its score by 1.6 to 68.2 per cent. This performance reflects the positive effects of an improving environment for democratic governance, coupled with a gradual improvement in the effectiveness of public institutions.
The real gross domestic product (GDP) growth slowed down sharply to an estimated 4.2% in 2014 from 7.3% in 2013 as domestic activity was hampered by the gas supply volatility from Nigeria, a sharp fall in the currency and rising inflation, which required policy tightening. The inflation was 17% (headline) in December 2014 compared to 13.5% in 2013 following the price adjustments in the petroleum and utilities as government removed the subsidies and sharp depreciation of the cedi. Inflation eased slightly to 16.5% in February 2015.
To tackle the structural imbalances, the government recently announced a fiscal stabilization strategy and reached an agreement with the IMF about a new program. If realized, the program should support fiscal adjustment for the 2015-2017 period.
Recent Economic Developments
Ghana’s overall macroeconomic conditions further deteriorated in 2014 with large twin-deficits lingering, fueling government debt and inflation, a sharp depreciation of its currency, and a weaker pace of economic growth. Macroeconomic challenges continued to be driven by the high wage bill and rising interest costs, the fiscal deficit declined only slightly to an estimated 9.4% of GDP in 2014 from 10.4% in 2013. Despite the slight increase in the revenue, interest cost increased to 6.2% of GDP from 4.6%. The government continued to add to its stock of public debt to finance the fiscal deficit. Ghana’s public debt has reached to an estimated 67.6% of GDP in 2014 through borrowing both domestically (33.8% of GDP) and externally (33.2% of GDP).
The domestic debt financing has become extremely costly as the maturity of domestic debt has shortened with treasury bills rates around 25% (600 bps higher than the levels in December 2013).
Ghana’s external imbalance remained large with current account deficit at 11.7% of GDP. The external financing was particularly challenging during the first three quarters of the year with net outflows of $560 million short-term capital and increased private amortization despite stable FDI flows. As a result, the Ghanaian cedi depreciated against the US dollar by 43% on the forex bureau market and net international reserves plummeted to cover only 4 days of imports of goods and services by August 2014.
Nevertheless during the last quarter of the year, the gross international reserves level was boosted by the Ghana Cocoa Board (Cocobod) loan of $1.7 billion. Ghana also issued a Eurobond of $1 billion in September immediately after announcing the start of the IMF talks but still had to pay a premium of 100-150 basis points over the comparable sovereign bonds of Kenya, Zambia and Tanzania. Despite these two inflows, the Ghanaian cedi recovered only slightly finishing the year with 33% depreciation against the US dollar after already 14.4% in 2013.
The real GDP growth slowed down sharply to an estimated 4.2% in 2014 from 7.3% in 2013 as domestic activity was hampered by the gas supply volatility from Nigeria, a sharp fall in the currency and rising inflation, which required policy tightening. The inflation was 17% (headline) in December 2014 compared to 13.5% in 2013 following the price adjustments in the petroleum and utilities as government removed the subsidies and sharp depreciation of the cedi. Inflation eased slightly to 16.5% in February 2015.
To tackle the structural imbalances, the government recently announced a fiscal stabilization strategy and reached an agreement with the IMF about a new program. If realized, the program should support fiscal adjustment for the 2015-2017 period. Nevertheless, Ghana has significant hurdles ahead, and the adjustment process is unlikely to be smooth.
GDP growth is expected to fall further to 3.4% in 2015 as the energy rationing is expected to continue at least until June, planned fiscal consolidation and slow adjustment in inflation will weigh on domestic demand. The export sector is not expected to be supportive, either. The oil export revenues face downside risk amid significantly lower oil prices even as production is expected to improve. Lower prices for gold—which is likely to be accompanied by weaker output—and cocoa are also likely to also weigh on export growth.
Despite the downside risks in the short-term, Ghana’s growth prospects are positive in the long-term. Under the assumption that current macroeconomic problems will be addressed according to the announced plan under an IMF program, the growth rate is expected to rebound to 7.8% by 2017. Even at low prices, the contribution of oil is expected to increase in tandem with its production levels in the medium-term.
The key risks for Ghana’s outlook is global financial conditions that might abruptly curtail the private capital flows both Foreign Direct Investment and debt flows that Ghana have heavily relied on in recent years, and sustained decline in international commodity prices of gold, cocoa and oil that account more than 75% of its exports. The other risk is related with the government’s ability to control its spending in the light of upcoming general elections in 2016.
Last Updated: Apr 22, 2015