FEATURE STORY

Ghana Looks to Retool Its Economy as it Reaches Middle-Income Status

July 18, 2011

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STORY HIGHLIGHTS
  • Now that Ghana has become a middle-income country, the West African nation is taking stock of the many challenges it faces, including uneven development
  • Authorities are consulting with experts at home and abroad on how to ensure that oil revenues benefit all Ghanaians in a sustainable manner
  • The World Bank is reinforcing state action in areas such as oil and gas management, decentralization, and agricultural commercialization

WASHINGTON, July 18, 2011—The recent production of oil in Ghana has led analysts to revise upwards the country’s gross domestic product (GDP), spurring hopes for greater strides in the fight against poverty. On July 1, the country moved from low-income to lower middle-income status, according to World Bank country classifications.

Projections from the Bank’s Global Economic Prospects position Ghana as the fastest growing economy in Sub-Saharan Africa for 2011, with a forecast GDP growth of 13.4 percent. But even as the fever spreads, authorities are now anxious to see that the oil windfall has a positive, lasting impact on the lives of all Ghanaians. In particular, leaders have a desire to steer clear of the so-called “Dutch disease”—the unique paradox where resource-rich countries grow too heavily dependent on oil at the expense of other productive sectors.

With that in mind, Ghanaian officials have initiated a round of consultations with experts at home and abroad, seeking advice on how to best move the development agenda forward. This is what led Ghana’s Vice President John Dramani Mahama and senior government officials to meet with World Bank Vice President Obiageli Ezekwesili in Washington mid-June. The meeting  saw the participation of World Bank heads of departments who are familiar with Ghana’s development. It was an opportunity to highlight areas of high potential but also to raise flags on some of the most pressing challenges facing the West African nation.

Runaway Spending

The first challenge is to rein in public expenditure. Ghana’s highly competitive political environment has made large fiscal deficits a common occurrence, even as the current government is trying to repay domestic arrears that have built up over the years. A high-stakes presidential election  scheduled for next year is likely to make matters worse, as various constituencies, buoyed by the expected oil revenue, are likely to step up demands for public expenditure.

“A major priority for us is to ensure the fiscal and macroeconomic stability of Ghana,” Ms. Ezekwesili told the Hon. Dramani Mahama. As Ghana transitions into middle income status, she said, authorities should recalibrate the institutions of public service delivery to take into account rising household incomes and lower foreign aid. It is therefore critical, according to Ezekwesili, to ease the pressure on public finances by prioritizing, putting more emphasis on public-private partnerships to fund major transportation, energy, and water supply projects, and by improving tax administration.

Acknowledging the remarks, Vice President Dramani Mahama said he took good note of the various proposals, including the suggestion that Ghana should consider the possibility of a fiscal responsibility law. Such law, if enacted, would guide public expenditure management and complement reforms envisaged by the formation of the Ghana Revenue Authority, which aims to make revenue collection more efficient.

Uneven Progress between Regions

Another pressing challenge is the growing disparity and uneven development between regions. While it is true that Ghana is one the few African nations that has a solid chance to reach the Millennium Development Goal of cutting poverty in half by 2015 thanks to sustained growth over the past two decades, much of the progress achieved so far has largely taken place in the southern part of the country, which includes Accra, the capital.

A World Bank study released last March showed that while southern Ghana saw 2.5 million people rise out of poverty between 1992 and 2006, in stark contrast the number of poor people in the northern part of the country increased by nearly a million over the same period.

In recognition of this problem, various administrations have initiated a number of interventions aimed at expanding economic inclusion, with varying degrees of success. These include school feeding programs, consumer and farmer subsidies, as well as the Livelihood Empowerment Against Poverty initiative, a cash transfer program aimed at helping the bottom 20 percent of Ghana’s poor. Despite providing some relief, these programs have generally suffered from a lack of geographic targeting. In 2009, the government developed a common targeting mechanism that pools resources from five ministries with the broad objective of improving coordination and rationalizing expenditure. It is hoped that this will helpmaximize the impact of social protection interventions in the country.

Keeping Momentum on Agriculture

A third challenge is the risk that, as seen in other African countries, the beginning of oil production in Ghana could lead to a loss of competitiveness of the agricultural sector, despite the fact that agriculture remains the primary livelihood for the majority of the population, especially the poorest.

Added to that is the threat of climate change, which already manifests itself through severe droughts and flooding, particularly in the northern part of the country. Seen from that angle, sustained investments in agricultural expansion through commercialization and the adoption of modern technologies could help both create job opportunities for the poor and fight an increasingly hostile climate.

A Favored Investment Destination

Luckily, Ghanaians have already taken initiatives on their own to steer their country in the right direction. First, it is an environment that is conducive to investments and economic growth. For years now, Ghana has been on the list of persistent reformers as measured by the World Bank’s Doing Business report. Last year the country jumped 10 places to position itself as the fifth best reformer in sub-Saharan Africa, and the first in West Africa. As a sign of investors’ confidence, recent bonds issued by the government have all been oversubscribed.

Ghana is also one of only a handful of countries in Africa certified as “compliant” under the Extractive Industries Transparency Initiative. This means that citizens now have access to information related to mining revenue. The country is also weighing passage of a Freedom of Information law, which could take transparency and accountability to an unprecedented level.

As they prepare for the big changes ahead, Ghanaians can count on the continued support of the World Bank, Ms. Ezekwesili said. We’re interested in how Ghana can take full advantage of all the options we have to offer—not just financing, but first and foremost partnerships, critical knowledge and expertise. For a middle income economy, the soft infrastructure matters just as much as physical infrastructure — if not more.”

The current World Bank portfolio in Ghana is comprised of two dozen projects that cover a variety of sectors in line with the country’s own vision. These include providing technical expertise for oil and gas management, strengthening Ghana’s decentralization model to help municipalities deliver public services better, technical and vocational training, and agricultural commercialization.


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