ACCRA, October 8, 2010 -- In early 2009, Ghana’s economy faced deepening fiscal imbalances, low market confidence and soaring inflation. A bold move by the government, with support by donors including the World Bank’s International Development Association (IDA), created much-needed stability and helped the economy stay on course to build growth and jobs.
The first months of 2009 brought mixed fortunes for Ghanaians. The country saw a smooth transfer of power following what was one of the closest fought presidential elections in Africa and gained international applause. Yet, to the surprise of many observers, the economy began to deteriorate after a decade of steady growth.
Ghana’s currency, the cedi, which had been weakening in the previous year, lost 45 percent of its value against the US dollar in just a few months. Inflation soared to 20 percent and the fiscal and current account deficits – at 15 percent and 18 percent of GDP respectively – reached overbearing heights.
The Ghanaian government responded quickly, and with help from leading donors, including IDA, was able to adopt and execute a stabilization plan to put the economy back on track.
Rapid crisis response
The government’s response was swift and bold. It immediately adopted a multi-year fiscal stabilization plan meant to restore confidence by reigning in a runaway deficit, putting the fiscal situation back on a sound and sustainable path, and paving the way for structural reforms. But the plan needed urgent financing, something a government in the red could not afford.
To fill the gap, several development partners acted together to raise and disburse more than US$1.6 billion to execute the stabilization plan. This included US$300 million of commitments from IDA in direct budget support, the Association’s single largest approval for Ghana to date. The first half disbursed immediately and the second half disbursed in June 2010.
IDA also played a lead role in helping coordinate the multi-donor support and assisting in design and roll-out of the stabilization plan. In addition, IDA remains committed to helping Ghana’s government sustain the gains from 2009 and has ensured its commitments in budget support for 2010 of about US$200 million.
Results benefit average Ghanaian
The most immediate and dramatic result of the government’s intervention was stabilizing the currency within the first few months of 2010. In addition, the fiscal deficit decreased sharply from 15 percent to 10 percent of GDP on a cash basis, and 20 to 11 percent on a commitment basis (that is, accounting for public arrears). Inflation has also fallen from above 20 percent in early 2009 to less than 10 percent in 2010.
These improvements are more than economic figures. They matter to the average Ghanaian like Beatrice Opoku Asamoah, who imports wares from Asia and owns a retailing shop in Accra’s Makola market.
According to Asamoah, there are still challenges but it is better that the economic situation is now more stable.
“The depreciation of the currency really hurt my business; I made losses on sale of my imported wares because my customers couldn’t afford the increase in prices,” she said. “But now that the value of the cedi is more stable, much of the uncertainty has eased, my customers are able to place orders. I think the situation has improved,” she said.
Remaining challenges ahead
The achievements of late 2009 need to be consolidated through 2010 to pave the way for a developmental use of oil revenue, which is expected to start flowing in late 2010, according to development experts.
As oil revenues enter the picture, government, civil society and development partners realize the need to improve transparency, executive accountability and oversight on public financial management systems. Such measures are critical, says World Bank Country Director for Ghana Ishac Diwan, “to avoid fiscal overshooting going unnoticed in the future, as it did in 2008.”