Economic rebound faces new challenge

Over the past fortnight, the conventional wisdom that Ghana is in the early stages of a sustained economic rebound after two successive quarters of economic contraction during 2020, is increasingly being called into question.

Initial data emergent since late November indicating the start of a second wave of COVID-19 infections was not widely perturbing, ostensibly because both the political class and the electorate were all caught up in the excitement of the then-impending December 7 elections.

However, all that changed a fortnight ago when President Nana Akufo Addo, in a televised address to the nation announced the re-introduction of limited restrictions on social activity, threatening further restrictions if Ghanaians failed to observe COVID-19 safety protocols.

With the general populace having become notorious over the past nine months for refusing to comply with those protocols, public policy analysts and commentators are predicting more restrictions imminently, possibly culminating in an outright second lock down.

This has changed the outlook for Ghana’s economy in 2021; even the Bank of Ghana which has been one of the most enthusiastic believers in a quick economic rebound now warns that under the unfolding circumstances, fiscal consolidation will take longer than originally anticipated. By extension, so will its benefits.

Actually, even the generally accepted belief that an economic rebound has started since the fourth quarter of 2020 has not yet been confirmed by data.

After the economy suffered an unprecedented 3.2 percent contraction in Gross Domestic Product, measured in year on year terms, during the second quarter of the year, following a wide range of socio-economic restrictions to curb the spread of COVID-19 including an outright lockdown of the country’s two biggest economic hubs for three weeks in April, the BOG forecast that a rebound would commence in the subsequent quarter, this projection based on early data received by the central bank.

But this did not happen. During the third quarter of last year, the economy contracted again, albeit by a slower rate of 1.1 percent. This forced the BoG to revise its full-year growth forecast downwards, from the 2.0 – 2.5 percent it had forecast in late September; by late November, having received the third-quarter growth data from the Ghana Statistical Service, it announced that it expected growth of about one percent, roughly in line with the 0;9 percent forecast made by the Ministry of Finance in its mid-year budget review presentation to Parliament, made in July.

But even this is uncertain; the fourth-quarter data has not been released by the GSS and there is still the possibility that it will be disappointing, like the third-quarter data that preceded it.

If that happens and growth for the last quarter of the year turns out to be negative, or even just flat, Ghana could officially be termed to be in a recession – the formal definition of a recession is three consecutive quarters of negative growth.

While this is unlikely, the resurgence of COVID-19 and the requisite re-imposed restrictions is a dampener, on both economic activity and the underlying business and consumer confidence that drives it.

According to the latest BoG surveys “consumer confidence has remained firm at pre-lock down levels, reflecting optimism about current economic conditions following the gradual lifting of COVID-19 related restrictions.”

The snag is that this survey was conducted before restrictions started being re-introduced and their re-introduction will push consumer sentiment in the other direction, a trend which will reflect in the next survey, the results of which will not be announced until late March, even though the sentiments are already in play now.

The latest BoG survey on business confidence also reveals that it has “increased significantly, reaching pre-lock down levels for the first time as businesses meet their short term company targets and have expressed positive sentiments about growth prospects.”

Again, the circumstances have changed significantly since this survey was conducted but, as with consumer confidence, the results will not be revealed until late March.

Underlying all this are the actual economic outcomes. The BoG’s Composite Index of Economic Activity surged by 11.4 percent year on year up to November 2020, three and a half times the growth recorded over the previous 12 month period.

This suggests strong economic growth; the CIEA tracks economic activity while the GDP growth data from the GSS tracks changes in the size of the economy, but since the two are correlated both tend to move in the same direction albeit at different paces.

But the peculiar circumstances created by COVID 19’s impact have loosened the correlation somewhat; instructively, the CIEA results announced in November revealed that economic activity was increasing but the GSS subsequently announced a 1.1 percent economic contraction for the third quarter.

Nevertheless the sheer quantum of upward movement in the CIEA most recently strongly suggests that Ghana will record positive GDP growth for the last quarter of 2020, no matter how marginal.

But this is only the beginning of what promises to be a most difficult year. Prior to the surge in new COVID-19 infections and the reintroduction of measured restrictions, the road map for macro-economic management this year was fairly straight forward, even if difficult to implement: cut public spending to rein in the fiscal deficit then cut interest rates further.

But the resurgence of COVID-19 and the consequent reintroduction restrictions has changed all this. Firstly it means fiscal consolidation will be slower than originally envisaged. Secondly, it means there will be cutbacks on both production and consumer demand.

The first will consequently pressurize the BoG to curtail its plans – and delay the timing – for monetary easing. But the second will pressurize the central bank to speed up monetary easing to provide a stimulus for economic growth, this monetary stimulus made all the more important by government’s lack of capacity to provide a fiscal stimulus like it did last year at a cost to the national treasury which only now is fully becoming evident.

This is a dilemma that government and its central bank will have to resolve if Ghana is to move away from an economic recession towards resumed strong economic growth.

Instructively government has pinned its hopes for a sustained economic turn around on its ambitious Ghana COVID 19 Alleviation and Recovery of Enterprises Support (Ghana CARES) initiative, which requires the state to cough up GH¢30 billion in programme financing over the next three years while the private sector provides the other GH¢70 billion.

But the evolving new circumstances means that the private sector’s portion will need to come primarily in the form of direct equity financing rather than debt and this in turn means that the Ghana Investment Promotion Centre, the Petroleum Commission, Minerals Commission and the Ghana Free Zones Authority will be more important than ever.

Indeed, with Ghana now above the generally accepted debt sustainability threshold of 70 percent of GDP even as it needs to start refinancing impending annual Eurobond amortization obligations of some US$1 billion a year, it will have to give investors comfort by getting both the two new mines and two oil and gas fields ready to begin development on track.

What was already going to be a very difficult year with regards to economic management has just become so much harder to navigate.