Economy worse off in 2015

Economists and analysts are generally of the view that this year would end worse than expected for the Ghanaian economy, compounding the challenges already faced by employers and businesses in general despite efforts by government to restore stability.

The power crisis persisted throughout the year in spite of government’s assurances that ‘dumsor’ was to end soon. Painfully, the timeline for an end to ‘dumsor’ has recently been pushed further to the end of 2016.

The latest on energy is the controversial deal between Ghana and the Africa and Middle East Resources Investment Group (AMERI) which has generated heated public outcry.

Energy experts have stressed that Ghana’s energy problem has more to do with money than generation capacity.

Economist, Dr Eric Osei Assibey maintains that initial economic challenges facing the country were worsened by the energy crisis, to the extent that businesses have suffered losses while incomes of individuals have been eroded.

Referring to the 2015 mid–year budget review, Dr Assibey indicated that “government did pretty well initially in meeting its revenue targets, but the expected outcome of fiscal consolidation has been disappointing.”

“If we look at fiscal consolidation with regard to the key macro-economic indicators, the performance has been below expectation,” he said.

Proceeds from the country’s exports have been poor due to the persistent decline in prices of gold and crude oil.

Crude oil prices reached US$59.82 a barrel in June 2015 and fell further to US$42.46 a barrel in September 2015 compared to Ghana’s annual benchmark revenue projection of US$99.38 a barrel for 2015 which was later revised to US$57 per barrel.

In spite of the commodity volatilities, revenue has been buoyant due to good tax measures though over-taxation of businesses was a worry. Concerns are however rife to the effect that unplanned expenditure by government could render the budget deficit target unachievable.

After years of unbridled fiscal slippages and mismanagement of the economy, Ghana returned to the IMF to restore credibility to a battered economy.

The country received an amount of US$114.75 million (in May) being the first tranche of the total amount of US$918 million expected to be disbursed in eight equal installments as balance of payment support over the 3-year period.

The IMF Executive Board is expected to consider the review by the end of this year after finalization of the required documentation.

For the first five months of 2015 government was able to contain its fiscal deficit at 2.2 per cent of GDP but failed to control other variables, according to the Institute for Fiscal Studies (IFS).

Due to fiscal challenges from 2014, government took some hard measures including a partial deregulation of the petroleum sector where subsidies were drastically reduced.

At the same time, utility tariffs for water and electricity have gone up by more than 100 percent.

Experts believe these decisions were influenced by Ghana’s programme with the IMF which is set to also lead to rationalization of the public sector from January 2017.

According to the latest Economic and Financial Data report by the Bank of Ghana (BoG), the country’s budget deficit stood at 5.1 percent of GDP at the end of September 31, 2105 against an end-year target of 6.5 per cent.

The country’s rising debt has been a major concern to both domestic and international finance institutions. Many economists have warned that the Ghanaian economy will be thrown out of gear if government continues with its borrowing spree.

By June 2015, the total public debt stock had reached a high of GH¢96.9 billion, representing 72.7 percent of GDP.

Provisional public debt stock as at September 2015 was GH¢92.2 billion, about 69.1 percent of GDP according to the Bank of Ghana. The huge surge in the country’s public debt stock in just one decade is attributed to the large deficits registered over the years which were financed by funds borrowed from both domestic and foreign sources.

The Institute of Statistical, Social and Economic Research (ISSER), the Institute of Fiscal Studies (IFS) and the Institute of Economic Affairs (IEA) have all warned that Ghana could suffer the fate of Greece where the European country is struggling to pay its debt with high levels of unemployment and imbalances in its economy.

Deputy Director of the Fiscal Affairs Department of the IMF, Sanjeev Gupta in October this year called on government to stabilize the debt-to-GDP ratio and take steps to bring it down over time, so as to restore macro-economic stability.

“It is very important that the authorities in Ghana control the wage bill and minimize the risk of fiscal overruns from next year's elections. And so, this is absolutely crucial as far as the fiscal stability is concerned going forward,” he said.

Monetary Sector

1. Exchange Rate Market

Developments in Ghana’s exchange rate market over the past 11 months show a weakness in the Ghana cedi against the US dollar and other major trading currencies.

The turbulence of the local currency led some experts to conclude that the phenomenon is a clear manifestation of the fact that managers of the economy are clueless on how to undo the puzzle.

The cedi began the year at GH¢3.20 to a US dollar, went beyond GH¢4 in mid-June and in a dramatic turn appreciated against the dollar after a month to GH¢3.5 to a dollar.

The local currency depreciated by 26.7 percent between January and June meanwhile its cumulative depreciation for 2014 was 31.2 percent compared with 14.5 percent in 2013.

This was in spite of government’s position that “bold measures taken since 2013 have restored confidence in the economy resulting in the improvement in foreign exchange inflows.”

The currency which performed poorly in 2014 as compared to what was recorded this year is currently hovering around GH¢3.86 to the dollar with barely two weeks to end 2015.

2. Interest Rate & Monetary Policy

Generally interest rates have been high on the Ghanaian market. Though 91-day and 182-day Treasury bills rates have been dropping to about 23.4 and 24.3 percent respectively they are still considered high compared to sub-Sahara African markets. Lending rates have also shot up to about 32 percent on the average, making loans and advances very expensive. The Central Bank’s latest report on the banking industry even indicates how loans have gone bad because of the high lending rates. These high rates are mainly due to the regulator’s tight monetary policy stance to check rising inflation.

The BoG’s Policy Rate has from November 2014 to October 2015 been reviewed upwards by 500 basis points to 26 percent, forcing up lending rates (currently the second highest in Africa) and suffocating players in the country’s private sector.

Desperate for funds for infrastructural purposes and to retire old maturing debts, government issued and secured US$1 billion Eurobond at a coupon rate of 10.75 percent with a maturity of fifteen years, a move economists including the IMF described as “unfortunate and disappointing.”

2. Inflation

It is instructive to note that inflation, which the Central Bank has been fighting to contain and for which monetary policy has seen the strongest tightening in a year, has failed to respond positively.

Inflation which stood at 17.0 percent at the end of 2014 fell to 16.4 in January 2015 due to declines in the rate of change in both the Food and Non-food Consumer Price Indices (CPI). It is now at 17.6 per cent (as at November), widely missing the 11.5 percent target for 2015.

3. Trade Balance

Falling commodity prices particularly gold and oil have worsened the nation’s trade balance.

According to the Bank of Ghana summary of Economic and Financial Data, the trade deficit as at the end of September 2015 stood at US$ 455.5 million. This is about 1.3 percent of GDP.

The current account deficit also stood at US$ 961.0 million, approximately 2.7 percent of GDP.