GDP contraction: ‘Reforms saved economy from sinking deeper’

Ghana’s economy would have sunk deeper into recession but for the financial sector reforms implemented by the central bank as well as the fiscal stimulus package announced by government, Courage Martey, an economist with the Databank Group, has said.

Mr. Martey, commenting on the Ghana Statistical Service’s (GSS) latest data that showed that the country’s economy contracted by 3.4 percent year-on-year in the second quarter, said the various reforms strengthened the economy to withstand the shock presented by the pandemic.

The financial services sector, according to the statistical service, grew at 3.9 percent in the second quarter of this year, among a number of sectors that escaped the contraction caused by the coronavirus.

“Ghana had just emerged from fiscal and financial sector reforms, with the growth momentum already strong around its potential levels. Consequently, while the contraction was expected, the fiscal and financial sector reforms had already strenghtened Ghana’s capacity to withstand shocks,” Mr. Martey told the Business24 in an interview.

“Also, the swift decision by the Bank of Ghana to provide strong liquidity support to the financial system to mitigate a total collapse in private sector demand may have played a part. And since private sector demand would take time to recover, the government’s fiscal stimulus, as the bigger spender in the economy, was crucial to provide a backstop for aggregate demand.”

Other factors

The biggest slump in the second quarter GDP data occurred in the hospitality sub-sector, which fell by more than 79 percent year-on-year. This was followed by the trade, repair of vehicles, and household goods sub-sector, which saw a 20.2 percent contraction.

Despite the overall contraction in GDP growth, Mr. Martey explained that government’s decision to ease restrictions earlier, compared to most African countries, may have prevented further damage.

“This enabled a quicker restart of the economy and partly explains Ghana’s relatively modest contraction, compared to its peers. This also set up the economy to avoid a recession when the third-quarter numbers are published, because we expect a marginally positive growth rate for the third quarter of 2020,” he added.

Mr. Martey said government’s projection of achieving 0.9 percent GDP growth in 2020 appears more feasible now considering that the economy showed signs of a rebound in the latter part of the second quarter.

“If we consider the GSS data that proved that the economy had started showing signs of restarting from late Q2-2020, then there’s a reason to be hopeful for the 2H-2020.

For growth to fall short of the 0.9 percent projection for end-2020, we would have to grow by less than 1 percent on average in the second half of 2020.

“But I feel strongly that we have the potential to recover growth to 1 percent or more. Public expenditure in the lead up to the December 2020 elections should also provide another extraordinary lift to aggregate demand.”