Ghana@59: A failing manufacturing sector

As Ghana celebrates its 59th independence, we take a look at some of the recent issues confronting one of the key sectors of the economy—the manufacturing sector.

In 1957, after Ghana gained independence, the Nkrumah government launched an industrialization drive that increased manufacturing's share of GDP from 10 percent in 1960 to 14 percent in 1970. This expansion resulted in the creation of a relatively wide range of industrial enterprises, the largest including the Volta Aluminum Company (Valco) smelter, saw mills and timber processing plants, cocoa processing plants, breweries, cement manufacturing, oil refining, textile manufacturing operations, and vehicle assembly plants.

Many of these enterprises, however, survived only through protection. The overvalued cedi, shortages of hard-currency for raw materials and spare parts, and poor management in the state sector led to stagnation from 1970 to 1977 and then to a decline from 1977 to 1982. By 1987 production from the manufacturing sector was 35 percent lower than in 1975 and 26 percent lower than in 1980.

As at last year, the Association of Ghana Industries (AGI) reported that the manufacturing sector’s growth had dipped to an unprecedented -8%, largely caused by the erratic power supply that intensified in the country for almost two straight years.

"The manufacturing sector continues to shrink and Ghana risks losing its industrial base if government policies do not quickly address these challenges to revive the industrial sector," AGI president, James Asare-Adjei said in the report.

Today, the current macroeconomic indicators have not provided a favourable and enabling environment for the manufacturing sector. The inflation rate continues to surge and currently stands at 19%-- the highest rate since January 2013. The local currency continues to tumble and lose its value to the major trading currencies, notably the dollar and the pound sterling. The cedi currently trades at almost GH?4 to the dollar. High interest rate also cannot be left out of the problem as banks are lending at the rate of more than 30 percent. A situation that has led to the crowding out of many businesses because they cannot afford to take loans from the banks.

As if the above problems are not enough, additional ones have been added to compound the plights of the sector. The Public Utility Regulatory Commission (PURC) in December last year increased electricity and water tariffs by 59.2% and 67.2 % respectively, while a 27 percent tax was slapped on petroleum products.

The situation dealt a big blow to the sector as some producers threatened to halt production and/or increase the cost of their goods and services to buffer them against the triple shock.

One such industry is the Association of Sachet and Packaged Water Producers, which is seriously considering increasing the prices of sachet water to at least 50 percent in order to remain in business.

The textile industry cannot be overlooked when discussing the country’s manufacturing sector. The industry, which was once the leader in Ghana’s industrial sector, has been declining over the years largely due to trade liberalization policies and programmes. This has resulted in the proliferation of fake imported textiles into the country which is usually sold at cheap prices compared to the ones produced locally.

This situation, Mrs Edwina Assan, President Spinnet Textiles and Garment Cluster, an association of small businesses in the manufacturing of textiles and garments for the domestic and export markets, said, has led to about 60 percent reduction in the production capacity of the textile industry and has contributed to job losses.

The Small and Medium-Scale Enterprises (SMEs) involved in production cannot be left out of the equation, as many of them continue to grapple with the difficulty in accessing capital from financial institutions which has eventually collapsed some.

Effects on youth unemployment

Even though Ghana does not have a reliable and comprehensive unemployment data, available statistics shows that about 300,000 young people enter the labour market every year. The formal sector is only able to engage less than 6000 (3%), leaving more than 97 percent to survive in the informal sector or out rightly, unemployed.

For that indicator, the World Bank provides data for Ghana from 1992 to 2006 for the country’s unemployment rate. The average value for Ghana during that period was 7.2 percent with a minimum of 3.6 percent in 2006 and a maximum of 10.4 percent in 2000.

Research further indicates that Ghana’s population has a youthful structure with the youth defined officially as aged 15 –24 years, constituting about one out of every four of the population. Over the past forty years, the number of the youth in the total population of Ghana has increased from 1.1 million in 1960 to 2.3 million in 1984 and to 3.5 million in 2000. The latter constitutes about 22.6 percent of the economically active population.

The above statistics creates a very worrying situation looking at the present state of the country’s manufacturing sector which is supposed to engage the majority of these youths in gainful and productive activities.

This therefore depicts that; government must take practical steps to bring this problem, which has the potential of threatening the national security of the country as was experienced some time ago with the “Arab Spring” situation that caused a lot of disturbing consequences.

Way forward

After considering the troubles that a sector, which is supposed to be a driver of economic growth and development (but seeing negative growth for some years now) is going through, which has resulted in high unemployment rate in the country, government must take certain steps to address the situation and create an enabling environment for businesses to thrive.

One of the pressing things government must to do is to fix the frail economy. The Bank of Ghana must work assiduously and devise new, prudent and effective ways of taming inflation rather than the continuous tightening of monetary policy that has not been able to arrest the problem.

This point is underscored by the Head of policy think-tank Institute of Fiscal Studies (IFS), Prof. Newman Kusi, who said: “The inflation that we have now is not demand-cost but cost-push inflation -- in the sense that the exchange rate is being depreciated and this is a country where everything is imported. So as exchange rates depreciate, the landed cost of imports also goes up and automatically feeds into the price”.

According to Prof. Kusi, the ideal approach to tackling interest rates and inflation hinges on government’s ability to put in place measures that will increase domestic production and make businesses more attractive in terms of profitability and productivity.

Government must also fight corruption which tends to divert state funds which otherwise should have been used to develop infrastructure and bring on board certain structures to accelerate economic growth into the pockets of state officials.

Another important step is for government to desist from borrowing from banks which has resulted in the crowding out the private sector, so that they can have access to loans from financial institutions at reasonable rates.

When these steps are taken to stabilize the economy alongside government’s social intervention schemes targeted at creating employment for the citizens, we are confident that the manufacturing sector will be on a good footing to create more jobs to address the youth unemployment in the country.