Ghana economy: Capital move?

Ghana's planned Eurobond issue has risks, but could boost long-term growth by improving the country's economic infrastructure.

Ghana has begun a road-show outlining its planned issue of a Eurobond. If it is able to attract sufficient investor interest--and this is likely, as recent and highly publicised liquidity squeezes in Western debt markets and the resulting rate cut in the US have if anything reinforced investors' wish to access wider varieties of credit in order to earn yield--Ghana will become the first country in the world to access the international capital markets after having benefited from debt write-offs under the heavily indebted poor countries and Multilateral debt relief initiative. This has raised questions about why Ghana is looking to borrow money in foreign currency at market interest rates so soon after receiving debt write-offs from creditors.

The answer is rooted in the policies of the National Patriotic Party (NPP) and its leader, John Kufour. Since its election in 2000 the government has adopted policies designed to engender macroeconomic stability; as a result, the inflation rate has fallen to around 10% from more than 40% when the NPP took over, while the fiscal deficit has declined to 2.1% of GDP in 2006 from 9.7% in 2000. However, the resulting macroeconomic stability, while pleasing the IMF and World Bank, has done little to satisfy the domestic population: while consistently remaining above 5% a year real GDP growth has not attained the 7-10% level that is necessary to make a noticeable impact on Ghanaians' economic development and social welfare.

In 2006, therefore, Accra began to look beyond towards a more transformative approach. Credit policy was therefore loosened and interest rates lowered so as to expand domestic credit, while spending on agricultural development was also boosted via an award from the US through the Millennium Challenge Account. The government also identified infrastructure as the key to shifting Ghana onto this new growth path. As well as crippling electricity and water shortages, the road system is inadequate, the rail system barely functioning and covering only a small fraction of the country, and the port system inefficient. Significant investment is therefore needed in order to transform the transport and utility infrastructure.

In order to achieve this, however, Accra needs significant funds for investment. In 2006 the finance minister estimated that an additional US$4bn of expenditure would be required. The domestic debt burden is already rising, while international donors do not by and large have the capacity (or the inclination) to be the sole financers of Ghana's push for growth. Thus borrowing from the international capital markets is seen as the best option in order to finance this expansive economic strategy.

However, there are a number of risks associated with this strategy. Foremost among these is the spending of the money itself. Very few (if any) African governments have successfully created the levels of sustainable economic growth that Ghana is hoping to achieve solely through targeted expenditure. Instead, administrations that have looked to transform their economies through transformative spending have come up against civil service capacity constraints that have made effective government investment very difficult and spending very hard to control. Ghana already has its own example of such problems: the Osagyefo barge was ordered by the state-owned Ghana National Petroleum Company under the previous administration, at a cost of US$68m. Upon completion in 2003 it was revealed that the government had not built the facilities to house the barge in Ghana, leading to several million dollars of harbourage and necessitating a further loan of US$10m, from Japan. When the barge did finally arrive it was announced that there was no gas connection to the facility to drive the barge. As a result, it has remained idle notwithstanding the country's severe power shortages, although a US firm has now agreed to convert it to a combined-cycle plant, at a cost to the government of up to US$100m. The barge is now expected to become operational at the beginning of 2008, five years after completion and at almost double the original cost.

The NPP government would of course argue that bureaucracy has been rationalised and reformed. However, this in itself has created a second and related problem. Under initial public-sector reform efforts pay increases were focused on "key workers". However, this led to unrest and strikes by other public-sector employees insisting on pay equality. As a result, the government created a Fair Salaries and Wages Commission which is due to report later in 2007. Accra has hinted that its recommendations will be included in the 2008 budget, but the administration has little room for manoeuvre in dealing with wage pressure, and may cave in to union demands for larger settlements in order to avoid strike action in an election year.

While purchasers of the Eurobond will not be overly concerned with the way in which the money is being spent, investors will care about the potential economic ramifications of the borrowing, and these too may not be positive. Ghana may have difficulties both in effectively spending the money it borrows and in limiting the expenditure solely to investment in key sectors. As a result, further borrowing from the domestic sector is likely. Having dramatically increased its domestic debt burden, as well as repeatedly lowering interest rates in 2006, this would most likely have to be accompanied by an interest rate rise, crowding out private-sector credit growth and undermining the reduction in non-performing loans. Against that, the NPP government has a good track record in economic management, and while there are clearly risks inherent in rising expenditure, the need to invest in infrastructure is equally apparently. In sum, therefore, Ghana would seem to be better-placed than most of its peers to implement such a strategy and--hopefully--move the country onto a new growth path.