Ghana’s foreign money has been one of many world’s worst performing towards the greenback this yr, inflation is at a 21-year excessive of 40 per cent and debt servicing is predicted to take up 47 per cent of income in 2022, a reversal of fortune for a rustic as soon as hailed as an financial success.
“We are in a crisis,” Nana Akufo-Addo, Ghana’s president, warned in a speech final month, earlier than the most recent in a string of protests demanding his resignation.
“I do not exaggerate when I say so. I cannot find an example in history when so many malevolent forces have come together at the same time.”
While Ghana’s economic system expanded at a mean 6 per cent gross home product development yearly between 2000 and 2019, this yr — battered by the Covid-19 pandemic and the fallout of Russia’s invasion of Ukraine — it’s forecast to develop by 3.5 per cent. Although Akufo-Addo insists it may possibly nonetheless meet its debt repayments, it has began talks with the IMF to obtain a mortgage of as a lot as $3bn.
Many African economies have been hit laborious by a world rise in meals and vitality costs brought on by the battle in Ukraine simply as they had been starting to recuperate from Covid. The US Federal Reserve’s tightening financial coverage has led to a powerful greenback, elevating the price of items in import-heavy economies.
In Ghana, this has been exacerbated by the cedi’s fall by greater than 50 per cent towards the greenback in 2022, the worst efficiency of the 148 currencies in a Bloomberg tracker. This drop got here whilst its central financial institution elevated rates of interest by 1,100 foundation factors to 24.5 per cent over the previous yr.
Ghana might have been dealt a blow by Covid and Russia’s battle, however its issues run deeper, mentioned John Asafu-Adjaye of the Accra-based think-tank African Center for Economic Transformation (ACET).
The economic system’s overreliance on commodity exports — primarily gold, cocoa and oil — makes it weak to exterior occasions that trigger international foreign money crunches and an financial downturn.
“Not all the blame can be put on the current government,” mentioned Asafu-Adjaye. “Ghana has not been able to diversify its economy. The structure of the economy has remained the same since independence.”
Before the pandemic, Ghana’s debt as a proportion of GDP was 62.7 per cent. That has now ballooned to 84.2 per cent, based on IMF information, because it borrowed closely to protect its economic system through the pandemic, racking up a deficit of 15.2 per cent. The common fiscal deficit in low-income creating international locations was about 5 per cent of GDP.
At the top of the primary half of 2022, Ghana’s public debt was $28.1bn. With debt servicing anticipated to take up 47 per cent of income this yr, there have been now issues over “the government’s ability to repay its debt”, mentioned Asafu-Adjaye of the ACET, pointing to the choice of the three massive ranking companies to downgrade Ghana to junk standing.
The development of the previous twenty years was bankrolled by loans, mentioned Bright Simons, vice-president of think-tank Imani, with debt reduction within the early 2000s paving the way in which for the federal government to problem Eurobonds in every of the previous 9 years. Debt reduction and the anticipation of a windfall following oil discovery in 2007 led to “fiscal looseness”, he mentioned. Money was spent on a nationwide healthcare scheme, free schooling was expanded to incorporate secondary faculty college students and what Simons described as a “dramatic increase in the wage bill” of the general public sector.
“When Ghana got debt relief, a lot of the restraint that the global aid system normally imposes when you’re getting money from the IMF, World Bank and donor partners was removed. But Ghana did not implement strong enough domestic checks and balances to keep the government in check from overspending,” he mentioned.
Frank Gill, Emea sovereign specialist at S&P, mentioned that “fiscal policy has historically been driven by the electoral calendar. In the run-up to past elections, there has been a loosening of fiscal policy and that has tended to push up public debt well before the shock of the global pandemic.”
Ghana’s intensive borrowing and spending haven’t been matched by a commensurate improve in income. It collects simply 11.3 per cent of taxes as a proportion of GDP, under the African common of 16.6 per cent.
With Ghana struggling to lift cash on international markets this yr, the federal government has taken on home loans with rates of interest as excessive as 32 per cent. Accra turned to the IMF in July, looking for $3bn over three years, a political blow for the president after months of resistance by finance minister Ken Ofori-Atta that Ghana, a “proud nation”, wouldn’t search help from the Washington-based lender.
“Ghana needs a credible IMF programme in order to increase confidence in the economy,” mentioned Simons. Analysts mentioned the IMF would search “fiscal discipline” from Ghana that would come with spending cuts.
Akufo-Addo has set bold targets for Ghana to “restore and sustain debt sustainability” and improve tax collected as a proportion of GDP to as a lot as 20 per cent. But the president faces extra instant issues. As inflation continues to rise, opposition MPs in parliament are demanding the sacking of Ofori-Atta. This week the president dismissed junior finance minister Charles Adu Boahen over alleged monetary misconduct.
“Maybe the country should have been more cautious and shouldn’t have gone in as far or fast as it did,” Asafu-Adjaye mentioned of Ghana’s woes. “At the time, it seemed like a good idea and the money was available.”
