Ghana’s rising economic prosperity may be derailed by falling oil revenues

The Sierra Leone Telegraph: 14 April 2013

Ghana2Rising standards of living enjoyed by Ghanaians in the last three years is not a miracle, thanks to the discovery of King Oil, off the country’s coastal waters. Gross Domestic Product (GDP) has risen steeply. Government’s effort at diversifying the economy is paying dividends.

Ghana has the fastest growing year-on-year economic growth in West Africa. It also has the potential to become the commercial and industrial hub of the sub-region. But there are serious structural problems, which if allowed to continue, may well derail Ghana’s economic dream.

According to an International Monetary Fund (IMF) mission led by Christina Daseking, which has just concluded its assessment of the country’s economic performance on the 12 April 2013; “Economic growth continued at a robust pace of 8 percent in 2012 amid rising fiscal and external imbalances. A growing public sector wage bill, costly energy subsidies, and higher interest cost, pushed the fiscal deficit to about 12 percent of GDP.”

Rising government borrowing is bad for interest rates and the IMF pulled no punches. The head of the IMF mission – Ms. Daseking said; “A ballooning wage bill, if untamed, will bring debt to levels that could endanger the government’s transformation agenda.”

Ghana Sunyani Cocoa HouseShe said that. “The wage bill in 2012 rose by 47 percent, with much of the factors explaining the increase not yet quantified. In addition, deferred wage payments from the single spine salary reform were twice the level included in the supplementary budget. The mission urged the government to gain control over the wage bill. It recommended a thorough audit of the 2012 payroll and welcomes that the government has already started this process.”

Ms. Daseking went on to say that; “The government’s deficit target of 6 percent of GDP by 2015 will keep public debt high and buffers low.”

So what does the Ghanaian government have to do in order to prevent its economic ship from hitting an iceberg?

“The mission recommended an additional fiscal adjustment of 3 percent of GDP by 2015, using a combination of revenue and expenditure measures. This would lessen the public debt burden and raise official reserves toward the authorities’ target of more than 4 months of imports – up from 2.8 months currently. This target is consistent with the mission’s own analysis of optimal reserves, which suggests that a cover of 4.2 months of imports would provide a reasonable cushion against plausible shocks”, says Ms. Daseking.

According to the IMF report, the difficulties faced by the authorities in Ghana, where exacerbated, as “the external current account deficit also widened to 12 percent of GDP, while unadjusted fuel and energy prices and a tightening of monetary policy helped keep inflation in single digits.”

Ghana Akosombo Hydro Dam“The growth momentum has continued into 2013, with rising inflation pressures. While activity in the non-oil sector is dampened by energy disruptions and high interest rates, increased oil production should keep overall economic growth close to 8 percent. A weaker outlook for cocoa and gold exports will leave the current account deficit around 12 percent of GDP.

“The mission projects a reduction in the fiscal deficit to 10 percent of GDP this year, about 1 percent higher than the budget projections, assuming a delayed adjustment in utility tariffs.”

But perhaps the most important lesson to be learnt by potentially mineral and oil rich West African countries is that according to the IMF; “Despite Ghana’s strong economic potential, short-term stability risks have risen. Ghana’s strong democratic institutions and favourable prospects for oil and gas continue to attract significant foreign direct investment (FDI). Yet, low external buffers and a rising domestic debt ratio expose the economy to risks, such as weaker terms of trade, reduced capital inflows, or unanticipated spending needs.”

mahama2The development of strong democratic institutions and the degree to which the rule of law is firmly and uniformly applied, speaks volumes of the environment in which sustainable economic growth can thrive. (Photo: President Mahama taking his oath of office after winning elections).

The IMF is also conscious of key structural difficulties threatening the country’s economic prospects. “Energy sector problems could curtail growth, while excessive government domestic borrowing is raising the cost of credit to the private sector. Both factors have been identified as key growth constraints in Ghana. The mission’s still positive assessment of the economy is contingent on the authorities’ resolve to confront these challenges decisively.”

But the IMF report is generally encouraging. It says that:

mahama“The mission strongly supports the government’s ambitious transformation agenda, centred on economic diversification, shared growth and job creation, and macroeconomic stability. Rebuilding buffers to safeguard stability is now the immediate priority.

(Photo: Ghana’s president Mahama)

“This requires lower budget deficits to contain external pressures and keep debt sustainable. In due course, this will also allow for a reduction in interest rates. Going forward, successful economic transformation will require a realignment of spending, away from wages and subsidies toward infrastructure investment.

“The mission shared the Bank of Ghana’s views on keeping a tight monetary policy stance, for the time being. Both actual inflation and inflation expectations have risen recently, with upside risks from the sharp increase in government borrowing.

“To strengthen the signalling role of the policy rate within the inflation-targeting framework, the mission recommended narrowing the gap with current market rates. Successful fiscal consolidation will allow an easing of interest rates in due course, provided inflation expectations decline to levels consistent with the achievement of the target”, the IMF mission report concludes.

Ms. Daseking’s IMF mission met with President Mahama, Vice-President Amissah-Arthur, Finance Minister Terkper, Bank of Ghana Governor Wampah, other senior officials, members of parliament, and representatives of the private sector, think tanks, trade unions, and civil society. And on its return to Washington D.C., the team will prepare a staff report that is tentatively scheduled to be discussed by the IMF’s Executive Board in mid-June.


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