This year, Ghana will begin its transformation into a supply side driven economy. TOMA IMIRHE examines the readiness of the economy to accelerate its growth without sacrificing its hard-won return to stability.
This year, the President Nana Akuffo Addo administration has begun the third year of its four year tenure in office. But perhaps more importantly this is its first year without being on the leash of the International Monetary Fund and this gives it the opportunity to begin applying supply side macro-economic policy, after inheriting a demand management driven strategy in 2017, which has, over the past four years, more or less done its job.
To be sure, the IMF has not won many friends in Ghana for overseeing a four year Extended Credit Facility which has proved difficult for most to cope with, but which ultimately has restored macro-economic stability, thus establishing the foundation for faster, and sustainable growth.
This year, government has promised a respite from the inevitable illiquidity that businesses and households alike have had to endure for much of the past four years. Intelligently, it hopes to use major new investment in infrastructure – financed largely by foreign borrowing leveraging on Ghana’s bauxite deposits, its expected Ghana Education Trust Fund proceeds and its stature in the Eurobond market – to generate much of the promised liquidity and thus, at the same time solve another criticism of its performance so far- lack of infrastructural development.
The current lack of illiquidity on the streets is an inevitable consequence of both government’s disciplined adherence to its fiscal deficit targets and the Bank of Ghana’s very cautious approach to monetary easing. Actually, annual growth in broad money supply (M2) was virtually unchanged in 2018 at 16.5 percent compared with 16.7 percent in 2017. But monetary growth in both years has been a far cry from the heady increases of up to 40 percent year on year, earlier in the decade.
Having cut the fiscal deficit sharply over the past two years, government feels confident enough to deliberately aim at expanding it in 2019 for the first time since the most recent IMF programme commenced in 2015. The only other time this has happened since then was inadvertently when the Mahama administration’s election year spending in 2016 generated a fiscal deficit of nearly 10 percent of Gross Domestic Product after targeting a much lower 5.3 percent.
This year, that administration’s incumbent successor is targeting a fiscal deficit of 4,2 percent of an economy whose GDP has been rebased upwards by some 26 percent last year, and which has resulted in the fiscal deficit (on cash basis) for 2018 amounting to 3.8 percent of GDP, slightly lower than the rebased target for the year of 3.9 percent. For 2018, total revenues and grants amounted to GHc42.3 billion compared wit the target of GHc45.8 billion, while total expenditures were GHc53.7 billion, marginally below the target of GHc53.8 billion.
Government’s confidence derives from a fall in the stock of public debt as measured as a proportion of GDP, from well over 60 percent prior to rebasing to 57.9 percent as at November last year. Instructively though, if adjusted for rebasing, the ratio a year earlier was lower, at 54.5 percent of GDP than it was by November 2018, implying that the public debt has risen faster than economic growth, although this is in part the result of the cedi’s depreciation which has contributed to the public debt stock reaching GHc 172.9 billion by late last year, up from GHc140.0 billion a year earlier. Besides, a significant part of the increase in the public debt – GHc9.8 billion, or 3.2 percent of GDP – derived from issuance of bonds to protect depositors funds in universal banks and this is regarded as a one off expenditure which will be partly recovered from the realization of value from underperforming bank assets by their respective receivers.
The challenge facing government this year will be to inject more liquidity into the economy and accelerate economic growth without stirring up inflation. To be sure growth for the first three quarters of 2018 was disappointing at an estimated 6.1 percent compared with 9.1 percent for the corresponding period of 2017, which resulted in full year growth of 8.7 percent. Full year growth for 2018 is projected at 5.6 percent.
This year, government is targeting a rebound in Ghana’s economic growth rate to 7.6 percent, driven by faster growth particularly in the non-oil sector, which averaged 5.9 percent during the first three quarters of 2018, down from 6.1 percent in the corresponding period of 2017.
But achieving this, using increased deficit financing carries the inevitable risk of rekindling consumer price inflation. Here, the Bank of Ghana had been expected by economists not to ease monetary policy at he beginning of the year, but the temptation to support a rebound in economic growth appears to have won over, especially in the face of inflation stabilized in single digits (currently at 9.4 percent, down from 15.4 percent two years ago) and hope that slowing growth in the global economy – brought about by growing international trade tensions between some of the world’s biggest economies, the recent partial United States shutdown and the likely ramifications of an untidy Brexit -will slow down the pace of monetary easing through interest rate hikes in the US, EU and China.
Consequently, the BoG’s Monetary Policy Committee has opted to slash the Monetary Policy Rate by 100 basis points to a low of 16 percent. The strategy being attempted here is to let yields on the medium and long term government treasury notes and bonds keep rising on the secondary market – which would lead to similar increases in coupon rates of new issuances on the primary market – since these are the only securities which foreign investors are allowed to invest in and thus need to become more competitive against dollar denominated instruments to attract and retain those investors; but use a lowered MPR to push short term interest rates for purely domestic transactions, including bank lending rates, downwards.
This is already happening with regards to the structure and gradient of Ghana’s yield curve. During 2018, 91 day and 182 day treasury bill rates rose by 1.3 percent and 1,2 percent respectively to reach 14.6 percent and 15.0 percent. However medium and long tenured instruments yields on the secondary market rose considerably faster. Seven year bond yields rose by 4.7 percent from 16.3 percent to 21.0 percent; 10 year bond yields climbed by 4.5 percent from 16.7 percent to 21.2 percent; and 15 year bond yields increased by 4.2 percent from 17.2 percent to 21.4 percent.
The BoG’s strategy, while increasing yields for foreign investors in medium to long term bonds, has at the same time enabled a 3.2 percent fall in the weighted average interbank lending rate from 19.3 percent to 16.1 percent, while average lending rates of banks have declined by 2.4 percent from 29.3 percent to 26.9 percent.
This holds the potential to make short term credit to businesses cheaper while attracting the needed, medium to long term financing for government from foreign portfolio investors.
For government to achieve its economic growth target for 2019, the banks will have to step up their lending even as the lending rates they charge fall. Private sector credit growth in 2018 was 10.6 percent. But this was down from 13.4 percent in 2017 and even more instructively was just 1.1 percent in real terms. However the latest BoG credit conditions survey projects an easing of banks’ credit stance in the first quarter of 2019 in line with their enhanced capital levels after a tightening stance on loans to enterprises during the final two months of 2018.
Key to an improved economy in 2019 will be the ability of non bank commercial lenders to finance micro and small scale lenders; while these institutions only account for about 12 percent of total lending, they have the majority of the customers, by numbers. This year the BoG will devote its attention to cleaning up the dire insolvency currently afflicting many of them and to completing their ongoing, but belated recapitalization efforts.
Key to both containing inflation and boosting growth will be the performance of the cedi, which in turn will depend largely on Ghana’s external sector performance. In 2018 the cedi drew lots of attention as it depreciated by 8.4 percent against the dollar, compared with just 4.9 percent in 2017.Instructively however this was more the result of the dollar’s growing strength than the cedi’s growing weakness; last year the currency’s depreciation against both the pound sterling and the euro, at 3.3 percent and 3.9 percent respectively, was much smaller than the 12.9 percent and 16.2 percent suffered in 2017.
Nevertheless, the cedi will have to cope with major external sector pressures this year.
Ghana recorded a Balance of Payments deficit for the full year, 2018 in a reversal of the surplus achieved in 2017.
This largely accounts for the cedi’s fragility during the last three quarters of the year. The BoP deficit, of US$1,280.0 million – in complete reversal of the US$1,091.4 million surplus achieved in 2017 – was incurred despite an expansion of the merchandise trade deficit to US$1,778.8 million last year, up significantly from the trade surplus of US$1,187.7 million generated in the previous year.
However, while the current account deficit was more or less stable at US$2,072.0 million in 2018 (2017: US$2,003.0 million) it was still large enough to wipe away the trade surplus. But the ultimate shortcoming in Ghana’s external sector performance last year was the near halving of the capital and financial account balance to US$1,560.0 million, down from US$3,015.7 million in 2017. The sharp decline in the capital account balance occurred despite the record US$2.5 billion Eurobonds proceeds taken by government last year and another US$1.3 billion in proceeds from the year’s edition of the annual syndicated loan for local cocoa purchases, as private portfolio investment outflows in reaction to higher offered yields on dollar denominated assets took a harsh toll.
The result of all this was a decline in gross international reserves to US$7,024.8 million by the end of 2018, – enough to cover 3.62 months of imports – down from US$7,554.8 million, or 4.24 months of import cover a year earlier. Similarly, Ghana’s net international reserves fell to US$3,851.0 million down from US$4,522.5 million a year earlier.
Ghana’s deteriorated external position is responsible for the pressure under which the cedi came for the last eight months of the year in particular. The poor performance of private portfolio flows last year supports the Bank of Ghana’s decision to suspend its monetary easing with a view to strengthening the competitiveness of cedi denominated investment assets and thus stemming the net outflows.
Another source of worry is Ghana’s increasing reliance on oil exports to maintain the trade surplus which has been consistently recorded since the last quarter of 2016. Although gold still led as the biggest export earner in 2018, generating US$5,461.4 million, this was lower than the US$5,786.2 million it generated in 2017. Similarly export earnings from cocoa declined to US$2,091.6 million last year, down from US$2,661.4 million in 2017. However, oil export earnings, riding on the back of both rising global market prices and increased production, rose to US$4,573.4 million, up significantly from the US$3,115.1 million it generated in 2017.
Total exports amounted to US$14,868.1 million, up from US$13,835.0 million in the previous year. But total imports rose too, from US$12,647.4 million in 2017 to US$13,089.3 million last year.
Encouragingly though, non-oil imports experienced a rare decline albeit a marginal one, from US$12,655.2 million to US$13,089.3 million. Curiously though, oil imports increased to US$2,537.7 million in 2018, up from US$1,992.2 million in 2017, and despite concerted efforts to replace imported light crude oil for electricity generation with locally produced gas.
Ghana’s external sector in in the throes of restructuring but efforts to expand the non-traditional exports base and reduce the need for imports through initiatives such as the one district one factory programme and the efforts of the recently established Ghana Exim Bank will take time to pay off. In the meantime the country is looking up to improved production of and prices for its main commodity exports to improve its position and not much of either can be expected this year.
Nevertheless, most indicators suggest potential for better economic performance this year and indeed that is why the BoG’s Monetary Policy Committee has started the year by slashing the MPR to 16 percent.
As BoG Governor Dr Ernest Addison summarized the situation when announcing the 100 basis points cut at the beginning of this week: “The Monetary Policy Committee (also) noted that external financing conditions remain tight and uncertain, presenting risks to the budget with implications for the exchange rate. This calls for a recalibration of the financing policy mix towards more domestic financing by domestic investors to reduce the burden on the exchange rate, reserve accumulation and monetary policy. (See editorial on page 4).
“The MPC also observed that domestic growth remains fairly robust and in line with projections. Over the medium term, growth prospects are positive and would be supported by increased oil production and easing of credit stance. With the recently ended recapitalization banks are also better positioned to support economic activity. The BoG’s latest forecast shows that inflation will remain within the target band of 8 plus or minus 2 percent over the forecast horizon, barring any anticipated shocks. Immediate risks to the disinflation path are well contained and the current conditions provide scope to translate some of the gains in the macro stability to the economy.”