Ghana’s Economic Outlook for 2020

Ghana’s economic outlook is not healthy, according to the key economic indicators. The most critical indicators are interest rate, inflation, exchange rate and debt accumulation as a percentage of gross domestic product (GDP) which measures the nation’s production output. The GDP growth rate is expected to fall below the anticipated 5% to 6%  range for the next two years. Unemployment is forecast to continue to surge above the 7.2% mark by the end of the election year 2020 according to a recent World Bank report. The current inflation figure (7.8%) is acceptable compared to the previous year but the volatile nature of the exchange rate of the local currency against the major trading currencies could easily cause prices to increase on the market.  Currently, Ghanaians spend more than 43% of their total monthly income on food alone. The outlook is close to a Goldilocks economy.

With the novel Coronavirus (COVID-19) outbreak, Ghana’s economy is being hard hit due in part to the impact on her major trading partners ie China, Europe and the US especially because of mass production shutdowns and supply chain disruptions and port closures in China, The Covid-19 has caused global “twin supply-demand shock”. Africa is beginning to feel its full impact and plans to control and manage the humanitarian challenges of the virus are underway across the continent of which Ghana is not an exception. Economically, the effects have already been felt – demand for Ghana’s raw materials and commodities in China has declined and access to industrial components and manufactured goods from China has been hampered.

According to ratings agency, Fitch, the Coronavirus outbreak will present a downside risk for short term growth in sub-Saharan Africa, particularly in Ghana, Angola, Congo, Equatorial Guinea, Zambia, South Africa, Gabon and Nigeria – all countries that export large amounts of commodities to China.

The novel COVID-19 is expected to impact China’s global trade for several months and as China is Ghana’s biggest trading partner, the effects of COVID-19 are already being felt in the area of food supplies to Ghana. With China having shut down its manufacturing centers and closed its ports, there has been a resultant decrease in supply of commodities as most importers/exporters in China are cancelling orders due to port closures.

OVERVIEW

Over the next few months, the economy of Ghana will experience turbulent times which would lead to very slow GDP growth, increase in inflation, surge in unemployment rate, further depreciation of the cedi and a hike in market driven interest rates. This is as a result of stagnation in domestic revenue mobilization, higher interest payment on public debts, over the ceiling expenditure, a rise in government borrowings and increase in public service wages and salaries, particularly in the health sector..

These are some very worrying concerns about the economic outlook of Ghana that need the attention of the Government, its economic management team and concerned stakeholders.

The novel COVID-19 may cause Ghana’s GDP growth rate to fall to 2.2% by the end of the year due to slowdown of both local and global economic activities.

Ghana’s sovereign credit rating was recently revised downwards to B3 with a negative outlook and this ultimately emanated from the corona virus outbreak. The vulnerabilities in the economy especially on Ghana’s credit worthiness may affect the investor confidence built over the past few years.

It is worth noting that Ghana has a track record of fiscal slippages during election years and deficiencies in revenue mobilization will further weaken  government’s ability to meet its fiscal targets. Furthermore, the government may now need approximately GHc78 billion which is 21% of GDP to meet its 2020 financing needs, including debt amortization. Fortunately the US$3billion Eurobond (4.9%) has provided some inflow to support government’s revenue needs.

However, the widening of the fiscal deficit means that government may need approximately 3% of GDP more than originally anticipated in financing needs to meet its 2020 expenditure.

The government plans to fill the gap in the financing needs for 2020 with US$1billion (1.6% of GDP) from the IMF (Rapid Credit Facility), World Bank’s US$300million (0.5% of GDP) and US$200million (0.3% of GDP) from the Petroleum funds. The remaining would be raised from the local market through government bonds.

Ghana’s total debt stock is projected to reach 70% of GDP by the end of year 2020, unemployment is expected to surge to 7.4%, cash deficit to hit 8% of GDP and tax revenue approximately short by 35% of target for year 2020.

Recently, the World Bank cautioned Ghana against excessive borrowing as the total debt stock of the country hit GHS214.9 billion with a revenue mobilization target of GHS67.07 billion ,from which about GHS22.5 billion would be used to pay interest on loans alone.

GAME CHANGER FOR THE ECONOMY

The economy can experience  GDP growth rate in the non-oil sector which can translate into a positive macroeconomic growth boom. But this can only happen with a change of policy direction.

Government and stakeholders should have a policy review on the following to change the narrative.

• Capital availability for the private sector
• Monetary policy rate must translate into Commercial interest rate
• Cumulative data on demand and supply of foreign currency in Ghana
• Policy credibility on incentives to exporters
• Enforcement of policy direction on black market operations in Ghana
• Policy credibility on improving administration
• Strict policy on tax compliance
• Overhaul the current tax exemptions regime.

UNEMPLOYMENT

. The unemployment rate will average 7.4% in 2020 due to the job losses from the financial sector clean up and the contraction in the private sector due to lack of cheap funds for SMEs. The reality is that some people have been out of work due to the crises in the banking sector and that they’ll never be able to return to the high-paying jobs they used to have. As a result, structural unemployment would increase.

INFLATION

Currently, the single digit inflation of 7.8% doesn’t translate into the prices of goods and services on the market and the reason is simple; the consumer price index (CPI) does not properly reflect average expenditure patterns.. If the goods and services used  to compute the CPI are not the commonly and regularly consumed products of the majority of the citizens, the official inflation figure will differ from the reality as is the case of Ghana. Inflation is expected to average 9.8% in 2020 and rise to 10.5% in 2021 and 2022

INTEREST RATES

Interest rates at the commercial banks are still very high, even though, the policy rate has been lowered over the past two years. The simple reason why the lowered policy rate cannot translate into lower rates quoted on the commercial market is high cost of funds for the banks, huge non-performing loans and very unstable business environment for the private sector..

Unfortunately, the Central bank is more concerned about preventing high inflation rate than promoting growth within the market space.

The slow economic growth and macro impact in the lives of the people is the result of very high interest rates, lack of availability and access to funds for the private sector to thrive and expand so it can employ more.

DEBT & GOVERNMENT BORROWINGS

Ghana’s total public debt increased to GHȻ224.9 billion in 2019. As a percentage of GDP, the total public debt is now 63.1% of the rebased GDP in 2019. The bulk of the public debt, totaling GHȻ188.8 billion (85.3%) was incurred between 2013 and 2019. Of this amount, GHȻ86.3 billion (38.2%) was incurred in the 4-year period of 2013-2016 and GHȻ102.5 billion (47.1%) in the 3-year period of 2017-2019 and a total of GHȻ16.7 billion (8% of the total debt) was advanced towards the cleaning up of the financial sector, which the Bank of Ghana classifies as financial sector resolution bonds.

In February this year, the government issued another US$3 billion Eurobond to support its budget for infrastructure, restructuring of the energy and financial services sector, and a liability management exercise. This brought the total public debt stock to GHȻ234.0 billion at the end of February 2020.

Table 1. Ghana: Public Debt Accumulation, 2013-2019

Source. Government of Ghana & BoG

Total domestic debt stood at GHȻ105.6 billion (49.6% of total public debt) as at the end of December 2019.  The bulk of the total domestic debt amounting to GHȻ84.5 billion (82.1%) was contracted after 2012, of which GHȻ35 billion (34.0%) was incurred in 2013-2016 and GHȻ49.5 billion (48.1%) in 2017-2019 (Table 1). The banking sector held about 44.7% of the total domestic debt stock in 2018, showing a significant increase from the 35.5% share in 2017 due to the issuance of stocks to support the bailout of the financial sector. Holdings of domestic bond by foreigners saw a drop from 38.6% in 2017 to 30.1% in 2018 (GoG, March 2019).

Total external debt as at end of year 2019 was GHS111.9 billion (US$20.3 billion) in 2019, (52.1% of the total public debt). As a percentage of GDP, Ghana’s external debt is 32.4%. The bulk of the external debt, amounting to GHȻ94.3 billion (84.3%), was incurred between 2013 and 2019 (Table 1) with a significant portion raised through the issuance of Eurobonds.

TAX AND REVENUE

One obvious area of underperformance of successive governments is taxation which is immensely important to national development and a key source of sustainable revenue.

In analyzing economic performance, one critical thing to consider is the tax to GDP ratio of the country i.e. the amount of tax collection compared to the nominal GDP. According to Heritage Foundation data and OECD, Ghana’s tax to GDP ratio was around 11.9% as at 2019 which is low as compared to the highest ratio of 14.1% achieved in 2017. This is an area that needs a lot more work to be done for government to be able to invest more into capital projects.

CURRENCY AND EXCHANGE RATE MANAGEMENT

The exchange rate stabilized in the early part of 2017, recording just depreciation of 4.9% against the US dollar. The cedi however recorded a cumulative depreciation of 8.4 percent against the US dollar by the end of 2018, driven largely by domestic demand pressures and external factors, particularly, the strengthening of the US dollar and rising yields of US Treasury instruments, the effects of the US tightened monetary policy and the rise in interest rates. During the first quarter of 2019, the cedi again came under pressure, driven largely by;

• Seasonal demand pressures that recurred in the first quarter of the year resulting from foreign exchange demand by importers and corporate institutions to repatriate profits and dividends,
• Sentiments over Ghana’s economic outlook following the completion of the IMF Extended Credit Facility support program fuelled pressures on the foreign exchange market. The interplay of these factors, according to Bank of Ghana resulted in a depreciation of the cedi by 8% at the peak of the crisis in March 2019. By end of 2019, the cedi-dollar exchange rate had increased to 5.53, reflecting a depreciation of 12.9% in the year. In dollar terms, Ghana’s external debt increased from US$4.0 billion in 2008 to US$20.3 billion in 2019. In cedi terms, however, the external debt increased from GHȻ4.9 billion in 2008 to GHȻ111.9 billion in 2019, driven by the cedi-dollar exchange rate which dropped from 1.22 in 2008 to 5.33 in 2019, indicating that the cedi depreciated by 77.1% over the period. Thus, anytime the cedi depreciates, the country’s external debt and debt payments in cedis increase by the size of the depreciation.
• Black market operations and lack of adequate data on dollars in circulation at each point in time.
• Huge importation of goods and services into the country without proper forex management regime within the commercial banking space.
• Again, crude oil importation, financial conditions on the global market, and other factors within the fiscal management space also influence the cedi depreciation.
• Interest rate/coupon rate differentials on borrowed funds when it’s time to payback also puts some significant demand pressure on the US Dollar

HOW IT AFFECTS YOU                                         

Ghana’s 2020 economic outlook shows very unstable microeconomic indicators which has a direct and indirect impact on the macro i.e. the living standard and job sustainability and security for the people. The current situation in which Ghana finds itself leaves everyone in the country to be worried.

From the outlook, Ghana will experience subdued economic growth.. The effects of the government’s appetite for excessive borrowing, over the ceiling expenditure both budgeted and off the budget, interest payment on loans and employee salaries and wages has left no room within the fiscal space to allow for capital expenditure and developmental projects that would boost economic growth.

It is unfortunate that the government boasts GDP growth of 6.3%, but about 4.5% of this growth happens in the oil sector which only employs very specialized and skilled personnel leaving the real sector with much slower growth. The real sector of the economy is where growth is needed to create the jobs for the graduate, skilled, unskilled, and master craftsman.

These have led to increase in unemployment and most companies are concerned about the uncertainty in the economy resulting from the upcoming elections and the skyrocketing debt profile of Ghana.

©Jerry J. AFOLABI is a Financial & Economic expert who believes that ordinary people can do extraordinary things when given opportunity. He is a leader in his field and community. His passion is to empower young people, adults and entities today with a love of learning and self-determination to become effective and self-reliant citizens.  Email: jelilius@gmail.com ; Tel: +233541238987. #MONEYTALKGH SHOW#

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