Ghana’s growth defies external threats

Bank of Ghana

Despite the threats of a surging US dollar to Ghana’s returning macro-economic stability the country’s resurgent growth is proving to be resilient. Toma Imirhe examines the economy’s chances to overcome emerging difficulties.

As Ghana heads towards the last quarter of the year, the rebound of its economic growth, begun in 2017, looks set to be sustained through this year, just as was widely predicted by both international economic analysts and the Government of Ghana itself. Government is aiming at growth of some 7% this year and the latest data from the Bank of Ghana indicates that this target is still within reach despite emergent new challenges from abroad which have complicated the path to restoration of economic stability.

The Central Bank’s Composite Index of Economic Activity which has tended to quite closely mirror actual economic growth as measured by the Ghana Statistical Service, grew by 6.6% over the one-year period up to July 2018, the highest annualized growth in the index over the past eight months and three times the 2.1% growth in the index over the 12 months up to July 2017. The BoG attributes faster growth in economic activity [as different from economic output which is measured by Gross Domestic Product], to strong export growth, domestic Value Added Tax performance and increased industrial consumption of electricity, all of which indicate rising output, and added to these tourist arrivals have been on the increase as well. Since business related arrivals account for roughly half of all arrivals into Ghana by foreigners, this too suggests that business activity is picking up.

However, new challenges to Ghana’s economic growth have emerged since the beginning of this year, which serve as a reminder of just how fragile the economy still is when affronted by global economic headwinds. And unsurprisingly, their effects, are already chipping away at the enthusiasm that the latest change of government generated last year, this phenomenon intensified by a busy political opposition which has found new grounds for predicting that economic performance will fall well short of government’s own ambitious, and loudly trumpeted targets.

The biggest cause for worry has been the resumption of the cedi’s depreciation against the United States dollar, a key factor in Ghana’s fortunes. The cedi has fallen by fallen by 7.3% between the start of this year and September 20, which is far steeper than the 4.7% depreciation suffered during the corresponding period of last year. However while the two major political parties have descended into a public debate over which of them has done better in this regard during their respective tenures in office, the underlying primary reason for the cedi’s current travails – and what should be done about it – have been largely lost.

The cedi has fallen victim to a surge in the value of the US dollar as America’s central bank, the Federal Reserve Bank raises interest rates to signal the end of monetary easing in that country. Consequently, international investors are turning away from emerging market economies such as Ghana’s and returning to bigger advanced western hemisphere financial markets. This is exposing Ghana’s dependence on foreign subscription to its public debt issuances, the real depth of which is masked by the fact that much of it is in cedi denominated debt securities and is thus classified as domestic debt.

However, Ghana is still doing better than most of its peers with regards to local currency performance. Even relatively much bigger emerging market economies such as those of Argentina and Turkey have seen their respective local currencies slump by up to 50% over the past eight months. Besides, in real, trade weighted terms, the cedi’s depreciation is smaller than the cedi dollar rate would suggest. During the year to date, it has fallen by a significantly lower 5.5% against both the Pound Sterling and the Euro.

“The cedi remains competitive as indicated by developments in the real effective exchange rate” asserts Dr Ernest Addison, BoG Governor. “In trade weighted terms, it has remained within the desired band, indicating that they are broadly aligned with the underlying fundamentals.”

Nevertheless, the effects of a falling cedi are real and are shaking both business and consumer confidence. The Central Bank’s business and consumer confidence survey’s conducted in August, show an easing of confidence. “While news of the depreciation of the local currency dominated the headlines, business is also concerned about the political impact of the recent volatility in the exchange rate,” admits Dr Addison.

Those worries are exacerbated by the resultant impact on fuel prices, which are also being pushed upwards by rising crude oil prices on the international market. Earlier this year, when consumer price inflation fell below 10% for the first time in nearly a decade, the BoG declared its expectation that it could fall to the lower end of its target band, at 8% by the end of the year. But inflation has stopped falling – it was 9.6% in July and 9.9% in August – fuelled primarily by non-food inflation which is largely exchange rate determined and which stood at 10.8% by August, the same as the Central Bank’s measure of core inflation which excluded energy and utility costs.

“The most recent forecasts by the Monetary Policy Committee round show some marginal elevation of the disinflation pull taking into account the possible second round effects of the recent increase in petroleum prices, exchange rate depreciation, the effects of recent increases in taxes, the pick-up in global inflation as well as the effects of the tight global financing conditions” warns Dr Addison.

Tight local financing conditions are not helping matters either. Although the weighted average interbank rate has fallen further to 16.2% in August from 21% a year ago, and the average lending rate of the banks has similarly fallen to 27% in August from 29.8% a year ago, credit growth to the private sector remains sluggish. Banks are still repairing their balance sheets and the latest banking conditions survey shows a tightening in banks credit stance on loans to both households and enterprises. Credit to the private sector grew year on year in August by 15.8%, far better than the 6.5% growth a year ago, but in real terms the growth was just 5.4%

Add to this slower monetary growth, in line with the disinflation effort, but which means less liquidity available to businesses and households alike.   Broad money grew by 23.1% over the one year up to August, which was slower than the 24.9% growth over the previous one year period.

Nevertheless, Ghana’s economy is showing enough resilience to keep growing faster than before and faster than the average for sub Saharan Africa.This means Ghana’s economic managers have time to come up with solutions to the veritable challenges that have emerged this year.

By Toma Imirhe