Based on the formal definition of “recession” – two consecutive quarters of negative growth – Ghana’s economy technically does not qualify. If you ask the man on the street, however, he is just “managing.”
Data from the Ghana Statistical Service (GSS) states that Ghana’s GDP growth rate was a negative 3.1 percent in the 2Q 2013. This is in line with anecdotes that business activity in the run-up to the August 29th Supreme Court decision on the 2012 presidential election was severely curtailed. Economic activity shrunk as everyone waited to see what would happen.
That seems to run counter to what the African Development Bank (AfDB) forecasted. The AfDB estimates that Ghana’s economy will grow at 8.0 percent (6.5 percent excluding oil) for 2013. Ernst & Young estimates that Ghana will grow at 7 percent in 2013.
Several factors seem to be contributing to the disconnect between what the average man on the street is experiencing and what “outsiders”, e.g. the IMF, AfDB, are forecasting. The first factor stems from coming down from euphoria. Let’s say you believe all the macro data. Then consider that the peak in GDP growth was 19.1 percent in 2Q 2011; in the most recent quarter (3Q 2013) we’re running at 6.1 percent. This rapid deceleration in GDP growth should make anyone feel comparatively less optimistic about their economic prospects.
Second, the average person has not seen his wages increase substantially in the last two years while the main elements of his consumption basket have become more expensive.
Cedi loses 50 percent against USD in 2 years
Unfortunately for Ghana, nearly everything consumed — oil, chicken, rice, durable goods (cars, appliances), consumer products (radios, mobile phones, TVs), tools, building materials — is imported.
Over the last 2 years, the cedi (GHS) has gone from 1.50 cedis per US dollar to 2.18 cedis per US dollar. If you invert the values, 1 cedi in 2011 could be exchanged for US$0.65. Today that same cedi would only get you US$0.45.
A weakening cedi contributes to inflation in the local currency. Below, the GSS estimates that inflation rate is running close to 11.5 percent.
Ghana addicted to imports
Often times when you hear a country is addicted to foreign/imported goods, you will also hear the country is running a current account deficit.
Current Account = Total Exports – Total Imports
- If CA > 0, then the country is running a current account surplus. Examples of countries that run current account surpluses include China, Japan, Germany.
- If CA < 0, then the country is running a current account deficit. Examples of countries that run current account deficits include the US, Brazil, Ghana
“When a country runs a current account deficit, it is building up liabilities to the rest of the world that are financed by flows in the financial account,” explains the International Monetary Fund (IMF). “Flows in the financial account” means that the country needs to borrow funds in the international markets to finance these CA deficits. Moreover, CA deficits lead to a depletion of the country’s foreign exchange (USD) reserves because the country must finance its borrowings.
I mention all of this because — surprise, surprise — Ghana runs CA deficits. Note the direction of CA over the last decade.
On July 25, 2013, Ghana floated a $750 million bond offering (8 percent yield, 10 year tenor) to help pay its liabilities.
CA Deficits get a bad rap because they indicate that a country becomes vulnerable to economic shocks and becomes more economically unstable. (I can thank Professor Nouriel Roubini for explaining that in B-school.)
Current Account Deficits as percent of GDP for Greece and Iceland (2008 Global Financial Crisis)
Current Account Deficits as percent of GDP of Thailand (1998 Asian Financial Crisis)
Last year, the incumbent NDC government spent heavily in the run up to December 2012’s presidential elections. In 2012, the current account deficit reached 12 percent of GDP.
Current account deficits are not always bad if the country is borrowing for long-term growth. Unfortunately, African leaders are not known for their long-term economic foresight. If you are trying to buy public sentiment ahead of an election through excessive short-term public works spending, then that is not likely to help boost long-term productivity. For instance, our previous office manager complained that ex-president John Atta Mills’s administration was giving away compact cars at the University of Ghana to buy votes. The World Bank reported that Ghana has the fourth highest public debt as a percent of GDP in SSA.
Good News, Kind of
The good news is the government seems to care about whether Ghana runs large current account deficits. In a way, that shows the government is responsible. The bad news is the government seems to care about whether Ghana runs large current account deficits because they are implementing several measures to control deficits that are hitting Ghanaians’ pocketbooks.
Eliminate fuel subsidies
The new NDC government has had to implement several measures to pay for the excessive spending in the run up the 2012 elections. First, the government announced in May that it was eliminating fuel subsidies. Ghana’s National Petroleum Authority (NPA) estimated that fuel subsidies cost the country 1 billion cedis in 2012 and estimates that they would cost 2.4 billion cedis in 2013. Petrol prices have gone up 7 percent since the fuel subisidies were eliminated. The problem is that a bump in fuel costs increases costs for everything else — goods and people — that needs to be transported in the country.
Raise utility prices
In September it was announced electricity prices are going up as much as 79 percent and water prices are going up 52 percent.
Increase tax collection
In order to help pay Ghana’s bills, the government is trying to make everyone better comply with the country’s jumble of tax laws. For instance, in July 2013, the Ghana Revenue Authority (GRA) formed a 43-member team to increase the collection of taxes on rental income. Starting in June 2013, the GRA is also closing businesses for not paying their taxes.
Bad Timing of Falling Gold Prices
Another issue for the country is falling gold prices. Formerly known as “The Gold Coast”, Ghana derives a significant amount of inflows from the export of gold. As described in Wikipedia, “The Mining industry of Ghana accounts for 5% of the country’s GDP and minerals make up 37% of total exports, of which gold contributes over 90% of the total mineral exports.”
Thus, the $500 per oz or 28 percent drop in gold prices is taking a toll as a source of capital inflows. What’s worse, mining companies are indicating that they will need to cut 4,000 people. The average wage of people in mining is 1,000 cedis per month.
In summary, the country seems in the midst of a recession even though top line GDP suggests the country is growing. The excessive government spending ahead of 2012 presidential elections seems to have exacerbated many of Ghana’s problems. It has contributed to a weakening currency, sharp increase in inflation, and high current account deficits. The government’s attempts to act responsibly — eliminating fuel subsidies, raising utility prices, clamping down on corporate tax contributions — all make for a more challenging business environment.