Today, Dr Anthony Akoto Osei, a spokesman for the National Patriotic Party (NPP) (minority party), warned Ghanaians, “Brace yourselves for tougher times.” Apparently, this is also the view of the international rating agencies, Fitch, Moody’s, and S&P.
- Fitch: downgraded Ghana’s government debt from B+ to B (October 17, 2013)
- Moody’s maintained its B1 rating but changed its outlook from “stable” to “negative (December 5, 2013)
- S&P also downgraded its sovereign rating from B+ to B (December 8, 2013)
In other words, all of agencies regard Ghana as non-investment grade (or “junk”). All the rating agencies cited the government’s inability to bring adequate revenues and rising debt levels “despite rapid growth.” Additional concerns include low foreign exchange reserves and how government contracts are awarded based on sole bidder auctions.
I don’t understand how the African Development Bank’s 2014 estimate for growth can be 7.1 percent while nearly everyone I meet and all the media outlets complain of the crippling economy.
Last year, the cedi depreciated 12 percent from January 1st (1.91) to the Supreme Court decision on August 29th (2.13). From August 29 to the end of the year, the cedi depreciated another 10 percent to close at 2.35 on December 30. Today, the cedi is trading at 2.28 by the Bank of Ghana and 2.35-2.45 at foreign exchange bureaus. The cedi has lost about 25 percent in a little more than a year.
In a country where nearly everything is imported but wages are fixed in the local currency this means everyone who earns in cedis has about 25 percent less purchasing power than they had a year ago. According to Trading Economics, the country’s foreign exchange reserves as of June 2013 was $4.6 billion. I believe the reserves were bolstered somewhat by a $750 million Eurobond offering on June 25, 2013.
My economist friend said that these ~$5 billion in reserves is not much to stave further declines in the value of the cedi. In plain English, provided a country has adequate reserves, a country can use its foreign exchange reserves to buy its local currency (and sell dollars) to provide “support” and prevent further depreciation of its currency. (In the case of China and Japan, these countries has enough economic power to sell their local currencies and buy dollars to keep their currencies weak. This helps the countries continue to sell “cheap” goods internationally.)
For my business, last April I was charging 24 cedis ($12) for our lowest priced plan, 30 cedis ($15) for our intermediate plan and 10 cedis ($5) for each additional item per month. I have since eliminated the lowest plan. In order to maintain the same pricing to maintain my company’s purchasing power, I would have to raise prices to 36 cedis and 47 cedis. Right now, all my customers are stuck at 35 cedis with no one willing to pay for additional items. Furthermore, many customers have provided excuses or reasons as to why they’ve suspended their subscriptions.
Who is to blame?
In Ghana, the minority party (NPP) seems to enjoy blaming the Mahama administration for the country’s woes. But I don’t think you can pin all the blame on one factor. There are several possible culprits to Ghana’s economic problems:
1. Mahama and the NDC (party in power)
Okay, maybe Mahama is somewhat to blame. He was in charge in 2012 before the elections and he’s still the president now. It’s assumed that the incumbent party will spend to stay in power so that the “leaders” can continue to loot the countries coffers. All the rating agencies and the World Bank said that part of the fiscal problems stem from over-spending during the 2012 election. The Bank of Ghana reported that during Mahama’s tenure from August 2012 until August 2013, the public debt grew by 15.6 billion Ghana cedis. Ghana’s debt in August 2013 was nearly 50 percent of GDP or 43.9 billion Ghana cedis.
The New Statesman — no doubt a partisan media outlet — offers several examples of how the Mahama administration spent funds in the last quarter of 2012 including 58 million cedis for rlg, a local consumer electronics maker, on November 21, 2012 and 10 million cedis ($5 million) to MEST (the Meltwater incubator I mentioned in previous posts) for “laptops and computers”. (That’s a lot of laptops!)
One of the ladies who used to work here said that the Mills administration (Mahama was vice president to the late John Atta Mills) was buying compact cars for students at University of Ghana to buy their votes.
In order for the government to improve the country’s fiscal situation, it will need to do something that will hurt the economy in the short run: raise taxes. Just this week, I learned that the government has increased the VAT by 2.5 percent from 12.5 percent to 15 percent. The government also includes a 2.5 charge for national health insurance levy (NHIL) so levies will increase to 17.5 percent. Previously, the 15 percent VAT and NHIL was only for businesses that earned 90,000 cedis per month. Now the levy will pretty much include all businesses large and small as well as a broader group of businesses.
2. Price of Ghana’s Primary Commodities are Down
Ghana relies on cocoa, gold, and oil for 70 percent of its dollars. All of these are down from their highs. Gold is down 35 percent from the $1,900 per oz high in 2011 and cocoa bean are also down by 20 percent from the high set in 2010. Newmont Mining (Ghana) announced it was laying off 300 workers in September 2013 because of lower gold prices.
It’s a simple math from here. If Ghana is generating the same amount of gold and cocoa but is receiving 20-35 percent less in foreign currency, then the country is going to have a shortfall of dollars to pay for its other expenses. This can wreak havoc on the country’s finances and its ability to maintain a stronger cedi.
3. Blame the Fed
The US Federal Reserve (central bank) told the international markets that they were planning to stop supplying “easy money” into the system during the middle of 2013. Doing so would cause interest rates in the US to slowly increase and make US investments more attractive.
Since the Fed indicated that it was going to end the “taper”, many emerging market economies have suffered as investors withdrew money from those emerging economies and put them into the US and more developed countries. It’s entirely possible that shortage of dollars and some of the pain is due to the Fed’s “tapering.” Actually, Bloomberg has a headline today, “World Bank Says Fed Tapering Could Threaten Africa’s Growth.” Moreover, this article from the Financial Times does a pretty good job of explaining how the Fed is going to royally mess with emerging markets this year.
What This Means For Me
I’m coming to the conclusion that I will probably have to close my business soon. The cost of running the business cannot be supported by revenues of ever poorer customers. (For those of you who live in Ghana, I’m sorry to report that the gym at Lizzy’s Sports Center has closed. I guess $185 per month was too much to ask.) I’ve learned a lot about myself and running a business. I’ll save all my “lessons” for another post. Instead I will be turning my attention to more profitable uses of my time including web design, real estate projects, and equities related work.
Many people wonder why I’m still in Ghana. Let’s just say I have some personal obligations I need to take care of before I leave. These obligations are independent of my business. Furthermore, I’ve come to care about several people in Ghana and it’s not that easy to say “Goodbye”.