Ghana’s president, John Dramani Mahama, is fully aware of the Ghanaian economy’s shortfalls. But he is also a firm believer that the recent measures to stop the country’s currency, the cedi, continuing to spiral downward were necessary. Speaking from the comfort of the Landmark Hotel in Marylebone, London, and surrounded by a large and intimidating entourage of military and government officials, Mahama is very much at ease and very much in control.
First elected to parliament in 1996, hewas appointed minister of communications two years later while at the same time playing a central role in steadying Ghana’s telecommunications sector after it was deregulated in 1997. His communications background shines through.
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| Source: Reuters |
Ghana, he argues, has come a long way since the days of a command-and-control economy, which stunted economic growth in the early years after independence in 1957. The government has introduced a much more liberalized way of doing things, but the change still needs to be moderated.
“One [move we have made] was the liberalization of our foreign exchange regime, but in making that move we have moved from one extreme to another. Our foreign exchange regulations at the time were too lax,” he says. Perhaps, Mahama concedes, some of these measures should have been implemented beforehand. “But we took the opportunity of the current cedi slide to tighten things a bit. In the very short term we can see that there has been a positive response.”
In February, Ghana’s central bank raised interest rates 200 basis points to 18% and tightened controls on foreign-currency-denominated accounts in a desperate attempt to halt the decline. As part of the foreign-currency regulation changes, proceeds from exports must be converted into cedis within five days; the central bank removed transfers between accounts denominated in foreign currencies; and foreign exchange bought for the settlement of import bills must be reported in a specific margin account to be drawn on within 30 days. The central bank also limited withdrawals to the equivalent of about $10,000. Thorough documentation for international transfers will be required.
But even with a short respite brought on as a result of the policy changes, the cedi has continued to spiral out of control: year to date, it has fallen 8.2% against the dollar; over the past 12 months, it has fallen 33.6%. In 2013, the cedi was the worst-performing currency in sub-Saharan Africa after the South African rand. Policy changes have done little to change the cedi’s fate – so far.
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| Source: African Alliance, as of March 27 |
"The basic position for foreign investors is that Ghana is one of the most stable and advanced frontier markets in Africa, with peaceful, democratic transitions since the late 1990s,” says Sebastian Spio-Garbrah, founder of DaMina Advisors, a political risk consultancy headquartered in New York.
When Mahama took over from John Atta Mills, Ghana’s president from 2009 until his death in 2012, Mahama was swiftly and peacefully sworn into office: a testament to the democratic maturity of the country.
Mahama is part of a younger generation bringing change to Africa. He is Ghana’s first president to be born after independence, the 57th anniversary of which was celebrated on March 6, although economic woes certainly put a dampener on some of the celebrations.
Democracy has done well in Ghana over the past 20 years, but highly contested elections have also led to increased levels of government spending in the run-up to voting. During the last election, in December 2012, the government promised greater public expenditure on civil service salaries, putting pressure on Ghana’s fiscal position: those salaries soak up nearly 70% of government revenues.
“The wage and remuneration packagehas no doubt been one of the causes of the deficit,” says Mahama. “When the last government came into power, there had been an agreement to introduce a universal salary structure, the single-spine pay policy. At the implementation of the policy it was meant to be revenue neutral, but somehow it led to the spiralling of the wage bill. Now we are engaging the trade unions – they themselves are citizens and they will feel the overall impact that the deficit going out of control will have. I am sure we will be able to forge a consensus.”
With low export revenue as global commodities prices weaken and increasing imports, Ghana has become victim of a twin deficit: a fiscal deficit equivalent to 10.9% of GDP and a current-account deficit of 13% of GDP. Domestic debt-servicing costs in 2013 reached 40% higher than budgeted by the government, consuming 20% of government revenues. Moody’s predicts the debt-to-GDP ratio will reach 51.2% of GDP by the end of 2014.
“There is very little value added on the export side of things; most materials need to be imported,” says Samir Gadio, emerging market strategist at Standard Bank. “If you’re building a house, at least half of the materials need to be brought in from elsewhere. This problem has been heightened because the economy is actually growing too quickly in certain sectors. There are signs of overheating in the real estate sector, for example, which has been booming in places such as Accra – a pattern which is not obvious from looking at average GDP growth over the years.”
Although GDP growth in Ghana is far off the heady heights of 2011, when it hit 15%, it has remained relatively robust. According to the IMF, it reached 7.9% in 2012 and 2013. The finance ministry predicts 8% in 2014. Other agencies are less upbeat: Moody’s predicts 7.5% by the end of 2014; Standard & Poor’s expects 6.6%; the IMF opts for 4.8%.
“Whatever the prediction, empirically, things are happening really fast,” says Gadio. “And ironically, robust economic growth is having a detrimental effect on the economy overall, especially the current-account deficit.”
Perhaps Ghana could consider doing a deal with the IMF, but this wouldn’t prove politically popular. “An agreement with the IMF could mean reducing recurrent expenditure – something that wouldn’t succeed from a social and political standpoint,” Gadio says. “It could also be seen as a failure of local authorities to stabilize the economy.”
Ghana went to the IMF for help in 2009. It was granted a $602.6 million loan in July of that year as the country began preparations for oil production, but absorption was slow. “Although it might be seen as a good sign by the markets, there’s nothing to say that this time it won’t be just as slow to have any effect,” says Gadio.
Short-sighted, temporary policy changes will not be enough to address the structural issues facing the economy. Ghana’s reputation has become tarnished, and while international investors might think twice before going there, there is also a growing risk that the locals will soon become disillusioned with the system, says Spio-Garbrah. “The price of oil, rent and food is on the rise and interest rates for businesses are up to 30%,” he says. “Yes it’s true that, compared with its peers, Ghana is politically stable, but I predict that voter participation in Ghana will decrease as citizens become disgruntled by how democracy is working there. Things aren’t changing because of oil. People will stop thinking that elections will change anything.”
Although annual GDP per capita in Ghana increased by about 30% between 2008 and 2012, from $1,234 to $1,605, private-sector consumption as a percentage of GDP has been on the decline, from 96% in 2008 to 74% in 2012 – a big correction, according to Spio-Garbrah.
“This comes despite the fact that government spending as a percentage of GDP over the same time has increased from 11% to 14%, and despite the fact that FDI to Ghana has increased from 21% to 31% of GDP due to inflows in the offshore oil and gas sector, and from public investment in infrastructure, notably in energy,” he says.
So what’s the solution? Mahama recognizes that Ghana needs to reduce interest rates, bring the deficit down and, most important, encourage the use of goods made in Ghana. “We need to reduce our import dependence and diversify the structure of our economy,” he says. “In fact, the structure of our economy has not really changed since colonial times – we’ve relied heavily on a narrow band of primary products for export: gold, cocoa, manganese, bauxite. We need to increase the pillars on which the economy stands – look at more manufacturing and value-added products through secondary and tertiary processing.”
Ghana, the world’s second-largest producer of cocoa and gold, lost $1.3 billion in export revenues in 2013 as commodity prices took a tumble. And according to Ecobank, Ghana is set to produce 780,000 tonnes of cocoa in the 2013/14 season, falling short of a target of 830,000 tonnes set by the country’s regulator, Cocobod. Output is predicted to fall for the third season in a row as fertilizer subsidies for farmers are phased out.
Mahama believes that increasing the amount of secondary products manufactured in Ghana could help shelter the economy from volatile commodity prices. “First we need to expand the amount of cocoa we process,” he says. “In the medium term, we should look to increase production by 50% by increasing efficiency. At the same time, we need to look at processing cocoa into other products, such as cocoa powder, liquors, cocoa butter and whatever else we can build the capacity to do. Just exporting raw beans will not be enough.”
Mahama points to a similar need to process bauxite into aluminium, as well as to extract as much value as possible from Ghana’s new oil and gas industry. In 2007, large reserves of oil and gas were discovered offshore. The Jubilee oil field was developed by UK firm Tullow; its recoverable reserves are thought to be more than 370 million barrels, and possibly as much as 1.8 billion barrels. Ghana will start to process gas from the field in September. A $750 million plant was initially planned to be completed last year, but was delayed by financial and technical problems.
With the discovery of oil and gas, we’ll not only plan to export it, but we also plan to roll out a mid-stream and down-stream petroleum industry,” says Mahama. “We don’t have a specific timeline to get these additional projects up and running, and I don’t know how much money we will even need, but Ghana won’t be able to do this alone. Private investment in these sectors will be necessary. There have already been some unsolicited proposals, but we need to approach this in a more transparent manner: lay down the ground rules and find who our partners should be.”
While the government is trying to address these imbalances, investors don’t feel that Ghanaian leadership has a cohesive plan, says Spio-Garbrah. “Does the government want to focus on developing agriculture first?” he asks. “Or energy? Or even services? It can’t do everything at once. Look at the Asian economies that broke out of poverty – initially they focused on one industry, got it off the ground and then looked elsewhere. Ghana, as is the case with other developing economies, doesn’t have the capacity to do everything at once. There is no sense of prioritization, which at this stage is necessary.”
Mahama is adamant that diversification from the beginning is the way forward, and that Ghana does have the capability to make it work: “At the end of the day,