John Mahama carves a path for Ghana

Kanika Saigal
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Ghana’s president admits that only structural changes will solve deep-rooted difficulties in the economy. One way to do this would be to diversify, lessening dependence on commodity exports. But can this be successful in a country still finding its feet?

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.

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. 

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 package has 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."