Ghana: A change of course, old problems

After defeating the National Democratic Congress (NDC) in December’s general election, the new government found the budget deficit in 2016 had reached 10.2% of GDP, nearly double the target that the NDC had agreed with the IMF as part of an economic reform programme backed by a $918 million extended credit facility. There were around GHC 7 billion ($1.6 billion) of arrears and unpaid bills of which the Fund was unaware when it approved progress on the programme in the run-up to last year’s polls. A possible extension of the IMF programme, due to expire next year, is now under consideration, and the Fund described the start made by the traditionally pro-business NPP as “promising” in its annual consultation in April. It stressed the need for sustained reforms that extend “beyond central government’s operation to focus on the broader public sector”.

If it is to tackle these problems and keep its election promises, the government will need all the goodwill Ghana enjoys with its western donors, the result of its exemplary record of stable democratic rule. Akufo- Addo, a highly respected attorney-general and former foreign minister, had previously lost two close elections to the NDC, whose mismanagement of the economy led to its defeat last year. Ghana was facing bankruptcy in 2015 after a spending and borrowing spree that new oil revenue could not sustain, and became the first country to call in the IMF after the continent-wide official debt relief had wiped out official debts only a decade earlier. Power cuts, inflation and slowing growth turned Ghanaians against the government of former President John Mahama, which was already mired in corruption scandals.

The IMF recently noted that Ghana now has a “unique opportunity to change course” under a new government with an electoral mandate to restore macroeconomic stability and “create prosperity and equal opportunity for all”. The primary task of restoring fiscal discipline, made worse by the recent setback, will be hard to balance with the ambitious social and economic reforms set out in Akufo-Addo’s manifesto.

The reforms focus on three main areas of the Ghanaian economy:

Reducing the deficit. 

Akufo-Addo’s election campaign exposed the overspending and over-borrowing of the left-leaning NDC, taking national debt to 74% of GDP, and deficit reduction remains a priority. In April, Ofori-Atta, who founded Ghana’s leading stockbroker Databank before entering politics, said the government intends to reduce the deficit to 3-4% in 2018, in line with IMF guidelines. Cost-cutting measures include the removal of tax exemptions and evasion that were rife under the NDC, and improved public financial management. The government has announced the elimination of almost 27,000 ‘ghost’ public sector workers following a payroll audit, and mandatory public tendering for all state contracts. Sole-sourced procurement has cost the government $1.93 billion in overpriced contracts since 2010, according to a recent study by the Danquah Institute, a think tank in Accra.

Investors’ response has been positive, with the exchange rate recovering from a slump after the fiscal deficit was revealed. Ofori-Atta’s other priority is to restructure government debt, including three Eurobond issues, to reduce crippling debt service in cedis and dollars. The currency has recovered from an early-year slump as confidence returns to the economy. However, there is a tough debate in the cabinet about how to fund its firm commitment to provide free secondary education for all Ghanaians and secure an extension of the IMF credit facility.

Diversification and regionalisation. 

After the sharp fall in the value of its main exports – gold, cocoa and oil – accentuated Ghana’s economic slump from 2015, economic diversification is seen as essential, but current policies will also put a strain on the public purse. “One district, one factory”, a fanciful NPP flagship policy, proposes the government-backed creation of a new plant in all 216 of Ghana’s districts, aimed at agricultural processing. Ghana imports over two-thirds of its staple foods, such as rice and wheat. Boosting food production would also help to reduce inflation, currently at about 10% annually for food. A new campaign aims to create 750,000 new jobs in primary production, processing and transport this year and double that in 2018 through well-coordinated investment. The nation’s crumbling infrastructure and spending constraints will make the targets hard to achieve.

These policies will add a substantial fiscal burden, particularly in more remote and rural areas of the country where private sector support will be lacking. In a recent London briefing given by Deputy Trade and Industry Minister Robert Ahomka-Lindsey, significant focus was also placed on the development of Ghana’s mining, textiles and pharmaceutical sectors. However, consolidation of Ghana’s key extant export industries is crucial. Ghana’s oil and gas sector is still emerging, and will also require support. The President has therefore grouped six ministers together to deal with railways, business, inner cities, regional decentralisation and development, and four new regions will be carved out of the existing Western, Brong Ahafo, Northern and Volta regions. A key role in holding the fiscal line will be played by Anthony Akoto- Osei, a former Deputy Finance Minister and economist at the World Bank, who is running the Monitoring and Evaluation Ministry, based in the Presidency.

Business environment and anti-corruption drive. 

The new government aims to overtake Mauritius by 2020 as Africa’s highest ranking country in the Ease of Doing Business Index (Mauritius presently ranks at 49th worldwide, with Ghana at 108th). Changes this year have included 16 alterations to the Ghanaian tax code, and widespread reorganisation of Ghana’s business regulation, including at the business registry, which has required businesses to re-register. Reducing public sector corruption was also a campaign theme. Akufo-Addo criticised contracts awarded by the last government, particularly in the power sector, and in January formally announced the appointment of an independent public prosecutor to look into public sector corruption (subject to a vote in parliament). State-owned utilities are a major fiscal risk, with the energy sector’s debt estimated at $2.4 billion (over 6% of GDP) at the end of 2016.

The focus of investigations will be high-profile energy deals with foreign companies signed by the previous government. These include the $510 million contract with the UAE-based Africa & Middle East Resources Investment Group (AMERI) for emergency power supply signed on allegedly exorbitant terms, and a related power deal with Turkish contractor Karpower. Both contracts are to be reviewed, according to Energy Minister Boakye Kyeremateng Agyarko. The NPP in opposition also called for the Sankofa field deal with Italy’s ENI and oil trader Vitol to be renegotiated, alleging that the terms are disadvantageous. The dispute will be complex as the ENI-led project is part-funded by the World Bank’s International Finance Corporation.