In view of the IMF Reforms in Ghana, the austere measures from the reforms, combined with slow economic growth and worsening living conditions, have had some experts questioning the effectiveness and success of the program so far. The country is a lower-middle income nation which posted a GDP growth rate of 14% in 2011, and was touted as one the best economies among its peers. However, the budget deficits recorded over the years, especially since 2012, has impacted the economy negatively. The government in April 2015, engaged the International Monetary Fund (IMF) to help manage the country’s economy under a 3-year Extended Credit Facility program. Almost a year after the launch of the IMF program, we are yet to see concrete signs of macro-economic stability in the business environment. Many analysts see 2016 as a crucial year for fiscal management as the government is expected to deviate from the trend of huge spending overruns that have been associated with past election years and contributed to the current unsustainable and costly debt burden.
The economy in perspective
Ghana’s wealth of natural resources coupled with a democratic political system makes it undoubtedly one of Africa’s leading lights. The economy is modeled based on commodities such as oil, gold and cocoa. Political stability is high and this has helped the country’s growth in foreign direct investment (FDI) in recent years.
The net public debt stood at about ¢93bn (Ministry of Finance) and translated to debt to GDP of 70% as at November, 2015. The country has never defaulted in past local debt or past external debt, with high ability to raise taxes. The national income per capita is $1400.
GDP growth rate in the last five years was promising with the highest growth recorded in 2011 at 14.0% and the lowest at 4.0% in 2014 (Ministry of Finance).The local currency in the last two years, however, depreciated by 32% and 15.4 % respectively.
Year-on-Year inflation in the last five years averaged 13.0% with the lowest at 8.1% in 2012 and the highest at 17.7 % recorded in 2015(Ghana Statistical Service).
In 2012, the country’s budget deficit stood at 11.5% of GDP and it was reduced to a deficit of 7.0% in 2015 (provisional). Also, the primary balance, which stood at a deficit of 8.2% in 2012, has been reduced to a deficit of 0.2%. Similarly the current account deficit which in 2012 was at 11.7% of GDP has been reduced to 8.2% in 2015.
The IMF together with the government’s home grown policy implemented fiscal and monetary policies to bring back the economy on track. A key feature of the program was to front-load the policy and adapt restrictive monetary and fiscal policies to decrease aggregate demand and output. Restrictive monetary policy affects growth, in part by increasing interest rates and thereby reducing investments and consumption spending. Restrictive fiscal policy decreases spending, either directly or via higher taxes, and thus decreases output in the short to medium run. When capital mobility is low, the impact of monetary and fiscal policy changes on domestic interest rates will not induce major changes in capital flows. In such cases, monetary and fiscal policy effects on exchange rates will operate primarily through trade flows rather than capital flows.
Ghana’s current outstanding stock of government debt is very high, at 70% of GDP as at November 2015. Moreover, projections for the government debt-to-GDP ratio point to further increases well into the near future.
Slow Pace
Year-on Year inflation has accelerated to 19.0% in the first month of 2016; up from 17.6% in November 2015 and 17.7% in December 2015. This trend is well above both BOG and Ministry of Finance’s 8.0-10.0% end of year target range for 2016. The core inflation, which is used to guide monetary policy, is likely to rise and adding more pressure to the stability of the cedi; taking steam out of the country’s economic activities. Furthermore, elevated inflationary pressures are likely to result in labor agitation and strikes because of worsening standards of living. The current inflation rate is quite worrying because this trend is likely to rise and persist into the next two quarters of 2016 due to imposition of energy levy, increase in utility tariffs, rising transport fares and the much talked about ECOWAS Common External Tariff (CET).
Fiscal consolidation remains on track as the budget account recorded a cash deficit equal to 5.6% of GDP as against a programme target of 6.8% of GDP in the first 11 months of 2015. Also, oil prices remain low, helping to reduce import costs.
The local currency has remained broadly stable since the last quarter of 2015. This trend is attributed to the recent tightening in monetary policy, fiscal consolidation program as well as boosting of the country’s foreign exchange reserves following COCOBOD’s USD1.8bn syndicated loan and government’s USD 1bn Eurobond issuance. However, risks to the stability of the local currency still persist especially with high inflation and the US Federal government’s tapering of interest rates.
On the contrary, the current GDP of 4.1% is among the lowest recorded in the last 5 years. This has resulted in a decrease in real business activities and less capacity utilization of the economy. Consequently, leading to slack in the economy with its attendant high unemployment rate.
A recent survey by Association of Ghana Industries (AGI) indicates that production activities are on a slowdown due to difficult business conditions (weak macroeconomic variables) pertaining to the economy. Challenges with the energy crisis, high cost of capital / debt and hikes in taxes have led to high operational expenses in this sector. This has resulted in lower business confidence. Similarly, the BoG’s Composite index of Economic Activity indicates a slower pace of growth in November 2015 compared with same period in 2014. Ghana’s benchmark interest rate has been raised 11 times by a total of 1,250 basis point since February 2012, amid efforts to reduce inflation and also support the weakening cedi.
Cross roads
Inflation rate in the first month of 2016 is 19.0% and trending upwards. The IMF reforms and Bank of Ghana inflation targeting policy have so far failed to keep inflation rate at its target after raising the benchmark interest rate to 26%.
The credit trend is deteriorating. Ghana’s debt/GDP ratio is rising rapidly. The government is running a budget deficit (7.0% of GDP, 2015) and a sizeable current account deficit (8.2% of GDP,2015), which means it must attract funding from internal or external investors, further increasing the debt burden. Provisional numbers from Ministry of Finance (January 2016) indicates that the ratio of interest payments to revenue is now estimated at 28.9% as at November 2015. This is quite high and worrying to many economists.
In a recent visit to Ghana by the Deputy Managing Director of the International Monetary Fund (IMF), Min Zhu, stated that, ‘’the debt to GDP ratio of 70% is way higher than Ghana’s peers in the lower middle-income countries. And this poses enormous risks and any further slippages will make debt management extremely difficult; thus refinancing it will be very difficult’’.
Government was expecting crude oil to sell at US$53 dollars per barrel in the 2016 budget, but recent decline of its prices has seen the commodity trade at an average of US$30 per barrel. The government has hinted of presenting a supplementary budget to parliament to outline government turnaround strategy to curb the slow growth of the economy. It is estimated that government would have to cut its expenditure significantly to make room for the price shortfall. This situation will likely cause a persistence of tough times for the country for as long as the crude oil prices remain low.
Government rising expenditure pose some challenges to the fiscal policy. Managers of the economy’s commitment to lower the wage bill, cut down statutory funds such as (District assembly common fund, Get fund etc) and boost revenue collection (taxes) may help rebalance fiscal position. However, the likely rise in election related spending may throw the reforms program out of the window.
Impact on capital market
Weak macro economic variables are associated with volatile equity capital market. 2016 poses a challenging economic outlook for the Ghana’s equity market due to the underlying volatility of corporate earnings as a share of GDP. Companies will have to re-strategize in order to survive, which strategies may include recapitalization of the business.
After achieving the best performing stock market in Africa in 2013, the Ghana Stock Exchange (GSE), over the past two years, has seen share prices of most listed companies plummeting. The GSE recorded 71.81% return in 2013; however, 2014 and 2015 saw the composite index recording 5.4% and minus 11% respectively. The outlook of this market, in the short to medium term, depends on investors’ confidence in the macro economic factors and interest rates from the fixed income market.
Even though interest on short term money market instrument has been falling in recent times, it will remain high and likely push borrowing cost upwards. This will adversely affect the private sector which is expected to be the engine of growth.
Conclusion
One of the objectives of the IMF Reforms program was for the economy to gain some credibility from international investors. However, the country’s risk profile has gone up as reflected in the last Eurobond issued at a yield of 10.75%. This was higher than the previous Eurobond issued by Ghana which yielded 8.25%, and well above the yields of peer countries with similar risk. Even this was achieved with a partial guarantee from the International Development Association. Similarly, credit rating bodies (Fitch and Moody’s) have rated the country’s outlook negatively since September 2015.
Government appears to be making progress with its increased collection of revenue. However, the country has been characterized recently with rising inflation and interest rates, subdued economic growth and unstable (weakening) currency. Furthermore, with significant cuts in public spending and job losses, amid progress in the IMF-program, Ghana is indeed at cross roads in 2016 particularly as the General Elections approach.
Author: Wencelav Atule Safrega. The writer is the head of Corporate Finance and Research at TTL Capital Limited.
Contact: wencelav.safrega@ttlcapital.com.
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