Ghana: Is the Black Star losing its lustre?

President John Mahama[/caption] For decades now, Ghana has been the darling of the multinational organisations and international ratings agencies. At the turn of the millennium, it seemed the country was destined to become one of the stars of the entire global emerging markets. But things have not quite turned out that way. Eric Kwame Amesimeku explains why Ghana is going through hard times. Few but the most unremitting optimists can fail to be depressed by the economic news coming out of Ghana recently. Once a shining example of progress on the continent, the country has, since 2013, had to deal with an unending stream of bad reviews, not least from the international ratings agencies. Even the International Monetary Fund, one of its most ardent cheerleaders, has become cold in its assessment of its former star pupil. It wasn’t always like this. Since the 1980s when the West African country took a long hard look at itself and decided to change its trajectory of growth, progress has been more or less consistent. Coming from negative growth at the start of the decade, a programme of economic liberalisation combined with a rationalisation of government expenditure saw it return to growth rates of around 5% by the time it entered the last decade of the last millennium. Post 2000, market-led reforms were undertaken with even more conviction, leading to a boom in services – especially in telecoms and financial services. With the discovery of oil in 2008 and the commencement of oil production in 2011, it seemed that the former British colony had finally got all its cards lined up in just the right way. In 2011, its GDP growth topped 11%, one of the highest in the world that year. As a happy consequence. Ghana has become one of the key destinations of foreign investment on the continent and even among emerging economies globally. Added to political stability are a host of business and investor friendly policies that have seen the country attract billions of dollars in FDI, particularly into – but not limited to – its extractive and services sectors. This has been key to the country’s economic fortunes. Under its changing paradigm, public sector employment has been steadily declining, unless you count a series of programmes through which the government, in partnership with the private sector, has been employing to stimulate employment. However, the local private sector, while well meaning and determined, has been stymied, in large part by the lack of adequate capital, preventing it from contributing significantly to national growth. In addition, the sense of satisfaction and pride that came with Ghana being upgraded to lower-middle-income country status, has been soured because concessionary loans and grants have not been as forthcoming as before. This means that Ghana has to rely on the commercial money markets to fund its pressing infrastructure needs; just one of the many things that, as a growing country, it needs to do. In the past decade, Ghana has issued two Eurobonds, raising a total of some $2bn. A third, initially called off in March in the face of the “uncertainty” in the market, will soon be issued. It is not surprising then that Ghana cares very much how it is viewed internationally. Unfortunately, international perceptions have become increasingly unflattering. Ratings agencies Fitch and Moody’s have both downgraded the country to a ‘B’ rating, drawing vehement reactions from the government each time. However, it may well be that the agencies have good reason. In 2012, the government overshot its own spending projections by around a 100%, ending the year with a deficit of just above 13%. A year later, after tax hikes and an announced programme of rationalisation that included the removal or reduction in subsidies, the government still missed its target for reducing the deficit. Government insists, however, that it is still on course to meet its 2015 target of 6%. Nursing the debt hangover It is uncertain how it intends to achieve that. The Single Spine Salary Scheme, introduced in 2010 to improve the quantity and uniformity of public sector pay, has put great pressure on the state purse. Driven perhaps by the promise of oil wealth, the scheme has brought the wage bill to touching distance of 70% of the government’s recurrent expenditure, leaving precious little for investment. A proposal for a wage freeze was shot down by workers even before it was made. Government has had to resort to the domestic market to finance its operations. Debt repayments have once again become a significant headache for the national exchequer and in some more pessimistic quarters, talk is already rife about HIPC (the Highly Indebted Poor Country status that the nation had to accept in 2001 to free itself from debt repayments that threatened to cripple it). Inflation, which had a near 12-month run at single digits, is also creeping up again, reaching 15% in July. Troubles with the cedi are even more pronounced, with the national currency losing over 20% of its value against its major trading partners. Umbrage at rating demotion In the light of these, there have naturally been concerns about Ghana’s position as an investment destination. Ghana may be open for business; but can it still attract customers? The Minister of Finance, Seth Terkper, thinks the country is ripe for business. Together with the Vice President, Paa Kwesi Amissah Arthur, Terpker has mounted something of a campaign in response to the negative reviews from ratings agencies. Amissah Arthur is an economist by profession and was formerly governor of the central bank and also number two at the Finance Ministry during the Economic Recovery Programme. Both have described the downgrades as unfair and pointed to what they describe as the country’s “sound economic fundamentals” as evidence that the difficulties are temporary and can be overcome. A closer look will show that these sentiments may be on the sanguine side. The cause of the difficulties can be ascribed to these very fundamentals. The economy is heavily dependent on the export of raw materials, making it overly susceptible to price shocks in the commodities markets. Its cash flow problems currently are due in large part to the drop in commodity prices as a result of investors moving back to stocks as international markets have stabilised. Aside from this, Ghanaian governments are notorious for election year splurges. Many a new government has started its term with little left in the kitty – most of it having been blown away on electioneering by the departing government. Previously, newly installed governments have been able to count on the goodwill of donors and partners, which allowed them some leeway as they tried to clean up the mess left them. This time, it has been doubly hard to court sympathy as the mess was caused by the very administration that now faces the task of cleaning up. Of course, all is not lost. The country still has the capacity to turn things around. It is still endowed with sufficient natural and human resources to enable it to weather the current difficulties. Ironically, what it requires is a renewed and stronger will to deal with the fundamentals. The country must foster the growth of new industries that will balance the weight that it gives its commodity exports. As one of the more robust ICT nations in the sub-region, it could, for example, profit by giving free rein to the burgeoning yet struggling software industry. Above all, the nation can use the crisis to reinvent its huge government and notoriously lethargic bureaucracy, with the twin purpose of reducing costs and boosting efficiency. There would also be benefits for the private sector which could, as it says itself, do with a more responsive and dynamic public sector. Above all, it must find a way to curb the now-routine election year imprudences that casts a shadow over its largely positive democratic exercises. After the reforms of the ’80s and the liberalisation of the 2000s, this could be an opportunity for the country to put a new sheen on its coat, revising the structure of both the economy and the state. If you are still looking for fundamentals, you may be soothed by a report from US-based Frontier Strategy Group ranked Ghana as the fourth most-preferred FDI destination in Africa, after Angola, Kenya and Nigeria and ahead of South Africa. Clearly, that coat is only a little dirty; a good wash should see it ready to be shown off again. *Source africanbusiness]]>