- Gold, cocoa exports helped economy weather global crisis
- Oil coming on stream in 2011, could bring middle-income status in 10 years
- $600 million IMF loan has boosted reserves, strengthened currency
In the next few years, Ghana will become an oil producer.
If the country uses its new-found oil wealth wisely, it stands the chance of achieving middle-income status within ten years, according to the IMF’s latest analysis.
Ghana is one of Africa’s frontier emerging markets, having entered the global capital market for the first time in September 2007. Its past wealth lay in gold and cocoa―commodities that have remained in high demand, and which have helped the country weather the recent global recession.
Despite Ghana’s favorable long-term prospects, it faced an external financing crisis in 2008-09. Highly expansionary budget policies ahead of the 2008 elections boosted inflation and eroded its international reserve position. A slump in foreign exchange inflows linked to the global financial crisis made things worse. At the government’s request, the IMF put together a three-year lending arrangement of $600 million in mid-2009 to strengthen Ghana’s international reserves. Linked to tighter budget policies, this worked well. Ghana’s currency recovered its strength, and inflation began to fall.
In this interview, the IMF’s mission chief for Ghana, Peter Allum, talks about the prospects for Ghana.
IMF Survey online: What has been the impact of the global economic crisis on Ghana?
Allum: Ghana has been affected, but less so than many other frontier emerging markets. Private remittances from those working abroad has fallen by about a fifth, and foreign direct investment has fallen to a four-year low. At the same time, global economic uncertainty has led to a slump in the domestic construction industry.
But unlike a lot of African commodity exporters, Ghana has been very fortunate that its two main exports, gold and coca, fared very well during the global recession. Global demand and prices for both have remained very strong and that has helped it weather the recession better than most countries.
At the same time, Ghana doesn’t have a very large manufacturing base, unlike South Africa, so it hasn’t been affected by the slump in manufacturing trade globally. And its financial sector is also relatively insulated from the global financial system.
So while growth has slowed, it’s still in the 4 percent range, down from 7 to 8 percent in 2008. For Africa as a whole, we’re projecting growth of 1 percent in 2009, so it’s substantially higher than Ghana’s peers in Africa.
IMF Survey online: Ghana was recently granted an IMF loan of $600 million. How is it using those resources?
Allum: We agreed on a new loan of $600 million in the middle of 2009 that will be dispersed over a three-year period. The loan has helped strengthen the international reserve position of the central bank. That in turn has brought greater confidence in Ghana’s balance of payments and has helped avoid the currency depreciation and associated inflation that we saw in 2008 and the first half of 2009.
At the same time, the fact that the IMF is willing to stand behind Ghana’s economic program has made it easier for the World Bank to move quickly in 2009 to make its own loan of $300 million. The IMF-supported program has also encouraged bilateral donors to continue with their funding.
IMF Survey online: What are the main challenges facing Ghana?
Allum: Ghana’s problems are mostly homegrown. The government had a very expansionary fiscal policy in 2008 ahead of the national elections, with the fiscal deficit expanding to 15 percent of GDP or more.
With stronger expenditure management in 2009, the deficit was substantially reduced. But that remains far too high. At current levels, the public debt is still rising rapidly, and heavy budget borrowing from the banking system is keeping interest rates high and taking money away from potential corporate investment.
"Ghana has been very fortunate that its two main exports, gold and coca, fared very well during the global recession."
Bringing down inflation represents another challenge. Inflation has historically has been higher in Ghana than in other African countries The government got it down to about 10 percent at the end of 2007, but then as a result of the global food and fuel price increases, it rose through 2008 and in 2009 to about the 21-22 percent range. But it’s started to come down again now.
IMF Survey online: You mentioned cocoa and gold. Will those two sectors be the main source of growth and jobs in the years to come?
Allum: It will help the economy, but the areas which have been growing fastest in the recent past have been the financial services sector and communications. And those two sectors have been core areas of growth throughout Africa, and it’s quite likely that that will continue in Ghana also.
Ghana also has prospects to expand its commercial farming sector, but that partly depends on improving its transport link from the interior to the coast.
But the big story for Ghana is that oil production will start in 2011, and that will lead to quite a substantial increase in output. Now that won’t create many jobs in and of itself. It’s a very capital-intensive industry and the oil is based offshore so a lot of those jobs are going to be expatriate jobs. But it will generate a substantial boost in revenues for the government—we estimate in the range of 6 to 7 percent of GDP. If that money is used wisely, it could lead to a substantial improvement in Ghana’s infrastructure and its competitiveness, and that could lead to further growth and job creation.
IMF Survey online: We know from experience that oil resources aren’t always used wisely. How do you think Ghana will manage?
Allum: The perceived wisdom is that resources can be a curse for economies. When you look at oil exporters, they have not always seen the benefits in terms of stronger growth and improved living standards. But when you look closely at resource exporters, there are some that have done very well. For example, Botswana has moved into middle-income country status on the back of diamond exports even though it’s a landlocked country.
"The big story for Ghana is that oil production will start in 2011, and that will lead to quite a substantial increase in output."
The difference seems to be in the quality of the economic and political institutions. To use resources well, you need a system that can look to the long term and invest wisely, rather than using the resources to satisfy interest groups. Ghana has a well-developed democracy. We hope that it will enable the country to identify a consensus on its developmental needs. And its budgeting system, although it needs substantial improvement, is better than in many countries in Africa.
We will be working with the government within the framework of the IMF-supported program to reduce the fiscal deficit substantially in 2010 and 2011. That will be important to ensure that the oil revenues, when they come on stream, can be used to finance new projects and programs rather than just being used to finance the fiscal deficit.
IMF Survey online: You have served as mission chief for Ghana since 2008. What is your take on the country’s future?
Allum: Ghana has always stood out as one of the more promising countries in Africa, and that has been reflected in the attention that they’ve got. President Obama’s visit in June 2009 signaled international recognition of their success on the democratic front, having achieved a peaceful democratic transition now on two occasions, in 2000 and in 2008. That can only help bring attention and business interest to Ghana.
But it’s also a country which is still struggling with a very high level of poverty. You see that on the streets. There’s a lot of people in very marginal jobs, selling products from the side of the road to cars and a lot of small businesses.
Yet when you look at the aggregate statistics, Ghana is one of the countries in Africa which has managed to achieve quite strong rates of growth. The business sector is doing relatively well. And although there are overall capacity constraints and quality issues and staffing within the government, there are a large number of very bright people working in the ministries. That offers quite a bit of hope for Ghana’s future.