Strong GDP growth in the period up to 2013
Annual average GDP growth was above +5.5% in 2000-10, a relatively good rate of expansion but around the pace required for a country like Ghana to make positive advances in socio-economic development. In that period, growth largely reflected the performances in the gold, cocoa and forestry industries and associated exports. However, growth of GDP accelerated in 2011, boosted by the energy sector as oil output came on stream at the Jubilee oilfield in that year, when GDP expanded by around +14%. The impetus from that significant economic development was not maintained in 2012 and 2013 but annual GDP growth remained above +7% in those two years.
Policy reality check as IMF provides assistance…
From 2014, weakness in commodity prices for oil, gold and cocoa and earlier fiscal over-spending (with growth and inflationary repercussions, see charts) resulted in reduced capacity to finance twin deficits and the authorities requested IMF financial assistance. Formal Fund board approval for a three-year Extended Credit Facility (ECF) was granted in April 2015. The financial support package of approximately USD940mn runs until the beginning of April 2018. The facility was agreed on the basis that Ghana implements a reform agenda aimed at limiting fiscal and current account deficits. Fund support restored some investor confidence, although the reform strategy (and implementation) will be required to carry over in to the medium term and Ghana remains vulnerable to anti-EM sentiment in general.
As part of the reform strategy and associated austerity measures aimed at restoring debt sustainability, the local authorities agreed to introduce a 17% petroleum tax, to freeze public sector employment levels and to curtail energy subsidies. The overall fiscal consolidation plan suggested a challenging period would ensue and that the rate of overall growth would slow. That is exactly what happened, with GDP growth easing to +3.2% in 2015, compared with an annual average of over +9.5% in 2010-13.
Ghana’s previously good track record of economic management and governance was a key feature underpinning IMF support. The World Bank also provides substantial assistance, including a USD500mn IDA payment guarantee involving gas purchases from the offshore Sankofa Gas project and a USD200mn "Enclave Loan" guarantee by the IBRD.
…but, having taken the medicine, the outlook is now improving again
While the Jubilee oilfield is now producing crude oil, other fields have yet to be developed fully and natural gas output holds further potential, including through the Atuabo gas processing plant and associated infrastructure. Output of crude oil is currently around 105,000 bpd, with a target of 190,000 bpd by end-2016 and over 240,000 in 2018. Accordingly, high GDP growth rates are likely to return. EH forecasts GDP growth will increase to around +5% in 2015 (after +4% and +3.2% in 2014 and 2015, respectively, the years of austerity and consolidation) and rebound to approximately +7% in 2017.
Twin fiscal and current account deficits provide vulnerability
In recent years, governments of varying political allegiance have consistently promoted pro-market policies. Despite current financial constraints, EH does not envisage a redirection in broad policy formulation. Even so, twin deficits on the fiscal and current accounts require careful management. It is partially because of these deficits that Ghana is one of the frontier markets that experiences contagion from a general sell-off in emerging markets.
Governments have opened the economy to bilateral assistance, as well as multilateral support, and this is most noticeable in the involvement in the country of China. The lending programme with the China Development Bank includes large infrastructure projects, including in the energy, transport (road, rail and ports) and agriculture sectors.
Fiscal deficits (including -11.8 % of GDP in 2012 and still around -6% in 2016) are not sustainable over a protracted period and the economic reform programme supported by the IMF’s ECF targets further reductions in the coming years. Public debt is currently equivalent to around 65% of GDP. The government successfully issues Eurobonds and this suggests there is market support that will help to finance the government budget (and support the GHS).
Current account deficits will remain large, although declining in the medium term
Large current account deficits (annual average -8.6% of GDP in 2000-08) were recorded before oil output came on stream and exports of crude oil have now boosted the trade balance. However, imports of energy-related capital goods maintained large current account deficits (-11.9% of GDP in 2013). EH expects deficits of around -6.5% and -5.5% in 2016 and 2017, respectively. After that, with the initial machinery and other oil-industry inputs largely in place and export earnings increasing, current account deficits should be lower.
Foreign exchange reserves provide import cover of just below three months, the international comfort benchmark, but FX levels will increase gradually into the medium term. Foreign debt levels and ratios are challenging but servicing commitments on the debt remain comfortable (debt servicing/export earnings below 6%).