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When did the economy of Ghana stop being an African lion?

When did the economy of Ghana stop being an African lion? Mindful Money

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Today I wish to venture south to the continent of Africa to examine the crisis which is currently hitting the country of Ghana. I mean the economics one, although sadly the current epidemic of Ebola is on Ghana’s borders as well. Let us hope that it remains outside its borders.

However, if we return to the economics there may well have been some considerable surprise among those who do not directly follow events there when Ghana’s President approached the International Monetary Fund (IMF) to ask for its advice earlier this week. After all it was as recently as March 2012 that President Obama was pouring praise on Ghana:

"But I think it’s important for us to also focus on the good news that’s coming out of Africa, and I think Ghana continues to be a good-news story.

"In addition, Ghana has become a wonderful success story economically on the continent. In part because of the initiatives of President Mills, you’ve seen high growth rates over the last several years."

But it was not just President Obama as the Guardian was on the case too in December 2012 under a headline of the booming world:

"Ghana expatriates return home to seize opportunities from booming economy."

The BBC was on the case more recently (May 2013) with George Alagiah’s report on an “African Lion” in the manner of the Asian tigers:

"Growth rates here put most of the rest of the world in the shade and Ghana is in the vanguard."

Indeed the luxury property development he visited had this:

"All the mod cons including the wine cooler, just the thing you need to keep your chablis at the right temperature. It’s exactly what Ghana’s new burgeoning middle class would want."

What happened next?

Let me open with a signal that looks very out of place in these times of low interest rates and even negative interest rates in the euro area. From the Bank of Ghana on July 9th:

"On the balance therefore, the Committee viewed risks to inflation as elevated and decided to increase the policy rate by 100 basis points to 19 percent to contain inflation pressures and realign interest rates in favor of domestic assets."

Okay, so massively out of kilter with the theme of these times and we have a hint of one of the driving forces of this which is inflationary pressure so let us examine that too:

"Headline Inflation reached 14.8 percent in May 2014 from 13.5 percent in December 2013. Food inflation rose to 8 percent from 7.2 percent while Non-food inflation increased to 20 percent from 18.1 percent over the same period. (Inflation in fact rose to 15% in June)."

In some ways, this is reminiscent of the UK in the mid-1970s, and if we look at a major factor in all of this we get another flavor of those days:

"Developments in the foreign exchange market indicated that the cedi cumulatively depreciated by 26.7 percent against the US dollar in the first half of 2014 compared with 3.4 percent depreciation same period last year."

So, a rather toxic mix of a declining currency pushing up inflation which the central bank has responded to by raising interest rates to levels which in these times seem stratospheric. The gushing praise by George Alagiah of a luxury building boom has a different emphasis now I think. Also, the parallels with the UK of the 1970s are not finished:

"Broad money (M2+) grew by 30.8 percent year-on-year to end May 2014 at GH¢22.8 billion, compared with 17.1 percent growth in the same period last year."

Oh, and there is one extra similarity in this all: our yesterday’s theme for UK readers, as you see a few years ago, Ghana struck oil. The main Jubilee oil field came on stream in 2010. So not an exact like-for-like comparison, but one with many similarities. This is not entirely reassuring as the UK made a pretty poor job of digging itself out of that particular mess and it took quite some time.

Let us move on but do so with the thought that a currency which has fallen by around 40% in 2014 is not exhibiting much of a petro-currency status is it?

What are the causes of this?

The IMF signaled the major problems here back in May:

"Ghana is heading for a third successive year of slower growth as large current account and budget deficits expose the economy to risks."

There is plenty of food for thought in a country which is a cocoa and gold exporter which also has oil reserves running a trade deficit. But, if we move to the fiscal deficit, we see that it has followed a path which sadly is all too common in Africa. From the Financial Times:

"Public-sector pay accounted last year for nearly 65 per cent of Ghana’s total tax revenue after the public wage bill jumped roughly 75 per cent over two and a half years."

Rather than using the commodity revenues to boost the infrastructure of Ghana it looks as though its ruling class and bureaucracy decided to reward itself. It is not as if there is a lack of things to do in a country where a quarter of the population lives below the (IMF) poverty line and where the electricity supply is often unreliable. Indeed, a clear signal as to the state of sanitation services was provided by the recent outbreak of cholera in Accra. However it had the consequence that the budget deficit exceeded 10% of GDP in 2013 and according to the Bank of Ghana this year will not be much better.

"Government must continue to enhance revenue measures and rationalize expenditures to achieve the fiscal deficit target of 8.5 percent of GDP for the year."

It all seems a far cry from the heady days of the early part of the last decade when Ghana benefited from international debt relief programs. Indeed, so high has its borrowing been that its central bank has financed some of it:

"In the particular case mentioned in the Fitch report, it is true that the Bank of Ghana lent to government to finance the budget deficit during the first quarter of the year. However, this is consistent with the provisions in the Act."

Direct monetary financing? No wonder the currency has been the world’s worst performer in 2014. According to the Economist Intelligence Unit, there is little relief in sight for this year:

"Overall, we expect the budget deficit in 2014 to miss the government’s target of 8.5% of GDP, coming in at 9.7% as the government struggles with the wage bill."

This has a rather obvious implication for the national debt:

"Regardless of the sources of the borrowing, public debt is expected to surpass 70% of GDP in 2014."

Comment

There is much to consider here in the story of Ghana. It is exhibiting many of the signs of overheating in a growing economy. In fact it is not far off a textbook case of a falling currency and fast money supply growth leading to high inflation. Such developments are going to be hard to fix with a budget deficit of around 10%. But in many ways, the most symbolic and revealing number is a current account deficit which reached 12.3% of GDP in 2013. This is from a country with considerable natural resources (gold, cocoa and more latterly oil) which makes the number all the more disappointing. Should the IMF be fully called into Ghana, it is going to have its work cut out for it and any policy prescription is likely to be painful. Also we have the begged question of when Ghana will be able to govern itself. At the moment we seem to have periods of it before the IMF needs to be called in again in what has become something of a regular cycle.

This article was written by Shaun Richards and originally published in Mindful Money under the title When did the economy of Ghana stop being an African lion?


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