Five major threats to Ghana’s ongoing economic recovery

Ghana is expected to be the fastest growing economy in sub-Saharan Africa by 2019, with a growth rate of 8.8 percent. This was made known in the recently released World Economic Outlook report by the International Monetary Fund (IMF). It also shows that Ghana would once again take the position of the rising star of Africa which it occupied in 2011.

However, the IMF which earlier made this prediction has identified five major threats to the country’s ongoing economic recovery, which could significantly slow the accelerating growth rate.  This was presented to the government and other stakeholders in the form of a Ghana Risk Assessment Matrix. The matrix identifies the nature and sources of the risks, assesses their relative likelihood of their happening and their expected impact if realized and recommends policies to mitigate the risks.

According to Ghanaian news platform, Goldstreet Business, since Ghana’s Extended Credit Facility programme with the IMF has expired at the beginning of this month, the government is not under any obligation to implement the recommendations presented by IMF; but it is instructive that government takes them seriously. These risks have been categorized by the IMF as either high, medium or low, which is dependent on its likelihood.  

Sharp tightening of global financial conditions

IMF revealed that the biggest danger to Ghana’s economic recovery, is a sharp tightening of global financial conditions, which the Fund warns would cause higher debt service and refinancing risks, as well as stress on vulnerable sovereign bond issuances and those with un-hedged dollar exposures. The likelihood of this risk was rated high by IMF. This means that the probability of it happening is between 30 and 50 percent because the government’s financing needs remain sizable (though declining) and reliance on non-resident investors is high.

Failure to secure financing would call for higher interest rates, further dampening growth and exacerbating fiscal cost and debt dynamics. Instructively this is actually happening, forcing coupon rates offered on Ghana’s medium to long term debt upwards.

Reduced external financing

Reduced external financing would erode foreign exchange buffers and possibly put pressure on the exchange rate and inflation. Although Ghana’s recent US$3 billion Eurobond issuance has provided some respite.

In order to reduce this risk, IMF recommends the implementation of a credible medium term fiscal adjustment strategy to bolster investors confidence, the building of forex buffers to enhance resilience  and the formulation and adoption of contingency measures in case financing conditions tighten further and more adjustment is needed.

Fiscal loosening in the run-up to the 2020 elections

IMF asserts that the fiscal loosening in the run-up to the 2020 elections is going to affect the economy. “Political pressures to spend more and tax less are evident and Ghana has de facto entered pre-election campaign, said the IMF.”

This threat could result in further payment arrears accumulation and thus increasing non-performing loans as well as strained public service provision. The resultant lack of confidence in government could trigger pressures on the exchange rate, affecting inflation, balance sheets and debt sustainability.

The IMF therefore recommends medium term fiscal adjustment balancing measures that cut spending and increase revenues.

Continued and intensifying weaknesses of the state owned utility providers

The other threat with high potential of actually happening is the continued and intensifying weaknesses of the state owned utility providers, which continue to make significant losses and thus could add to government’s risk of debt distress and constrain growth. However, this would only have a medium impact on the economy. IMF calls for a credible strategy to tackle energy sector inefficiencies, while monitoring and oversight of SOEs are strengthened.

Drop in oil price

A significant drop in oil prices if global growth slows or supply exceeds expectations would have a high impact on the economy and this would result in a sharp contraction in exports and falling international reserves which will in turn create pressures on the exchange rate and inflation.

The other is financial stability problems arising from liquidity problems, the large stock of non-performing loans and capital shortfalls in some parts of the financial sector. The IMF rates the expected consequences of this as medium too, by limiting lending to the private sector and thus lowering investment and growth.

To prevent this, the IMF recommends the addressing of banking sector weaknesses, including resolution of distressed firms and tackling NPLs. Again this is already being done through the Bank of Ghana.