Deficit fears cast shadow on Ghana’s economic star

London (UK) – 31 Oct 2013 – FT - Anyone seeking proof of Ghana’s status as one of Africa’s economic stars may be impressed by a giant billboard in Accra advertising Hublot luxury watches. The fancy shopping malls, hotels and new apartment complexes in the capital might reinforce the view that all is rosy in a country that has enjoyed average growth of more than 7 per cent for a decade.

But look at other financial indicators, and talk to Ghanaians about the cost of living, and a different picture emerges.

Nearly three years after the start of oil production, which was meant to further strengthen the fiscal position, the economy is starting to look vulnerable. The change of fortune is significant as Ghana has been the poster child of the “Africa rising” theme that has attracted foreign investors into the continent, launching the first US dollar sovereign bond in the region in 2007.

The International Monetary Fund on Thursday warned African countries for the first time that they are becoming vulnerable to financial shocks as they rely more on foreign investors, who can pull out their capital at short notice if they feel the economic situation is deteriorating. On October 17, Fitch downgraded Ghana’s credit rating from B+ to B, warning that “policy credibility has been significantly weakened” due to the size of the budget deficit and noting the rising costs of servicing domestic government debt. Meanwhile, sharp rises in the price of fuel, water and power have led unions to threaten strikes.

“It’s a very sober mood here,” said Kissy Agyeman-Togobo, partner at Songhai Advisory, a business intelligence consultancy in Accra. “Ghana from the outside looks a lot more positive than it does from the inside.”

The financial concerns have put pressure on the government of President John Dramani Mahama, which now stands accused by the opposition of mishandling the economy. Mr Mahama’s party, the National Democratic Congress, introduced a new public sector salary structure in 2010, designed to motivate workers and improve service delivery.

This saw the government’s wage bill rise 47 per cent between 2011 and 2012, and salaries now consume more than 70 per cent of tax revenue. With other state spending also increasing ahead of the presidential election last December, the budget deficit grew from 4 per cent in 2011 to 11.8 per cent at the end of 2012, nearly twice what was aimed for.

It’s a classic case: a country finds oil, people’s expectations rise and government spending balloons- Sebastian Spio-Garbrah, managing director of DaMina Advisors

Chastened, the government announced a plan to reduce the deficit to 6 per cent by 2015, with a 9 per cent goal for 2013. But Fitch said this year’s target was unlikely to be met – an assessment that Ghana’s finance minister Seth Terkper subsequently agreed with.

Though the rating agency described Ghana’s outlook as “stable”, it said “external vulnerability has increased” this year. Foreign exchange reserves cover less than three months of imports, while government debt now stands at about 50 per cent of GDP.

Meanwhile, inflation rose to a three-year high of 11.9 per cent in September, and Ghana’s currency, the cedi, has tumbled 15 per cent against the dollar since December. GDP growth for 2013 is now expected to be closer to 7 per cent than the 8 per cent that was forecast.

Ghana is not alone in Africa in seeing its fiscal position worsen. But while other countries such as Kenya and Ivory Coast can attribute much of their widening budget deficits to increased capital expenditure, such as infrastructure projects – a positive sign for long-term development – Ghana’s capital spending as a share of GDP has fallen in recent years. Sebastian Spio-Garbrah, managing director of DaMina Advisors, a frontier markets advisory firm, said that this meant that for Ghana the early consequence of petroleum production was “[narrow] private sector wealth and public sector decrepitude”.

“It’s a classic case: a country finds oil, people’s expectations rise and government spending balloons,” he said. “The problems are not going to go away until the government takes enough unpopular but necessary measures.”

Mr Terkper, the finance minister, told reporters that Fitch had not given enough weight to the fiscal consolidation efforts already under way, such as the cuts in fuel and utility subsidies. New corporate taxes have also been introduced. Trimming subsidies further and reducing the public sector wage bill are necessary if the deficit is to be tamed, but are also politically difficult.

Other factors have worked against the government. Problems in securing gas supplies from Nigeria have increased reliance on more expensive imported diesel to fire power plants. Oil production, now at about 110,000 barrels per day, has lagged behind expectations. Gold exports were worth nearly as much as oil and cocoa sales combined in 2012, but the subsequent drop in global prices means that the government’s take will shrink sharply this year.

‘Our message is that it is time to rebuild buffers,” said Abebe Aemro Selassie, deputy director, Africa department, at the IMF. “Elevated fiscal deficits should be reined in. Ghana is one of the countries where most fiscal consolidation is needed.”