Ghana faces higher poverty as crisis deepens — World Bank
Ghana is in a deep macroeconomic crisis. Since the onset of COVID-19, Ghana has experienced a growth slow-down and worsening macroeconomic imbalances that have now reached crisis proportions.
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Pre-existing vulnerabilities (large fiscal deficits and external financing needs, significant energy and financial sector costs) were compounded by the COVID-19 shock, resulting in loss of access to the international capital market, and by late 2022, unsustainable public debt burdens.
Meanwhile monetary financing of the deficits compounded inflationary pressures from currency depreciation, as the cedi lost over 40 per cent of its value against the US dollar.
IMF assistance
The authorities have sought support from the International Monetary Fund (IMF) and reached a staff-level agreement (SLA) in December 2022. Ghana is seeking a three-year arrangement under the extended credit facility (ECF) of about $3 billion.
With a view to restoring public debt sustainability, the authorities have announced a comprehensive debt restructuring, implemented a moratorium on external official bilateral and commercial debt repayments, requested debt treatment under the Group of Twenty (G20) Common Framework, and committed to an ambitious fiscal consolidation plan.
They completed a domestic debt exchange (DDE) programme in February 2023.Recent developments in gross domestic product (GDP) growth is estimated to have slowed to 3.2 per cent (3.1 per cent announced by the Ghana Statistical Service) in 2022, down from 5.4 per cent in 2021.
Growth declined to 3.5 per cent year-on-year over the first three quarters of 2022. The slowdown affected mostly the non-extractive sectors, as the recovery in gold exports supported extractive growth.
Growth in agriculture slowed to 4.4 per cent and services to 4.7 per cent, from 8.7 per cent and 10 per cent, respectively, in the first three quarters of 2021.
Inflation High inflation and interest rates depressed private consumption and investment. Government demand was weakened by lack of access to capital markets and high debt service obligations.
The 2022 fiscal deficit was well above target. The overall fiscal deficit (on a cash basis) reached 9.9 per cent of GDP, against a target of 6.7 per cent. The primary deficit reached 2.8 per cent of GDP, well above the 0.5 per cent target.
The slippage was mostly on the expenditure side: total expenditure reached 25.6 per cent of GDP, against a 20.4 per cent target driven by higher compensations of employees, interest payments and higher project loan disbursements (impacted by the cedi depreciations).
Inflation accelerated throughout the year.In 2022, average consumer producer inflation was 31.9 per cent, (up from 10 per cent in 2021), and reached 54.1 per cent in December (year-on-year).
The Bank of Ghana (BoG) responded by increasing the monetary policy rate from 14.5 per cent to 28 per cent over the year. However, these efforts were undermined by the government’s extensive use of its overdraft facility with B0G (estimated at 6.7 per cent of GDP in 2022).
The balance of payments recorded a large deficit in 2022, in spite of the improvements in the current account. Oil exportsThe current account deficit narrowed due to a higher trade surplus driven by oil exports receipts.
However, significant portfolio reversals and reduced foreign direct investments (FDIs) led to a capital outflow of three per cent of GDP.
Overall, the balance of payments recorded a deficit of five per cent of GDP, from a surplus of 1.9 per cent in 2021.
As a result, international reserves fell to $5.6 billion (2.5 months of import) in December 2022 from $9.1 billion (4.2 months of import) a year earlier, while useable reserves fell to less than one month of import cover. Cedi depreciation After remaining stable in 2021, the cedi lost over 40 per cent of its value against the US dollar in 2022.
Banking sector vulnerabilities have increased as a result of the cedi depreciation and the impact of the (DDEP).
The bank-wide capital adequacy ratio (CAR) stood at 16.6 per cent in December 2022, above the regulatory minimum of 13 per cent, but down from19.6 per cent in December 2021.
The decline in the CAR reflects rapid growth in risk-weighted assets. Impact of DDEPImplementation of the DDEP will impact Ghana’s financial sector due to the heavy exposure of banks, insurance companies and pension funds to government debt. It is estimated that 42.1 per cent of government domestic debt is held by these entities.
Poverty reduction slowed
The ‘international poverty’ rate is estimated at 20.5 per cent in 2022.
Currency depreciation, increased price of electricity and water, and an increase in the value added tax (VAT) have driven up the cost of living, particularly for food.
This places considerable strain on household budgets, especially for the poor who devote more than half of their budget to food.
Rural farmers were also affected by increases in the prices of fertiliser and other inputs.
Outlook
Growth is expected to decelerate further in 2023 as macroeconomic weaknesses and contractionary fiscal and monetary policies dampen aggregate demand.
Growth is expected to slow further to 1.6 per cent in 2023 and remain muted in 2024, before returning toward its potential.
Non-extractive growth is expected to be low compared to the COVID-19 pandemic and 2014 crisis periods, with agriculture affected by high input prices and a disease affecting cocoa trees.
Extractives growth is expected to be robust thanks to new gold mines and a recovery in small scale mining.
What to do Going forward, the authorities will need to complement their incipient macroeconomic stability program with growth enhancing structural reforms such as improving the business environment and promoting export competitiveness, transitioning to the digital economy to boost productivity, and investing in resilient public infrastructure to adapt to the impact of climate change.
The outlook is challenging. Risks to the outlook include delays in external debt re-structuring and the IMF programme, increased financial sector vulnerabilities, and the realisation of contingent energy sector liabilities.
International poverty is projected to decline slowly from 20.5 per cent to 19.5 per cent by 2025, consistent with a muted outlook on growth for the country and high inflation.
In the shorter term, poverty is expected to increase slightly, due to the cumulative effects of increases in electricity and water tariffs, rising food prices and an increase in VAT.
The revised electricity tariffs could be less regressive and reduce poverty if a portion of the increased revenues were targeted to the poor in the form of cash transfers.
