The world’s second largest exporter of cocoa is currently experiencing serious economic pain.
Proceeds from Ghana’s cocoa, timber and gold exports have not been enough to cater for its national lifestyle. Add liquid gold to the mix and suddenly this regional champion is showing symptoms of the proverbial Dutch disease so early in its crude oil career.
Ghana’s financial system is now frequently constipated, coping with low savings and high borrowing rates. Its also is characterized by unsustainable appetite for foreign goods, resulting in missed spending targets, inflation and dollar-denominated thinking. Sustaining real economic growth has therefore been difficult. In a nutshell, West Africa’s second largest economy is engulfed in a failing currency crisis.
The Ghanaian cedi is suffering its worst humiliation against major trading currencies in decades. Consumer price inflation peaked at 14.5% in April. Public sector spending has remained way above the regional sub-Saharan average for many years, even as the country continues to record fairly strong growth.
By contrast, the cedi has depreciated in recent years. As a result, equities on the Ghana Stock Exchange (GSE) have also been losing weight, shedding about 16% of their value in US dollar terms this year alone.
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The business community and ordinary Ghanaians feel helpless. Their view is that politics now threaten to transform their currency into ordinary tissue paper.
“Notwithstanding the fact that Ghanaians are resourceful and resilient people, local businesses have been hit hard by this currency crisis… the authorities need to cultivate public empathy, they need to involve the business community in their fiscal planning process,” says Albert Ngumba, general manager of e-commerce firm Cellulant Ghana.
The crisis has induced a total slowdown of the once stable polity and left politicians and economists puzzled on how to stop this once bubbling economy from drifting away.
How is it that Ghana now finds it difficult to pay its bills after years of sustained economic growth and after commercial production of crude oil began in 2010? How can a nation be growing into poverty?
For those interested in the fortunes and foibles of African nations over the last five centuries, this is an old tale. The logic of the international marketplace is a simple linear equation: if weaker economies have weak currencies then stronger currencies will produce stronger, more robust economies. This is the turf of the world’s central banks.
Of course, beyond the currency conundrum, one of the reasons why economies fail is fiscal indiscipline. This has been the bane of Ghana’s current economic woes. Its current account deficit, according to the Bank of Ghana (BoG), the banking industry regulator, was a whopping 12.30% of its GDP, as at December, 2013. Debt-to-GDP ratio is forecast to reach 51.2% by the end of 2014. If this figure ever gets to the 60% mark, Ghana might lose its status as a lower middle-income country, according to the IMF.
Government’s quest to increase teachers and civil servants pay blew up in its face: public sector salaries now gulp 70% of internally generated revenue. These civil servants represent less than 1% of the population. With falling commodity prices, and energy supply hiccups, the fiscal deficit is expected to persist for at least another five years.
To stem the negative currency tide, the BoG outlawed companies from maintaining domiciliary accounts and engaging in foreign currency denominated transactions in February. It also limited withdrawals to approximately $10,000. The plan did not work. The cedi has depreciated by more than 6.4% since then. The BoG promptly unfastened the guidelines in July. The effect of this policy flip-flop on the psychology of the markets has been mixed: macro- and micro-level economic pains, heightened currency and sovereign risk ratings, faith in the ability of the economy to turn around in the long term, and erosion of confidence in government’s economic management capabilities.
The matter is threatening Ghana’s hard won reputation as a magnet for foreign investment. Ghana’s share of Africa-bound FDI ($3.3 billion per annum) needs to grow. The value of exports also needs to grow. Ghana’s business and political elite need to be stimulated to increase their appetite local products.
For most Ghanaians, whose outlook on life has been defined by decades of mass penury and perseverance, this is proving to be a bitter pill to swallow, especially after President John Mahama made promises of steady and sustained economic progress.
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