By Monica Johnson, International Banker
“We are in a crisis; I do not exaggerate when I say so. I cannot find an example in history when so many malevolent forces have come together at the same time,” President Nana Addo Dankwa Akufo-Addo acknowledged in a televised address to his nation on October 31, 2022. Despite the country registering healthy economic growth over the last few years, the Ghanaian president hit the nail on the head, acknowledging that the West African nation had been forced to confront one of its worst-ever economic crises as massive debt, a currency crash and soaring inflation had all conspired against Ghana, leaving it in a weak and precarious position.
Indeed, one might be forgiven for assuming that Ghana’s economy has been thriving since Akufo-Addo came to power in January 2017, especially given the consistently strong annual growth rates registered for its gross domestic product (GDP), to the extent that Ghana was named the world’s fastest-growing economy in 2019. The new government also managed to rein inflation back into single digits in the months prior to the onset of the pandemic in early 2020, after it almost reached 20 percent four years earlier, and it reduced the budget deficit from 6.5 percent of GDP to under 5 percent during the same period.
And yet, deep-seated problems have arisen, with Ghana now finding itself in a serious economic crisis. For one, much of the solid growth it experienced in recent years was attributable to a single industry—crude oil—while other sectors languished. “We were so excited that the economy was growing, but we couldn’t devise strategies to ensure that the growth reflects in the other sectors of the economy,” Daniel Anim Amarteye, an economist with the Accra-based Policy Initiative for Economic Development, told Al Jazeera in late-December 2022. According to Amarteye, the agricultural sector—which accounts for more than one-fifth of Ghana’s GDP, two-fifths of its export income and a whopping 90 percent of the population’s food requirements—was largely “neglected” by a “complacent” government and left without “any meaningful value-added investment”.
By the third quarter of 2021, moreover, the grim spectre of accelerating inflation had returned, with the rate climbing back into double digits—thus above the central bank’s (Bank of Ghana’s) target upper bound of 10 percent—before surging to a two-decade high in December 2022 of 54.1 percent. In the eyes of many Ghanaians, these soaring prices have exposed the country’s overreliance on imports of essential goods, such as food items, basic commodities and fuel, all of which experienced substantial price appreciation last year, thus leading to astronomical hikes in costs and prices within the country.
Those imports were also chiefly responsible for sending the cedi into a tailspin, as cedis are mostly paid in US dollars. And with the US Dollar Index (USDX) surging to 20-year highs, Ghana’s currency lost more than half of its value between the start of last year, when it was trading at around 6 against the dollar, and mid-November, when it had weakened to 14. The cedi did, however, manage to claw back some of those losses to trade at around 10 by the end of the year amid a final quarter of pronounced volatility. But those gains did not prevent it from ending up among 2022’s absolute worst-performing currencies.
The stronger US dollar, alongside surging inflation and aggressive interest-rate hikes, also made it markedly more difficult for developing and emerging economies to service their dollar-denominated debt holdings—of which Ghana has owned substantial amounts, particularly since the start of the pandemic onward. Indeed, Ghana’s fiscal and debt vulnerabilities worsened considerably amid the increasingly challenging economic environment to such an extent that by December 2022, it had ceased payments on many of its outstanding debt obligations to commercial creditors, bondholders and even foreign governments. The Ministry of Finance announced “a suspension of all debt service payments” on external government debts as the country faced a “major economic and financial crisis, and its attendant social challenges” and that “global risk aversion triggered large capital outflows, a loss of external market access and rising domestic borrowing costs”.
That same month, Accra turned to the International Monetary Fund (IMF) for financial assistance for the seventeenth time since Ghana became an independent state in 1957. “During the COVID-19 pandemic, Ghana’s public debt increased significantly. At the same time, the government’s efforts to preserve debt sustainability were not seen as sufficient by investors, leading to credit rating downgrades, the exit of non-resident investors from the domestic bond market, and ultimately Ghana’s loss of access to international capital markets,” the IMF explained at the time. “These adverse developments, further exacerbated by price and supply-chain shocks from the war in Ukraine, have led to a large exchange rate depreciation, a surge in inflation…and pressure on foreign exchange reserves.”
The Fund tabled a $3-billion loan package to help Ghana restructure its hefty $58-billion debt burden, of which Ghana owes around $5.5 billion to foreign governments and state banks. “The goal of the government’s economic program is to restore macroeconomic stability and debt sustainability while protecting the vulnerable, preserve financial stability, and laying the foundation for strong and inclusive recovery,” the IMF noted, having reached a staff-level agreement with Accra for a three-year programme supported by an arrangement under the Fund’s Extended Credit Facility (ECF). “To support the objective of restoring public debt sustainability, the authorities have launched a comprehensive debt operation.”
According to President Akufo-Addo, moreover, Ghana’s request for IMF support is chiefly aimed at immediately restoring its balance of payments, as well as resolving structural challenges over the medium term and long term to restore a “resilient, robust” economy. The ultimate aim is to slash the debt from last year’s estimated 105 percent of GDP to 55 percent by 2028. “As we have shown in other circumstances, we shall turn this crisis into an opportunity to resolve not just the short-term, urgent problems, but the long-term structural problems that have bedeviled our economy,” the president added. Finance Minister Ken Ofori-Atta confirmed in mid-April that the IMF would likely approve the loan by the end of the second quarter.
Thus far, this rescue plan seems to have injected a modicum of much-needed confidence back into Ghana’s economy. Inflation has eased moderately since the December peak, with government statistician Samuel Kobina Annim confirming on April 12 that the annual rate for March was 45 percent and the monthly change from February was -1.2 percent. “China is beginning to play ball, and a creditor committee is almost upon us, so everything is falling in place for Ghana to approach the board for a possible approval,” Courage Boti, an economist at Accra-based GCB Capital, told Bloomberg in mid-April. “Inflation will trend downward at a steeper rate from April, propelled also by a positive base effect.”
Annim reported a week later that Ghana’s GDP for last year’s fourth quarter had beaten analyst estimates to register 3.7 percent from a year earlier and was higher than the 3.1 percent posted in the previous quarter. Somewhat encouragingly, agriculture was named among the chief drivers of this growth (along with mining and quarrying), which swelled by 13.4 percent in the quarter from a year earlier, as well as information and communications. That said, growth across 2022 still slowed to 3.1 percent from the 5.1 percent notched up in 2021.
Nonetheless, there is decidedly more upbeat sentiment surrounding Ghana’s economic prospects now than there was towards the end of last year. The Bank of Ghana is projecting that annual inflation will fall to 29 percent by the end of the year, in part due to the aggressive monetary tightening it has undertaken to both contain runaway prices and strengthen the cedi, although the currency has remained relatively weak to date. Borrowing costs are now at their highest levels since at least January 2001.
Akufo-Addo also confirmed that fresh inflows of dollars had bolstered liquidity within Ghana and that the central bank remains committed to ensuring the country’s commercial banks are sufficiently liquid before the IMF injection. “The government is working with the Bank of Ghana and the oil-producing and mining companies to introduce a new legal and regulatory framework to ensure that all foreign exchange earned from operations in Ghana are, initially, paid to banks domiciled in Ghana,” the president said in October, adding that the central bank is also set to boost its gold-purchasing programme.