Country Note | Ghana – New sheriff, new approach?

By Rafiq Raji, PhD

Click to download full report (includes monthly inflation forecasts, etc.)

We cut our 2017 growth forecast to 6 percent (from 7 percent). This would still be an improvement on last year’s growth estimate of 4 percent. Our tempered expectations are due to factors beyond the control of the new Akufo-Addo administration. Beside its discovery of careless spending by the immediate past Mahama administration, cocoa (one of its major exports) prices have declined by about 40 percent over the past year. Gold, another major commodity export, has also suffered price declines (about 9 percent to mid-May 2017 from July 2016). Still, there is good reason to believe growth would be better this year. Much of the optimism is driven by an expected increase in crude oil production. The Sankofa and Gye Nyame (SGN) oil fields are expected to add to already producing Jubilee and Tweneboa, Enyenra, Ntomme (TEN) fields by 2018 at the latest. In tandem with rising crude oil prices, increased production would in addition to boosting the government’s coffers also aid power supply. Gas supply from the fields (from SGN especially) would make Ghana no longer reliant on hitherto unreliable foreign supply from neighbouring Nigeria. Ambitious Akufo-Addo promises to cut the budget deficit to 6.5 percent of GDP in 2017 from 8.7 percent in 2016 augur well for the fiscal outlook, albeit it looks somewhat farfetched. But when the quite refreshing commentary emanating from finance minster Ken Ofori-Atta is countenanced, the new administration deserves the benefit of the doubt at least. For instance, at the National Policy Forum (NPF) held in mid-May, Mr Ofori-Atta was insistent on the commitment of the administration to not add new debt to an already worryingly high stock of 72 percent of GDP (2016), which he claimed at the NPF has already declined to 62 percent if the authorities’ 2017 GDP projection is countenanced. Ongoing monetary policy easing should also be supportive of growth, with already slowing inflation likely averaging at 13 percent for 2017, in our view.

Ghana Macro Forecasts 2017 2018 2019
Real GDP, % change 6.0 7.0 7.1
Inflation, % change 12.9 7.2 5.8
Current Account Balance (% GDP) -5.5 -5.0 -4.5
Fiscal Balance (% GDP) 7.0 6.5 4.5
USD:GHS* 4.3 4.1 3.9
Source: Macroafricaintel Research, *year-end

Populist election promises make us cautious about planned fiscal prudence. We see a decrease in the fiscal deficit to 7 percent of GDP in 2017 from 8.7 percent last year. Considering the authorities plan to reduce the fiscal deficit to 6.5 percent of GDP in 2017, our forecast is probably optimistic. Especially, when past target misses by the authorities are considered. In December 2016 (after the 7 December election loss of President John Mahama), former finance minister Seth Terkper revealed the 2016 fiscal deficit target of 5.3 percent would be missed by about 2 percentage points to 7 percent due to weaker than expected tax revenues and low crude oil prices. The new Akufo-Addo administration would later discover a hitherto undisclosed US$1.6 billion hole in the fiscus. New finance minister Ken Ofori-Atta announced the 2016 deficit was actually almost 4 percent of GDP higher at 8.7 percent (relative to the 5.3 percent target) in his 2017 budget speech in March. Thus, the risk to our deficit forecasts is more to the upside. So even as we are encouraged by the authorities’ fiscal consolidation plans, we remain cautiously optimistic, sceptical even. The relatively slight variance in our forecasts and theirs is simply on the need we see for the new administration to be given the benefit of the doubt. But we would not be surprised at all if the fiscal deficit turns out to be above 7 percent of GDP in 2017.

Some of the constaints (power supply, for example) that bogged down the erstwhile Mahama administration might not be as trying under the new Akufo-Addo government, however. But the itch to spend may remain, probably even more so. Mr Akufo-Addo has reiterated his one dam for every village, one factory for every district campaign promise since assuming office. True to type, allocations were made for these in the 2017 budget. Under the Infrastructure for Poverty Eradication Project (IPEP) initiative for instance, each constitutency would get U$1 million. And the ‘one district, one factory’ programme was specially mentioned. This is one of the reasons why we are a little sceptical about the government’s planned fiscal consolidation. There are indications, however, that the authorities may succeed in re-negotiating better terms on the $918 million IMF programme. Besides, the new government would probably change its mind about not extending the programme beyond April 2018. In this regard, the IMF ‘suggested’ in May that the authorities seriously consider this. Considering the government also insists it would wean itself of the eurobond market for the foreseeable future, we are not ruling out the possibility that it might also change its mind on this. Nonetheless, Mr Ofori-Atta revealed in early March that the government would only borrow from multilateral institutions going forward. And more longer-tenored domestic debt issuances are planned. Authorities already showcase cost savings from its debt reprofiling (on the back of US$2.5 billion in new debt). Still, when juxtaposed against the background of 2016 public indebtedness of about 72 percent of GDP (authorities said in May that the debt stock has already decreased to 62 percent of GDP, mostly due to an expected wider GDP base this year from expected higher growth), a term restructuring primarily around local currency but longer-tenored debt would probably still be inadequate. Besides, state-owned enterprises alone have a debt stock of about US$2.4 billion (more than 6 percent of GDP), according to the IMF in April. So, some nuanced approach would probably be more ideal. Thus, irrespective of the nomenclature (debt ‘reprofiling’ or ‘restructuring’), the new administration may still be forced to retain some of the foreign elements of the previous administration’s plan. Of course, should any new foreign debt be concessionary as the administration insists, that would be a significant positive. We would be positively surprised, however, if the authorities do not yet again go to the eurobond market.

Expansionary monetary policy stance to remain on course. Inflation has started slowing and would likely continue to do so, probably ending the year around 12 percent (authorities target 11.2 percent). Annual consumer inflation was 13.0 percent in April from 13.3 percent in January. The decline in the headline figure masks a significant monthly acceleration to 1.3 and 1.6 percent in March and April respectively, after a much slower pace of 0.7 percent in February from 2.7 percent in January. Higher transportation costs on the back of a petrol price hike was attributed for the latest monthly uptick. Even so, the annual inflation headline would likely trend downwards (except for base-related upticks in August and September) for the remainder of the year. Considering this leaves room for further policy easing by the Bank of Ghana – after a 200 basis point policy rate cut to 23.5 percent in March, we expect a cut of 150 basis points to 22 percent in May and another 400 basis point cut to 18 percent before year-end.

Ghana Q2 2017 Q3 2017 Q4 2017 Q1 2018
Policy Rate, % 22.0 20.0 18.0 16.0
Source: Macroafricaintel Research

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