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15
Macroeconomics and Development
Introduction
Ghana, West Africa’s second largest economy, has been
particularly adept over the last decade at consolidating
its democracy and bolstering its growth regime.
Despite the financial crisis, the country has seen
average annual growth rates of over 7 per cent since
2005. Furthermore, Ghana has recently become an oil
producer and the developing oil sector has quickened
the pace of growth, which reached almost 15 per cent
in 2011. This enhanced growth has resulted in a rise of
per capita income levels and enabled Ghana to attain
the status of a low-middle-income country according
to World Bank rankings.
Ghana is nonetheless at a crucial point in its
development process. First, significant social issues
persist insofar as a quarter of the population still lives
below the poverty line and the informal sector
accounts for 80 per cent of employment. In addition,
Ghana’s economy continues to rely heavily on the
exploitation of commodities. The country thus needs
to embark on a process to diversify its economic
structure so as to meet employment challenges and
ensure sustainable and inclusive growth. Finally, the
country is faced with rising macroeconomic imbalances
that could subdue its growth trajectory and jeopardise
its progress in the area of development. As well as a
marked increase in the fiscal deficit, there has been a
significant deterioration in the current account balance.
This twin deficit has notably translated into a sharp rise
in domestic and external debt and a rapid depreciation
of the national currency.
* Final drafting of this paper was in January 2014.
Ghana: The
challenges of growth
faced with increasing
imbalances*
Clémence Vergne
Macroeconomic Analysis and Country Risk Unit
vergnec @ afd.fr
This study analyses Ghana’s macroeconomic and sociopolitical situation and is divided into five parts. The first
traces the history of Ghana’s path to democracy and
the social challenges still facing the country. The second
focuses on structural changes in Ghana’s economic
growth model, while the third part concentrates on the
vulnerabilities of public finances through an
examination of the lack of budget execution
management and monitoring , and of the dynamics
driving the accumulation of new debt. Ghana’s banking
system is discussed in the fourth section. The last
section focuses on changes in external balances in order
to highlight the related vulnerabilities.
Table of Contents
1 / A FLEDGLING DEMOCRACY FACING
SIGNIFICANT SOCIAL ISSUES
3
5 / DETERIORATING EXTERNAL ACCOUNTS
AND RISING LIQUIDITY PRESSURES
31
1.1. A recent democracy in the process
of consolidation
3
5.1. Despite the emerging oil sector, the highly
concentrated export base remains a major
source of vulnerability for the economy
31
1.2. A society with low levels of violence and able
to avert border conflicts
1.3. What progress has been made in development?
6
6
5.2. The need for external financing is fuelled
by the wide current account deficit
5.3. Deteriorating external liquidity indicators
2 / GROWTH REGIME: AN ECONOMY IN SEARCH
OF DIVERSIFICATION AND GROWTH DRIVERS
OTHER THAN COMMODITY PRODUCTION
CONCLUSION
11
LIST OF ACRONYMS AND ABBREVIATIONS
2.1. Historical perspective of Ghana’s growth
trajectory: a firmer growth regime
11
2.2. The structural transformation of the economy
driven by the services sector raises the question
of the medium-term development model
15
2.3. Challenges for the Ghanaian growth model:
lifting structural constraints to ensure sustainable
and inclusive growth in the long run
17
3 / PUBLIC FINANCES AND GOVERNMENT
SOLVENCY ARE DETERIORATING
20
3.1. The dynamics driving the accumulation
of new debt... at a higher cost
2
3.2. Chronic and mounting budget deficits
22
23
4 / A SHALLOW BANKING SECTOR STILL
EXPOSED TO SOVEREIGN RISK
25
4.1. Although on the rise, private sector credit
remains limited
25
4.2. Financial soundness indicators have improved,
but the rate of non-performing loans remains
high
27
4.3. Supervision of the banking sector is being
enhanced, but the regulatory framework
is still incomplete
29
© AFD / Macroeconomics and Development / June 2014
RFERENCES
32
33
35
36
37
1 / A fledgling democracy facing significant
social issues
After decades of political instability and repeated military
coups, Ghana began its transition to democracy in 1992 by
establishing a multiparty system. Yet it was not until the 2000
elections following J. Rawlings’ nineteen years in power that
the first peaceful democratic handover of political power
came about, confirming the onset of democracy. Since this
major turning point in the political history of the fledgling
democracy, transitions between elected governments have
run smoothly and Ghana has steadily consolidated its
democratic achievements. In addition to the multiparty
system, significant progress has been made as regards political
rights, civil liberties and freedom of the press.
Socioeconomically, Ghana is classed as a low-middle-income
country (LMIC) following its 2010 revision of GDP estimates.
However, while considerable headway has been made
regarding poverty and living conditions, income inequality has
widened. Moreover, the informal sector still accounts for 80
per cent of employment. The formal private sector has been
unable to create enough jobs to absorb new entrants to the
labour market. As for security, Ghana experiences only low
levels of violence, as reflected by the relatively low homicide
rates. For the time being , the country also seems able to
protect itself against border conflicts.
1.1. A recent democracy in the process
of consolidation
Since independence, Ghana, like several other countries in the
sub-region, has experienced successive constitutional changes
mostly due to the Armed Forces’ incursions into politics in
the form of military coups. Yet Ghana, unlike many African
countries, has not descended into civil war or ethnic conflict.
How can the specific nature of Ghana’s trajectory be
explained? To do so, it would first be useful to briefly trace the
history of Ghana’s path to democracy, as this will provide a
context to explain the factors that secured the consolidation
of democratic gains.
1.1.1. Ghana’s path to democracy
Ghana has undergone four key periods since independence.
The First Republic
In 1957, the Gold Coast was the first of the African colonies to
gain independence and was thereafter known as Ghana. At
the time, Kwame Nkrumah already held the post of Leader of
Government Business as his party, the Convention People’s
Party (CPP), had won the 1951 legislative elections. Having led
the independence negotiations with the British, he enjoyed
some degree of legitimacy. However, as early as 1959, Nkrumah
clamped down on democratic governance, jailing members
of the opposition and censoring the press. In 1963, he instituted
a one-party state and declared himself president for life.
Political instability and successive military coups
Ghana then embarked on a period of political instability
marked by four coups. In 1966, the military took advantage of
President Nkrumah’s trip to China to seize power. They
formed an interim government under the leadership of the
National Liberation Council and promised a swift return to
elected government. In 1969, pursuant to a new Constitution,
power was transferred to a civilian government headed by
Koffi Busia. This Second Republic was, however, very shortlived. The army once again seized power in a bloodless coup
on 13th January 1972, citing the inability of Busia’s government
to halt rampant inflation following the December 1971
currency devaluation. However, the Supreme Military Council,
unable to deal with the economic crisis and the high cost of
living, faced rising discontent that was voiced during 1977 and
1978 through strikes and street demonstrations organised by
student and professional associations. In 1979, a young military
lieutenant, Jerry Rawlings, took power, only to stand aside a few
months later in favour of an elected civil president, Hilla
Limann. After just two years of democratic governance,
however, President Limann was overthrown in December 1981
by none other than Lieutenant Rawlings. He justified his
intervention by citing the government’s inability to eradicate
corruption and revive an economy in dire straits.
/ Ghana: The challenges of growth faced with increasing imbalances /
3
Democratic transition
After eleven years of authoritarian governance, the 1992
Constitution – which was approved by referendum – ushered
in the Fourth Republic, laid the foundations for a democratic
Republican state and paved the way for a multiparty system.
Jerry Rawlings was elected to the presidency of the Republic
in the 1992 and 1996 elections and his party, the National
Democratic Congress (NDC), won an absolute majority of
seats in the National Assembly.
Democratic consolidation
The elections in 2000 marked a major watershed in Ghana’s
political history and attested to the consolidation of the
democratic transition that had begun in 1992. Firstly, the
outgoing president Jerry Rawlings had respected the
Constitution, which limited the presidency to two four-year
terms, as he did not attempt to amend institutional
arrangements and stand for a further term. Furthermore, the
elections led to the first peaceful democratic turnover of
political power. [ 1] The New Patriotic Party (NPP) emerged
victorious from the elections and John Agyekum Kufuor
became president. He was re-elected in 2004. The 2008
elections once again confirmed that democracy had taken
root in Ghana. The NDC returned to power with Jerry
Rawlings’ former vice-president Professor John Atta-Mills as
president.
Following the death of John Atta-Mills in July 2012, John
Dramani Mahama became acting president. With 50.7 per
cent of votes, he won the elections held in December 2012 –
the first elections to take place without the presence of
international observers. However, the opposition leader Nana
Akufo-Addo lodged a complaint with the Supreme Court
challenging the election results and alleging large-scale fraud.
The Supreme Court, in consultation with the stakeholders,
asked the firm KPMG to audit the pink sheets that the
petitioners had submitted to the Court as evidence of
malpractice and irregularities in the polling stations. [ 2] The
Supreme Court returned its verdict on 29th August 2013 and
dismissed the NPP’s electoral petition. John Mahama
consequently remained in office as President of Ghana. The
fact that the judicial system was used to settle this case, as
well as the absence of unrest following the verdict, confirms
the consolidation of democratic progress in Ghana.
Representatives of the political parties have, however,
suggested that the Constitution be amended in order to
reduce the time it takes to process future petitions. Certainly,
the eight months required were not favourable to decisionmaking.
1.1.2. Factors guaranteeing democracy
Several factors help to reinforce democracy in Ghana.
Non-politicised ethnicity
Ghana is a multi-ethnic society in which the Akan [3] account
for 47.5 per cent of the population and the three other major
groups – the Mole-Dagbani, Ewe and Ga-Adangbe – 16.6 per
cent, 13.9 per cent and 7.4 per cent respectively. The country
has nonetheless avoided the civil wars that have plagued many
ethnically diverse African countries (Easterly & Levine, 1997).
Admittedly, ethnic tensions have surfaced, especially in 1994,
when clashes resulted in 2,000 dead and 150,000 people
displaced in northern Ghana. Yet, these tensions have never
escalated into widespread conflict. There are several reasons
for this. First of all, governments in Ghana, including those
formed by military regimes, have been mindful of ethnicity.
Nation-building has been a key success factor in the efforts to
temper the sense of ethnic belonging in Ghana, particularly
during the Nkrumah years (UNRISD, 2006). In fact, Nkrumah
encouraged interethnic marriage and mixed schools that
forged a sense of national belonging. In addition, the
Constitution states that “every political party shall have a
national character, and membership shall not be based on
ethnic, religious, regional or other sectional divisions” and that
political parties shall have branches in all the regions and also
be organised in not less than two thirds of the districts of each
region.[4] These provisions are reinforced in the Political Parties
Act of 2000. [5] Certainly, the two dominant parties, the NPP
and NDC, are generally identified with the Akan (especially
[1] Turnover of power is a key indicator of electoral competitiveness (Lindberg, 2006).
[2] Pink sheets indicate the number of voters. Some polling stations, however, recorded more votes than registered voters. Moreover, the vote allegedly took place in
some areas without biometric checks and figures given at polling stations differed from those listed on the pink sheets.
[3] The Akan are divided into 20 sub-groups and consequently very fragmented.
[4] Articles 55(4) and 55(7) (b) of the 1992 Constitution.
[5] Section 3(1) of the Political Parties Act states that “no political party shall be formed (a) on ethnic, gender, religious, regional, professional or other sectional divisions,
or (b) which uses words, slogans or symbols which could arouse ethnic, gender, religious, regional, professional or other sectional divisions”.
4
© AFD / Macroeconomics and Development / June 2014
1 / A fledgling democracy facing significant social issues
Ashanti) and Ewe ethnic groups. However, studies on what
determines voting patterns in Ghana show that the ethnic
component is just one of several factors. Moreover, non-ethnic
factors (education, occupation, income level) explain swings
in voting between elections, with votes based primarily on
ideological or political factors (Bossuroy, 2011). Finally some
institutional mechanisms have helped to mitigate the risk of
ethnic conflict. The Commission for Human Rights and
Administrative Justice (CHRAJ) was mandated in 1993 to
investigate complaints of violations of fundamental rights and
freedoms in both the public and private sectors, investigate
complaints of administrative injustice, abuse of power and
unfair treatment of any person by a public officer in the
exercise of his official duties. The CHRAJ has, among other
things, symbolised an accessible government entity,
responsible for documenting and addressing ethnic grievances.
A well-anchored multiparty system
Ghana’s political landscape and electoral system have three
main distinguishing features compared to many African
countries. First of all, the multiparty system is firmly anchored
given that the bipartisan political tradition has its roots in the
years of the independence struggle. [6] The NPP has inherited
a political tradition dubbed Danquah-Busia, [ 7] while smaller
parties such as the PNC and the CPP lay claim to Nkrumah’s
legacy. These two filiations have had a lasting influence on
Ghana’s political groupings. Although the growth of political
parties has often been interrupted by military coups, each new
republic has witnessed a resurgence of these two political
traditions. The Danquah-Busia heritage (the NPP) is associated
with pro-capitalist liberal tendencies, while Nkrumah’s heirs
(the NDC) have always backed government intervention and
socialist-leaning policies. Although opposition between the
two main parties remains political, underlying ethnic and
regionalist considerations are not absent. The NPP, recognised
as an Ashanti party, traditionally receives a maximum number
of votes in the southern regions, especially the Ashanti region.
The NDC, on the contrary, prevails in the three northern
regions as well as in the Volta region, which is predominately
Ewe and also Jerry Rawlings’ home region. Moreover, elections
are hotly contested insofar as the results are always extremely
close. In fact, 80 per cent of voters always vote for the same
party in elections and swing voters are not easily classifiable
since they exhibit no major distinctive characteristics (Lindberg
et al., 2005). Lastly, there is a very high voter turnout in
Ghana [8]. In the 2012 elections, 79 per cent of people on the
electoral register voted.
Institutions set up to monitor democracy
A number of institutions have been set up to avoid risks of
slippage, especially during electoral periods. The Electoral
Commission, created in 1993, is seen as one of the figureheads
of democratic consolidation (Gyimah-Boadi, 2009; Abdulai
& Crawford, 2010). In addition to its role of monitoring
elections, the Electoral Commission’s powers extend to
overseeing political party activities, namely registering political
groups and auditing their accounts. Furthermore, the
Commission is independent, a fact recognised by almost all of
the players in the country’s electoral process. Ghana thus has
a great asset as regards democratic consolidation since any
tensions that occur during the electoral process can be kept
within tolerable levels [9].
The key role of the media and civil society
Ghana boasts (a) diversified media and (b) many civil society
organisations that are truly able to both mobilise citizens and
engage in political dialogue.
Since the abolition in 2001 of the Criminal Libel Law, which had
been used to imprison journalists, the media have clearly
developed. According to the World Press Freedom Index
published by Reporters Without Borders, Ghana has risen
significantly over the last decade and is now ranked 30th
worldwide and 3rd in Africa (behind Namibia and Cape Verde).
Ghana has a strong culture of community life and a vibrant civil
society. Several longstanding civil society organisations have
been active in the country’s economic, social and political
spheres. The Government, for its part, has also become more
inclined in recent years to take the initiative of consulting civil
society groups and soliciting their input.
[6] Bipartisanship is a legacy of the United Gold Coast Convention (UGCC), then the United Party (UP) and finally the CCP. Founded in 1947, the UGCC played a key
role in Ghana’s independence. It includes members of the upper middle classes (business people, traditional chiefs, lawyers, doctors, large cocoa farmers, etc.). The
CPP, founded in 1949, is a populist party with an anti-imperialist and pan-African vision. “The ideological stance of these two parties has influenced Ghanaian politics
to the point that, since independence, elected civilian governments and even military regimes derive their support and claim legitimacy on one or the other of these
two traditions” (Busia, 1999). It should be noted that this cleavage does not stem from ethnic divisions but rather from ideological differences.
[7] The Danquah-Busia political tradition refers to the two leaders, A. Busia and J.B. Danquah, who founded the United Party after independence.
[8] Low voter turnout reflects a state’s lack of credibility (Ninsin, 1996).
[9] Outbreaks of violence have sometimes occurred during election periods, especially in the north of the country. However, these disturbances have remained minor
and localised.
/ Ghana: The challenges of growth faced with increasing imbalances /
5
1.2. A society with low levels of violence
and able to avert border conflicts
Map
1
Oil production zone in Ghana
Besides its political stability, Ghana is a country that enjoys
low levels of violence, as evidenced by the relatively low
homicide rates (Figure 1). Furthermore, for the time being ,
Ghana seems able to protect itself against border conflicts.
The border disputes between Ghana and Côte d’Ivoire over
the maritime border following the discovery of the offshore
Jubilee oil field (Map 1) have so far been settled peacefully.
Figure
1
Homicide rates in Ghana and several African
countries (per year, per 100,000 population)
35
Source: Ghana National Petroleum Corporation.
30
25
1.3.1. Substantial headway on the poverty front,
despite the still high level of poverty
20
15
10
5
0
Ghana
Cameroon
Kenya
South
Africa
Average
Africa
Source: United Nations Office on Drugs and Crime
1.3. What progress has been made
in development?
Following the 2010 revision of national accounts and nominal
GDP resulting in a 60 per cent increase in GDP (see Box 1),
Ghana has LMIC status according to the World Bank’s ranking.
Yet, with a 2012 gross national income per capita of 1,550
dollars (Atlas method, current USD), Ghana still borders on the
low-income country category, [10] as reflected by the level of
its socioeconomic indicators.
Since the mid-1990s, growth performance, couple with social
programmes, has enabled Ghana to make considerable
headway in poverty reduction. The poverty rate (based on
the national poverty threshold) has decreased from 51.7 per
cent in 1992 to 28.6 per cent in 2006 (Table 1). [11] Nevertheless,
in 2006 over half of the population was still living on less than
two dollars a day, a much higher percentage than the LMIC
average (37.3%). At the same time, according to an IMF study
(2011a), the economic growth observed during the 1998–2005
period was relatively inclusive. Indeed, the poorest quartile of
the population saw a substantial rise in annual per capita
consumption. Finally, Ghana is one of the only countries in
sub-Saharan Africa to be ranked in the medium human
development category. The latest UNDP Human
Development Report (2013) shows that Ghana is ranked 135th
(out of 178 countries) and is one of the countries where there
is a positive and very large difference between gross national
income per capita and the human development index. Growth
has thus enabled progress in human development.
[10] LMICs have a gross national income per capita of between 1,036 and 4,085 USD. In 2013, the other sub-Saharan African countries classed as LMICs are Cameroon,
Cape Verde, Republic of Congo, Côte d’Ivoire, Djibouti, Lesotho, Mauritania, Nigeria, Senegal and Zambia.
[11] More recent data are not available for the moment. However, the Ghana Living Standard Survey is underway and the results should be published in 2014.
6
© AFD / Macroeconomics and Development / June 2014
1 / A fledgling democracy facing significant social issues
Table
1
Ghana’s socioeconomic indicators: Evolution and comparisons with several LMICs
LMIC
Côte
d’Ivoire
Ghana
Nigeria
Senegal
Average
1992
1998
2006
2008
2010
2011
2005-2011
Gini Coefficient
38.1
40.7
42.8
41.5
48.8
40.3
40.6
Poverty rate
(national poverty line, % of population)
51.7
39.5
28.5
42.7
62.6
46.7
N/A
Poverty rate (at 2 USD per day PPP)
77.6
63.3
51.8
46.3
84.5
55.2
37.3
1992
2006
2011
2011
2011
2011
2005-2011
Participation rate
72.2
69.8
70,6
67,6
55,7
78,1
60,5
Unemployment rate
4.7
3.6
N/Av
N/Av
N/Av
10.0*
4.8
Youth unemployment rate
(% of active population aged 15-24)
17
16.6
N/Av
N/Av
N/Av
14.8*
15
Employment rate
68
66.4
66.7
64.2
52.2
69.3
55.3
Poverty and Inequality
Labour Force
Source: World Bank (World Development Indicators - WDI); author’s calculations.
N/A: not applicable; N/Av: not available; PPP: purchasing power parity; * 2006.
/ Ghana: The challenges of growth faced with increasing imbalances /
7
Box
1
Revision of national accounts and nominal GDP
In November 2010, the Ghana Statistical Service overhauled the methodology used for producing national accounts estimates, and a new
series of revised nominal GDP was released for the years 2006–2010. Specifically, two major improvements were made. Firstly, the base
year for constant-price data series was updated to reflect price changes in the country. The base year in the national accounts is now 2006
(and not 1993). In addition, the authorities sought to restructure the estimation methodology, update activity classifications and expand
the range of available statistical sources. This enabled the GSS to align with the latest version of the International Standard Industrial
Classification (ISIC 4), enhance the classification of national activity components and achieve a better appreciation of the economic
structure.
To estimate value added by sector, the statisticians used surveys (2003 industrial census, 2005/2006 living standards survey, etc.) and various
indicators (VAT receipts, fish-catch volume, number of livestock slaughtered and estimated herd stock, breakdown of telecommunications
numbers, income data, etc.). Information on household spending, in particular, enabled a better understanding of agricultural activities
and some informal sector activities. In addition, the new national accounts classification now includes new sectors such as service activities
(telecommunications and transport), forestry and oil sector development.
Table
2
Old and new GDP series
2006
2007
2008
2009
2010
2011
2012
GDP (GHC billion)
18.7
23.1
30.2
36.6
46
59.8
73.1
GDP (USD billion)
20.3
24.6
28.2
25.7
32.2
39.5
40.7
GDP per capita (USD)
929
1 100
1 232
1 100
1 305
1 563
1 570
GDP (GHC billion)
11.7
14
17.5
21.7
25.6
-
-
GDP (USD billion)
12.7
14.9
16.3
15.4
18
-
-
GDP per capita (USD)
580
667
712
658
753
-
-
GDP New Series
GDP Old Series
GHC : Old Ghanaian Cedi
Source : Ghana Statistical Service (GSS).
Table
3
GDP by sector (at constant prices, %)
2006
2007
2008
2009
2010
2011
2012
Agriculture
30.4
29.1
31
31.8
29.8
25.3
22.7
Industry
20.8
20.7
20.4
19
19.1
25.6
27.3
Services
48.8
50.2
48.6
49.2
51.1
49.1
50
Agriculture
38.8
37.6
37
37.7
35.6
-
-
Industry
28.3
28.2
28.3
27.2
28.3
-
-
Services
32.9
34.2
34.7
35.1
36.1
-
-
GDP New Series
GDP Old Series
Source : GSS.
8
© AFD / Macroeconomics and Development / June 2014
•••
1 / A fledgling democracy facing significant social issues
•••
The improved quality of statistical data used and the conceptual change that led to a wider coverage of economic activities in national
accounts have had a significant impact on national accounting. Tables 2 and 3 and Figure 2 show some implications of the GDP revision
for the years 2006–2010. For example, the ratio of (revised) GDP per capita now puts Ghana in the class of middle-income countries.
Figure
2
Real GDP growth rates for the old and new series
(y-y, %)
GDP old series
GDP new series
10
8
6
4
2
0
2007
2008
2009
2010
Source: GSS.
1.3.2. Inequality is more pronounced when it comes
to the labour market situation
The positive trend regarding poverty reduction and improved
living conditions is tempered by two important pillars of
inclusive growth: changes in inequality and employment
figures.
According to the latest available data, income inequality, as
measured by the Gini coefficient, has been increasing since
1992 and is now higher than the LMIC average (Table 1). In
addition, poverty levels are higher in rural areas and regional
disparities persist. There is a real divide between the north of
the country, which is particularly affected by poverty, and the
booming coastal regions.
As for employment, the situation has hardly evolved.
According to the Ghana Statistical Service, the unemployment
rate is estimated at only 3.6 per cent. However, the official
unemployment rate masks a high level of underemployment
as well as the disguised unemployment that is inherent to the
informal sector given that the Government’s definition of
unemployment does not take into account the high number
of unemployed people who may be available for work, but
not necessarily active job seekers. In fact, the informal sector
remains predominant in Ghana and still accounts for more
than 80 per cent of jobs (Table 5). Meanwhile, the formal
private sector fails to generate enough jobs to absorb new
entrants into the labour market. In particular, young people
(aged 15-24 years), who now make up 30 per cent of the total
population, account for only 14 per cent of formal sector
employees. The public sector and state-owned enterprises
thus substitute for the private sector and are the leading
employer in the formal sector. Finally, more than 40 per cent
of the working age population is employed in the agricultural
sector, which typically provides low incomes and is still largely
informal (Table 4).
/ Ghana: The challenges of growth faced with increasing imbalances /
9
Table
4
Table
Employment by sector
(% of total employment)
5
Employment by sector
(% of total employment)
2010
2000
2010
Agriculture, forestry and fishing
42
Public sector
6.4
6.2
Mining and quarrying
1.1
Formal private sector
8.5
6.8
Manufacturing
10.7
Informal private sector
83.9
86.2
Electricity and water
0.4
Parastatal sector
0.8
0.2
3
NGOs
0.35
0.5
Wholesale and retail trade; repair of vehicles
18.7
Others
0.05
0.1
Transport
3.5
Hotels and restaurants
5.4
Information and communication
0.4
Banking and insurance
0.7
Real estate services
0
Professional, scientific and technical activities
0.9
Public administration and defence
2.1
Education
3.9
Health and social work
1.2
Culture and leisure
0.6
Other service activities
4.5
Domestic services
0.7
Construction
Source: GSS; author’s calculations
Given the nature of the labour market, it appears that strong
performances have been concentrated in capital-intensive
sectors (extractive industries) and skilled labour-intensive
sectors (financial services and communications), hence the
limited impact on employment and inclusiveness of growth [12].
Source: GSS; author’s calculations
[12] Inclusive growth refers to economic growth that creates opportunity for all segments of the population and distributes the dividends of increased prosperity, both
in monetary and non-monetary terms, fairly across society” (OECD, 2013)
10
© AFD / Macroeconomics and Development / June 2014
2 / Growth regime: an economy in search
of diversification and growth drivers other
than commodity production
After decades of political and economic instability, Ghana has
gradually firmed up its growth regime. Now one of the lowermiddle-income countries, it has reached a critical stage of its
development process. On the one hand, the national economy
is still heavily dependent on agriculture and commodities. On
the other hand, 80 per cent of jobs are in the informal sector.
This section first of all proposes a review of Ghana’s growth
trajectory and then focuses more specifically on the Ghanaian
growth model [13] by examining the structural transformation
of the economy. Finally, the analysis will look at the structural
constraints that are hampering economic diversification.
2.1. Historical perspective of Ghana’s
growth trajectory: a firmer growth
regime
2.1.1. Since the 1980s, the pace and stability
of Ghana’s growth have gradually gained
in strength
Ghana’s accession to independence in 1957 did not enable
the country to effectively set in motion a real growth and
development process. During the 1960s and 1970s, which were
years of political and economic instability, Ghana experienced
particularly low average annual growth rates (Table 6).
Moreover, this growth was marked by very high volatility. While
Ghana registered one of the highest per capita GDP growth
rates in sub-Saharan Africa in 1960, between 1960 and 1983
it recorded a marked decline of 20 per cent (Figure 4).
After two turbulent decades, Ghana launched an Economic
Recovery Program (ERP) in 1983 under the government of
Jerry J. Rawlings. This programme, defined jointly with the
IMF and the World Bank, aimed to trigger real economic and
social change in the country. The first phase (1984–1986) was
designed to correct sizeable macroeconomic imbalances by
purging public finances and curbing inflation to restore
Figure
3
Real GDP growth rates (%)
Growth rate
Average annual growth
Non-oil GDP growth rate
14
9
4
-1
-6
1980
1985
1990
1995
2000
2005
2010
Source: IMF (WEO); author’s calculations
Table
6
Average real GDP growth in
Ghana and sub-Saharan Africa (%)
Growth Ghana
Growth SSA
1961-1969
2.1
4.6
1970-1979
1.4
4.1
1980-1989
3.8
2.6
1990-1999
4.5
2
2000-2009
5.8
5.5
Source : Banque mondiale (WDI) ; calculs de l’auteur.
[13] The analysis of the growth model or, in other words, the model associating changes in economic growth rates with the different structural socioeconomic explanatory
factors, aims to identify the potential vulnerabilities linked to this model.
/ Ghana: The challenges of growth faced with increasing imbalances /
11
investor confidence. The second leg of the ERP (1987–1989),
in tandem with the adoption of a Structural Adjustment Plan,
was chiefly characterised by the State’s withdrawal from a
number of productive activities and by the liberalisation of
exchange rates. The inflows of donor aid made it possible to
rehabilitate infrastructure and develop export sectors (cocoa,
minerals and timber). The continuation of the ERP, together
with donor support, enabled Ghana to significantly speed up
its pace of growth, showing an average of 3.8% and 4.5%
respectively during the 1980s and 1990s.
Figure
4
Evolution of GDP per capita in Ghana
(PPP, in constant USD, 1960 = 100)
200
180
160
140
120
100
From a historical viewpoint, Ghana’s growth regime gradually
firmed up, with the real growth rate averaging an annual 5.8
per cent over the 2000s. The growth dynamics of the
Ghanaian economy successfully placed the country on a
convergence path with sub-Saharan Africa (Figure 5). Yet, for
three decades, there has been virtually no catch-up with the
world average. At purchasing power parity (PPP), the country’s
GDP per capita stood at 17 per cent of the world average in
2012 compared to 15 per cent in 1980.
2.1.2. Is the accelerating pace of growth sustainable?
80
60
40
20
2008
2002
1996
1990
1984
1978
1972
1966
0
1960
In the early 2000s, given its high degree of productive
specialisation, the country faced an economic crisis due to
the fall in cocoa prices and the rise in oil prices. With the help
of the IMF, the new government elected in December 2000
engaged in an economic stabilisation programme designed
to ensure balanced budgets and restore the balance of
payments. [14] At the same time, although Ghana had always
refused to benefit from the heavily indebted poor countries
initiative (HIPC) [15], the new government reversed this position
and agreed to join the initiative.
Source : World Bank (WDI); author’s calculations.
Figure
5
Evolution of Ghana’s GDP per capita relative
to the world average and SSA average (%)
Ghana/SSA average
Ghana/world average
100
90
80
70
60
50
40
30
20
10
2010
2007
2004
2001
1998
1995
1992
1989
1986
1983
0
1980
The accelerating pace of growth seen from the mid-2000s
can be explained by a combination of several factors. On the
one hand, the country benefitted from the rise in commodity
prices (gold, cocoa). On the other hand, growth was driven by
internal demand-side factors (Figure 6). The increase in bank
lending helped to fuel consumption. In addition, in the context
of the 2009 presidential elections, public spending (current
and investment expenditure) increased substantially thanks
to the savings generated by debt relief.
Source : World Bank (WDI); author’s calculations.
[14] For more details on this period, consult the study by Barat, Massuyeau and Spielvogel (2002).
[15] Moreover, Ghana always refused to join the group of least developed countries (LDCs) so as not to cut itself off from external market-based financing, even though
its socioeconomic characteristics made it eligible for LDC status.
12
© AFD / Macroeconomics and Development / June 2014
2 / Growth regime: an economy in search of diversification
and growth drivers other than commodity production
In 2008, the hike in the price of food and energy products
compelled the Central Bank to lower its key lending rate in
order to curb inflationary pressures (Figure 7 and Box 2).
Combined with an increase in bad loans (see Section 5.2),
banks became increasingly risk-averse and reduced their
supply of credit. Additionally, the implementation of a
stabilisation policy by the new government team in the wake
of public finance slippages put a brake on public spending,
which adversely impacted the dynamism of the construction
industry and the manufacturing and services sectors. Thus,
although it was relatively unexposed to the international
financial crisis (and even benefitted from the drop in oil and
food prices), Ghana’s growth slowed down, reaching 4 per
cent in 2009 against 8.4 per cent in 2008.
discovered in 2007, officially came on stream in December
2010. After a start-up production level of 55 000 barrels a day,
this reached 100 000 barrels a day in 2013. [16] However, the
IMF recently revised its growth forecasts for 2013 downward
from 8 per cent to 5.5 per cent, mainly in light of Ghana’s
increasing macroeconomic imbalances and the slowdown of
its traditional growth engines. In fact, the prices of cocoa and
gold, the country’s main source of foreign currency, fell by
nearly 30 per cent and 15 per cent respectively after 2011.
Moreover, oil output had still not attained the originally
forecasted level of 120,000 barrels a day due to technical
problems that have disrupted exploitation of the Jubilee
oil field. Finally, the industrial sector remained strongly
constrained by problems of power supply and very high
interest rates.
The outstanding results recorded in 2011 (14.4%) are in part
due to the development of the oil sector. The Jubilee oil field,
Figure
Figure
6
Contribution of demand components to real
GDP growth (%)
7
Inflation (%)
70
Net exports
Private consumption
Stocks
Government consumption
GFCF
Total GDP
30
60
50
40
25
20
30
15
20
10
10
5
0
2010
2005
2000
1995
1990
0
-5
-10
-15
-20
Source : IMF (WEO).
2007
2008
2009
2010
2011
2012
Source: World Bank (WDI); author’s calculations.
[16] At the global level, Ghana’s oil reserves are relatively small. Even if they prove to be at the top end of current estimates (between 700 million and 1.8 billion barrels),
this would rank Ghana at only 50th place in terms of the world’s proven oil reserves, far behind major oil-producers such as Nigeria, Angola and Norway. Also, Ghana’s
oil output is modest compared to that of countries such as Nigeria and Angola (over 2 million barrels a day).
/ Ghana: The challenges of growth faced with increasing imbalances /
13
Box
2
The determinants and effects of inflation in Ghana
Ghana’s history has been marked by periods of very high inflation, with rates of up to 60 per cent in the 1990s. In 2007, the Central Bank
of Ghana adopted an inflation-targeting regime. Since then the inflation rate has certainly been more under control but is still high (13%
in 2013) and is one of the sources of Ghana’s economic vulnerability.
In Ghana, the main perverse effects of inflation on economic activity are as follows:
• It discourages saving
High inflation leads to limited savings. A steep price rise is in fact generally associated with negative real interest rates. This is a regular
occurrence in Ghana. Real interest rates on savings products were negative in 2012 and remain low until the today (around 1.5%). In this
context, economic agents have no incentive to save.
• It is difficult to anticipate how the economy will evolve, which limits the increase of private investment.
Although fluctuations in inflation rates have been less pronounced since the inflation-targeting policy was implemented, inflation remains
unstable. It rose from 10 per cent in 2007 to 19 per cent in 2009, and then dropped back to 10 per cent in 2010. This instability is a source
of uncertainty, which is not conducive to long-term investment.
• It creates economic distortions.
As inflation does not impact all goods and services to the same extent, it modifies the country’s relative price structure in a way that does
not necessarily correspond to economic realities and thus generates economic distortions. In Ghana, some prices are rigid as they are
administered by the government (mainly utility tariffs), whereas others automatically adapt to changes in the economic situation. Changes
in the relative price structure lead to changes in the behaviour of economic agents that are not necessarily in the general interest. Hence,
as no adjustment formula has been applied to electricity tariffs since 2011, this has caused further deterioration of the electricity sector
as a whole, with heightened impact on the sector’s public operators (Volta River Authority − power producer; GRIDCo − transmission
provider; ECG and NEDCo − distributors), whilst giving consumers no incentive to moderate their consumption.
• It accentuates inequalities.
High inflation tends to foster inequalities insofar as the richest save part of their income and are able to do so in foreign currency, whereas
the poorest use up all of their income and are then totally at the mercy of inflationary tax.
In Ghana, inflation basically stems from two factors:
• Depreciation of the domestic currency.
Depreciation of the cedi (Figure 8) gives rise to imported
inflation by pushing up the cost of imports.
Figure
Real effective exchange rate* and
nominal exchange rate (Cedi vs. USD)
REER (left-hand scale)
Nominal exchange rate (right-hand scale)
• Recourse to domestic financing of the budget deficit.
Direct financing of the budget deficit is one of the main
causes of inflation in Ghana. Moreover, the use of
monetary financing, notably during pre-electoral periods,
harms the credibility of the inflation-targeting regime.
8
120
0.0
100
0.5
80
1.0
60
1.5
40
2.0
20
2.5
0
3.0
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
Sources: Caupin, Chouteau and Nora (1997); IMF (2013).
Source: IMF (IFS).
* The real effective exchange rate (REER) is an indicator of a country’s economic competitiveness. A rise in this indicator means that the inflation differential between the country in question
and its trading partners was higher than the depreciation of the nominal exchange rate compared to other currencies and that the country’s economy thus lost some degree of
competitiveness. Ghana’s real effective exchange rate appears relatively stable, which indicates that depreciation of the nominal exchange rate has been able to offset the inflation differential.
14
© AFD / Macroeconomics and Development / June 2014
2 / Growth regime: an economy in search of diversification
and growth drivers other than commodity production
2.2. The structural transformation of the
economy driven by the services sector
raises the question of the mediumterm development model
from 10 per cent in the 1990s to 7 per cent over the
2010–2012 period.
The primary sector, which still contributes a large share of
value added, has seen its contribution fall considerably since
2005 (Figure 9). The secondary sector on the other hand
sharply increased its contribution to growth. This
development can be explained by the strengthening of the
extractive industries since 2010. The services sector has
become the leading contributor to growth.
With a sustained annual growth rate of over 5 per cent since
1990, Ghana has experienced a relatively moderate structural
transformation. [17] After a period of relative stability from 1970
to 1990, the productive structure of the Ghanaian economy
has nonetheless gradually changed, particularly over the last
decade. A closer examination of the sectoral breakdown of
Ghana’s GDP reveals two key characteristics of the
composition and evolution of each sector’s share of value
added. Firstly, Ghana remains a highly agricultural country
given that the share of the primary sector still accounts for
almost a third of total value added (Table 7) and over 40 per
cent of total employment. However, as is the case in most
examples of development, Ghana’s growth has shown a
marked decline in agriculture’s share of the economy, falling
from 56.5 per cent of total value added during the 1970s to
around 26 per cent over the 2010–2012 period (Table 7).
Secondly, the gradual decrease in the share of agriculture has
mainly benefitted the services sector rather than the
secondary sector. [18] The share of the services sector thus rose
from slightly below 25 per cent in the 1970s to nearly 50 per
cent in the years 2010–2012. The industrial sector, on the
other hand, has remained steady since 1990 at less than 25
per cent of total value added. Moreover, the share of the
manufacturing sector has registered a significant drop, falling
Figure
9
Contribution of the different sectors to value added
growth (period averages, in GDP percentage points)
Agriculture
Industry
Services
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1989-2000
2001-2005
2006-2012
Sources: Ghana Statistical Service, World Bank (WDI); author’s calculations.
Table
7
Sector composition of GDP in Ghana (average, %)
Primary sector
Secondary sector, of which
Manufacturing sector
Tertiary sector
1970-1979
1980-1989
1990-1999
2000-2009
2010-2012
56.5
52.5
42.6
36.3
26
19
13. 8
24.5
24.8
24.2
12.3
8.7
9.9
9.3
6.9
24.6
33.6
32.9
38.9
49.8
Source: World Bank (WDI); author’s calculations.
[17] Structural transformation refers to the shifting of economic activity from less productive to more productive sectors. It is one of the fundamental drivers of
economic development. It involves two factors: the rise of new more productive activities and the transfer of resources from traditional activities to these new
activities, which thus increases overall productivity.
[18] The secondary or industrial sector includes value added from mining, manufacturing, construction, electricity, water and gas.
/ Ghana: The challenges of growth faced with increasing imbalances /
15
Table
8
Contribution to GDP growth by sub-sector between 2006 and 2012
Share (% of GDP)
Value added growth
Contribution to real
growth (% of overall
growth)
Agriculture, forestry and fishing
27.3
3.4
11.5
Mining and Quarrying
4.3
41.1
15
Manufacturing
9.1
5.1
5
Electricity
0.7
5.4
0
Water
1.1
3.3
0
Construction
8
17.1
15
Wholesale and retail trade; Repair of vehicles
6.5
8.4
6.5
Hotels and restaurants
4.5
4.5
2
Transport and storage
13.1
7.7
12
Information and communication
3.1
15.4
6
Finance and insurance
3.1
13.2
5
Real estate
4.8
7.4
5
Public administration and Defence
5.2
8.4
6
Education
3.9
8,5
4.5
Health
1.4
7.9
1.5
Community, social and personal services
3.9
8.9
5
Source: GSS; author’s calculations.
The more detailed sector breakdown of contributions to GDP
in Table 8 shows that agriculture grew by only 3.4 per cent
over the 2006–2012 period, which is less than the official
target of 6 per cent annual growth. This weak performance
can be explained by the lack of transformation in the
agricultural sector, which mainly comprises small farms yielding
low levels of productivity.[19] Development of more productive
commercial farming systems that could provide the inputs
needed to develop local agri-food industries is hampered by
land issues and the lack of readily available credit, which
discourages investment.
The services sector, the main growth engine, is driven by five
sub-sectors: (i) transport and storage, (ii) community, social
and personal services, health services and education, (iii)
wholesale and retail trade, (iv) public administration and
defence and (v) the information and telecommunications
sectors. It should be noted that the services sector, which now
provides 40 per cent of jobs, is largely informal and
characterised by high flexibility and low capital requirements.
The secondary sector’s contribution to growth mainly rests on
the performance of the mining and quarrying sub-sector
(including oil). The construction sector benefitted from
intensive activity in public and private construction projects
in connection with the growth of the oil sector. Contribution
from manufacturing is limited, due to a series of setbacks that
hinder its development, notably the difficulties of accessing
[19] The agricultural sector relies heavily on rainfall: the irrigated used agricultural area (UAA) represents only 0.02 per cent of total land area. Moreover, Ghana has one
of the lowest fertiliser use rates in sub-Saharan Africa, which is a factor in the low fertility of agricultural soils.
16
© AFD / Macroeconomics and Development / June 2014
2 / Growth regime: an economy in search of diversification
and growth drivers other than commodity production
finance as well as the lack of infrastructure in the energy,
transport and telecommunications sectors.
2.3. Challenges for the Ghanaian growth
model: lifting structural constraints
to ensure sustainable and inclusive
growth in the long run
The above analysis shows that the structural transformation
of Ghana’s economy is underway, but at a sluggish pace, which
raises the questions of why this is so despite strong growth.
Several fundamental factors are holding back Ghana’s
economic transformation and, in the medium term,
jeopardising the country’s economic performance [20].
2.3.1. Weaker investment may weigh on
infrastructure development
Investment plays a major role in economic growth. According
to the Commission on Growth and Development (2008),
countries with a high and sustainable growth rate devote on
average over 25 per cent of their GDP to investment and
source this mainly through domestic savings.
Compared internationally, Ghana exhibits relatively modest
investment rates. Over the 2005–2012 period, the investment
rate stood at 20 per cent of GDP against an average 27 per cent
for lower-middle-income countries (Figure 10). What is more,
Ghana’s investment rate fluctuates considerably depending
on macroeconomic and political developments in the country
(Figure 11). From 1984, the investment rate gradually increased,
notably thanks to the stepping-up of public investment, which
was partly funded by substantive financial aid flows. The
turnaround in this overall trend came in 2006. Generally, the
weak investment dynamic is due partly to the decline of public
investment over recent years and partly to the shortfall in
private investment, which is still penalised by the crowding-out
effect caused by rising public deficits. Domestic savings are
diverted to financing public deficits and companies are thus
forced to self-finance their investments, leading to a reduced
level of private investment. Overall, the weak domestic savings
rate (4.6% of GDP over the 2005–2012 period) constrains the
investment dynamic (Figure 12).
Weaker levels of investment are likely to adversely impact
infrastructure development projects. Table 9 shows that while
the availability of infrastructure is relatively comparable to
Figure 10
Figure 11
Comparison of different countries’ investment rates
(2005–2012 average; % of GDP)
Composition of investment in Ghana
(% of GDP)
Private investment
40
Public investment
35
35
30
30
25
25
20
20
15
15
10
10
5
5
Source: World Bank (WDI); author’s calculations.
2012
2008
2004
2000
1996
1992
1988
0
1984
Vietnam
India
Morocco
Senegal
Ghana
Burkina Faso
Kenya
ASS
LMICs
0
Source: World Bank (WDI); author’s calculations.
[20] Some other important factors not mentioned in this section are: land and labour market regulations, and the lack of regional infrastructure.
/ Ghana: The challenges of growth faced with increasing imbalances /
17
Figure
that in other African countries, it nonetheless falls far short the
more advanced developing countries. In particular, the quality of
energy supply is a major constraint as evidenced by the
frequency of power outages. This impedes the development of
the manufacturing and agro-industrial sectors. The financial
situation of the state-owned enterprises responsible for
generating , transmitting and distributing electricity cannot
ensure the necessary investment expenses and maintenance.[21]
Yet, to meet growing demand, power generation needs to
increase by around 200 MW a year over the next ten years.
12
Evolution of the savings and investment rates
in Ghana (% of GDP)
Private investment
Public investment
35
30
25
20
15
2.3.2. Credit facilities do not support private sector
growth
10
5
Limited access to credit continues to pose a major obstacle to
the development of the private sector. Certainly, credit to the
private sector, which stood at 14.5 per cent of GDP over the
2006–2011 period, is particularly low compared to
international and regional levels (Figure 13). This situation stems
from the large and persistent spread between interest rates on
lending and deposits (see Section 5.1 ). On the one hand, the
real return on savings is negative, whilst on the other hand
real lending rates are very high, which strongly constrains
private investment. The Government’s increasing recourse to
domestic borrowing in recent years has caused a rise in
Treasury bill and interbank rates (Figure 14), which is likely to
create the growing risk of crowding out private investment.
0
2010
2006
2003
2000
1997
1993
1990
1987
1984
1980
-5
Source: World Bank (WDI); author’s calculations.
Table
9
Indicators of the quality and quantity of infrastructure stock
Ghana
Kenya
Morocco
Senegal
LMICs
14
28
51
17.5
16.3
Access to electricity (% of population))
60.5
16.1
97
42
67.4
Electricity consumption (KwH/capita)
299
154.5
788
187
695
Average number of power outages (per month)
9.6
6.9
2.5
11.75
N/Av
Average duration of power outages (in hours)
12.6
4.4
1.6
6.2
N/Av
Road density (km/100 km2)
46
10.6
13
7.5
42.7
Roads, paved (% of total roads)
12.6
14.3
70
35.5
47.3
Internet subscribers (per 100 people)
Source: World Bank (WDI, Enterprise surveys); author’s calculations.
[21] In Ghana, the electricity sector is split into power generation (Volta River Authority), transmission (GRIDCo) and distribution (NEDCo for the North and ECG for
the South of the country).
18
© AFD / Macroeconomics and Development / June 2014
2 / Growth regime: an economy in search of diversification
and growth drivers other than commodity production
Figure
Figure 14
13
Credit to the private sector (% of GDP)
Average 2006–2011
Interbank rate and Treasury bill rate (%)
Interbank rate
Treasury bill rate
25
120
100
20
80
15
60
10
40
5
20
2013
2012
2012
2011
2011
2010
2010
2009
2009
2008
Vietnam
Morocco
India
Kenya
Senegal
Burkina Faso
Côte d’Ivoire
Ghana
2008
0
0
Source: Bank of Ghana; author’s calculations.
Source: World Bank (WDI); author’s calculations.
/ Ghana: The challenges of growth faced with increasing imbalances /
19
3 / Public finances and government solvency are
deteriorating
The situation of Ghana’s public finances constitutes one of the
country’s main fragilities. The public debt is growing very
swiftly, mainly in the form of non-concessional loans.
Furthermore, given the recurrent and increasingly large budget
deficits, there are legitimate grounds to question the country’s
capacity to return to deficit levels that are compatible with
easing the public debt burden.
Figure 15
Evolution and decomposition of gross public debt
(% of GDP)
Domestic public debt
External public debt
140
120
3.1. The dynamics driving the
accumulation of new debt...
at a higher cost
100
80
60
3.1.1. Evolution of the public debt stock
40
The dynamics driving this accumulation of new debt is visible
in the simultaneous increase of external and domestic public
debt, with the latter however registering a greater increase
(Figure 15). Thus, in 2012, domestic debt represented 56.5 per
cent of Ghana’s public debt. This trend towards domestic
borrowing is explained by the authorities’ determination to
reduce exposure to foreign exchange risk and foster the
development of the domestic market for public debt
securities.
20
2012
2011
2009
2010
2008
2006
2007
2005
2004
2003
2002
2001
0
2000
During the 2000s, Ghana benefitted from extensive debt
cancellation. After reaching the completion point under the
Enhanced HIPC initiative in July 2004, the country was granted
substantial external debt relief in 2006. The public debt ratio
then fell to 42 per cent of GDP in 2006 compared with 182
per cent in 2000 (proportionally to the old GDP series), which
corresponds to a decrease from 127.3 per cent to 26.2 per
cent of GDP proportionally to the new revised GDP series
(Figure 15). In fact, after the revision of GDP in 2010, debt
ratios automatically became more favourable. However, the
country has quite rapidly re-accumulated debt. The debt stock
at nominal value increased by USD15 billion after 2006 and
more than doubled between 2009 and 2012 (Figure 16). The
public debt ratio thus almost doubled in the space of six years,
rising from 26.2 per cent of GDP in 2006 to 50.2 per cent of
GDP in 2012. When payment arrears are factored in, [22] the
debt ratio in 2012 amounts to 51.7 per cent of GDP.
Source: MOFEP, IMF; author’s calculations.
.
Figure 16
Evolution of total public debt
(billions of USD)
25
20
15
10
5
0
1990
1994
1998
2002
2006
2010
Source: MOFEP; author’s calculations.
[22] On this basis of available data, arrears are owed to various creditor countries. Moreover, many creditors complain about the irregularity of Ghana’s repayments.
20
© AFD / Macroeconomics and Development / June 2014
Figure 17
Evolution of the composition of external debt stock
by creditor category (% of total)
Non-concessional debt
Multilateral institutions
External public debt, which now represents 43.5 per cent of
Ghana’s total public debt, has trended upwards since 2006.
Moreover, the multilateral creditors’ share of external
government financing has declined in favour of financing via
international capital markets and commercial creditors, which
now account for 19 per cent of external debt stock (Figure 17).
Bilateral institutions
100
90
80
70
60
50
40
30
20
10
2012
2011
2009
2010
2007
2008
2006
2005
2004
2003
2002
2001
2000
0
Source: MOFEP; author’s calculations.
Figure 18
Evolution of the composition of domestic debt stock
by creditor category (% of total)
Banking system
Non-bank sector
Non-residents
100
90
80
70
60
50
40
30
20
Ghana was one of the first African countries to issue an
international sovereign bond (Eurobond), worth USD750
million in 2007. It recently renewed the operation in July 2013
with a USD1 billion Eurobond issue. [23] At this point, the risks
weighing on external debt are moderate insofar as this stock
is mostly characterised by long maturities and fixed interest
rates. Domestic public debt is in the main held by Ghana’s
banking sector (Figure 18). Non-banking institutions, notably
insurance companies and pension funds (including the SSNIT,
the social security body) hold 25 per cent of domestic debt.
The main development is that non-residents now hold an
increasing share of domestic debt – currently 27 per cent of
this stock compared to 2 per cent in 2006. Certainly domestic
borrowing has the advantage of mitigating exposure to foreign
exchange risk. Domestic debt, however, has much shorter
maturities than external debt: 32 per cent of outstanding
domestic debt has a maturity of less than one year and 53 per
cent less than five years. Furthermore, domestic interest rates
are much higher than those for foreign currency debt. [24] As
a result, the interest cost burden of domestic debt is much
higher than that for external debt. The strategy of borrowing
from local financial markets carries three major risks. Firstly, it
crowds out local private financing. Secondly, there are rollover
risks since the Government’s domestic debt is short-dated
and will therefore need refinancing at rates that may well be
higher in future years. This is why USD360 million of the
proceeds from the Eurobond issue are to be used to refinance
a part of domestic debt that has reached its maturity date.
Finally, the fact that one-third of Ghana’s domestic debt
portfolio is held by foreign investors exposes the country to
the risk of sudden capital outflow.
10
2012
2011
2009
2010
2007
2008
2006
2005
2004
2003
2002
2001
2000
0
Source: MOFEP; author’s calculations.
[23] The 2007 Eurobond issue had a 10-year maturity and an 8.5% yield at issue. The 2013 Eurobond also has a 10-year maturity and an 8% yield.
[24] In 2013, the Government paid on average around 4.3% on a 10-year dollar-denominated loan. However, when it borrows in national currency, the 3-month Treasury
bill rate is at least 23%. Taking into account the inflation differential, the gap between the cost of borrowing in dollars and in national currency is 10.6 percentage
points (5.4 percentage points, given the currency depreciation).
/ Ghana: The challenges of growth faced with increasing imbalances /
21
One important consequence of the changes in the
Government’s borrowing practices over the last few years is
that the debt-servicing burden has rapidly become heavier.
This aspect should be monitored for two vital reasons. First,
the debt service-to-revenue ratio has been increasing very
swiftly over the last four years (+12.7 percentage points since
2008) (Table 10). Secondly, its level is such that it could cause
a significant increase in rollover needs in the short and medium
term.
Table
10 Evolution of debt service
(% of Government revenue
excluding grants)
Total debt
service to
revenue (%)
2008
2009
2010
2011
2012 2013e*
16.8
20.1
27.6
28.4
29.5
32.6
* estimations
Source: IMF (Article IV).
3.1.2. Assessment of public debt sustainability
The joint IMF and World Bank analysis of the Debt
Sustainability Framework (DSF) was updated in May 2013 so
as to integrate the impact on public debt sustainability of (i)
oil output, (ii) foreign direct investment (FDI) flows linked to
growth of the oil sector and (iii) the mounting reliance on nonconcessional borrowing. According to the 2013 DSF analysis,
the risk of debt distress has heightened since 2011 but remains
modest. Using the baseline scenario assumptions, the
projections conclude that the public debt ratio would peak at
56 per cent of GDP in 2023 and converge in the long run
towards 52 per cent of GDP, that is, an additional 10 percentage
points of GDP compared to the projections of the debt
sustainability analysis carried out in 2011. Moreover, debt
service would reach 40 per cent of government revenue over
the long term.
The results of stress tests show that there is a need for vigilance
regarding the evolution of those elements that could impact
the debt profile. More specifically, the results of the projections
highlight that Ghana’s public debt remains vulnerable to
macroeconomic shocks that would cause a sharp slowdown
of growth. Thus, a 30 per cent depreciation of the cedi would
create a high risk of debt distress. This same risk would also
increase if the use of non-concessional loans was stepped
up. [26]
The 2013 Debt Sustainability Analysis underlines that, at this
stage, the risk of debt distress remains moderate, provided
that a fiscal consolidation policy is implemented. Certainly,
given that the debt ratio has increased by 26 percentage points
of GDP since 2006, the projections of the debt sustainability
analysis for the five coming years thus envision very different
policies and results from those seen over the last five years.
In particular, ensuring a sustainable dynamic for public debt is
contingent on the successful implementation of a significant
fiscal adjustment that could bring the fiscal deficit down to 6
per cent of GDP by 2015. However, this point is problematic
given the Ghana’s track record in fiscal policy. Moreover, the
substantial depreciation of the cedi (25% since the beginning
of 2013) heightens the risk of debt distress. According to the
most recent information available, the public debt burden has
significantly increased in 2013.
3.2. Chronic and mounting budget deficits
From a historical perspective, the budget deficits are recurrent
and tend to be accentuated as elections approach (Figure 19).
As a young democracy, Ghana is subject to very strong political
budget cycles. [ 27] More specifically, pre-electoral periods
typically involve a significant increase in recurrent government
expenditure (public sector wage bill and subsidies), which
creates a substantial rise in the budget deficit. In 2008, the
budget deficit widened to reach 8 per cent of GDP. In 2012,
the phenomenon was accentuated with a deficit of 11.8 per
cent of GDP compared to the initially targeted 4.8 per cent
of GDP, indicating a lack of control and budgetary credibility.
This series of successive slippages reveals the inability of
successive governments to conduct a budgetary policy that is
disconnected from electoral stakes. In total, the budget deficit
has averaged 6.8 per cent of GDP since 2006, compared to 4.2
per cent during the first half of the 2000s. Furthermore, the
Government continues to accumulate domestic arrears to
state-owned enterprises and the private sector, bringing the
stock of arrears to 3 per cent of GDP.
[25] A moderate risk of debt distress means that this could turn into a high risk if certain adverse scenarios were to happen.
[26] It should be noted that the DSA does not take into account the 2013 Eurobond issue.
[27] According to Brender and Drazen (2005), political budget cycles are specific to new democracies, in which voters have little experience in electoral politics or lack
the necessary information to evaluate fiscal manipulation.
22
© AFD / Macroeconomics and Development / June 2014
3 / Public finances and government solvency are deteriorating
Although the level and composition of government revenue
lessen its vulnerability to economic shocks, the structure of
government expenditure constitutes the foremost constraint
when it comes to managing the public deficit. Total government
revenue is in fact at a satisfactory level (more than 19 per cent
of GDP in 2012) and is barely dependent on external trade and
grants (Table 11). Thanks to a series of reforms, particularly in
the area of tax administration, Ghana seems to have successfully
completed its fiscal transition, with a shift from taxation based
on customs duties to one mainly based on domestic taxes. The
tax rate thus seems to have been on a positive trend since 2010
mainly due to the increase in domestic taxation. At this stage, oil
revenue accounts for only 1.2 per cent of GDP and should not
exceed 2 per cent of GDP in the medium term. This tax structure
makes it possible to limit large variations in government revenues
linked to the direct effect of international economic conditions
on the country’s external sector. In the short run, Ghana thus
seems able to manage the fiscal consequences of economic
shocks without excessive impact on the sustainability of its public
debt.
Figure 19
Evolution of the budget balance, public
expenditure and general Government revenue
(% of GDP)
Budget balance
Government revenue
Government expenditure
35
30
25
20
15
10
5
0
-5
-10
-15
1980 1984 1988 1992 1996 2000 2004 2008 2012
Note: the black columns denote election years.
Source: IMF (WEO); author’s calculations.
The level and composition of public expenditure constitutes
a much greater constraint than revenue in public finance
management. In fact, public expenditure rose sharply over the
last decade to reach 25 per cent of GDP in 2012 (excluding
arrears). Moreover, the composition of expenditure is
suboptimal insofar as the increase in spending is fuelled by a
rise in recurrent expenditure to the detriment of investment
expenditure. This trend is all the more problematic as most of
the proceeds from the 2007 Eurobond issue were intended
to finance spending on infrastructure projects. Yet, public
investment has not been ramped up accordingly. Crossregionally, the country’s investment expenditure still compares
satisfactorily. However, there is a risk that it could be used as
an adjustment variable, which would impede infrastructure
development and penalise medium-term growth.
The rise in recurrent expenditure over recent years results
largely from the higher wage bill. This spending rose by 47 per
cent in nominal value in 2012 due to (i) an 18 per cent pay rise
following the adoption of a new public sector salary grid (single
spine salary scheme), (ii) new hires in the civil service and (iii)
the payment of deferred wages. Transfers and subsidies have
risen, mainly spurred by increased fuel and electricity subsidies.
Lastly, interest on domestic debt has increased steeply in
connection with the rise in short-term debt interest rates.
In 2013, the Government planned to reduce the budget deficit
to 9 per cent of GDP in view of reaching 6 per cent of GDP
in 2015. To reduce public expenditure, it introduced the Ghana
Integrated Financial Management Information System
(GIFMIS) designed to better incorporate all budgetary items,
provide consolidated cash flow management, monitor
commitments more closely and manage public sector wages.
As a result, the Government expects to have more effective
control over spending and budget management. Moreover,
fuel subsidies were totally withdrawn between June and
September 2013. The Government has also announced an
increase in water and electricity tariffs (78% for electricity and
52% for water). However, these pricing levels are still far from
what is needed to ensure production cost recovery. [28] Finally,
the repair of the West Africa gas pipeline [ 29] will help to
facilitate the adjustment of utility tariffs. As for budget
revenue, the Government notably plans to implement new
[28] Tariffs had not been readjusted since 1 June 2010. The electricity and water companies had requested an increase of 166% and 112% respectively. They also stated
that they would have been bankrupted without this price adjustment.
[29] On 26 August 2012, the anchor of a Togolese ship damaged a section of the West Africa gas pipeline, which transports gas from Nigeria to Benin, Togo and Ghana.
According to Ghana’s Regional Volta Authority, which is responsible for electricity distribution, the accident caused daily shortfalls of 200 to 250 MW, putting additional
pressure on the already high demand and impacting the country’s productivity during this period, especially in manufacturing. The incident was resolved in August
2013, one year after the pipeline-related crisis.
/ Ghana: The challenges of growth faced with increasing imbalances /
23
Table
11
Central Government budgetary operations (% of GDP)
2007
2008
2009
2010
2011
2012
2013f*
17.5
16
16.5
16.9
19.3
19.3
20.5
-
-
-
-
1.1
1.3
1.2
Non-oil revenue
13.8
13.3
13.5
14.5
16.1
16.4
17.9
Tax revenues
13.3
12.9
12.2
13.3
15.1
15.9
17.4
Non-tax revenue
0.5
0.4
1.3
1.2
1
0.5
0.5
3.7
2.7
3
2.4
2
1.6
1.4
22.7
24
20.5
22.8
20.1
25.1
27.8
Recurrent expenditure
13.9
14.8
13.4
15.2
14
18.3
19.6
Wages and salaries
6.1
6.6
6.8
6.9
7.6
9.1
8.3
Goods and services
2.4
2.1
1.7
2.1
1.2
1.8
1.9
Transfers and subsidies
2.6
2.9
1.6
2
1.9
2.7
5
Reserve Fund
0.8
0.9
0.5
1
0.6
1.5
0.8
Interest on debt
1.9
2.3
2.8
3.1
2.7
3.4
3.6
domestic
1.4
1.6
2.1
2.5
2.2
2.6
2.9
foreign
0.5
0.7
0.7
0.7
0.5
0.8
0.7
8.7
9.1
7.1
7.6
6.2
6.8
8.2
Balance (commitment basis) (incl. grants)
-5.2
-8
-4.1
-6
-1
-6.1
-7.6
Net change in arrears
-0.3
-0.5
-1.7
-1.2
-2.5
-2.4
-2.1
VAT refunds
-0.1
-0.1
-0.1
-0.1
-0.1
-0.2
-0.4
-
-
-
-
-0.6
-2.6
0
-5.6
-8.5
-5.8
-7.2
-4.1
-11.8
-10
Total revenue and grants
Oil revenue
Grants
Total expenditure
Capital expenditure
Deferred wage payments
Overall balance (incl. errors and omisions)
* forecasts
Source: IMF, MOFEP; author’s calculations.
taxes. An additional tax on profits in the financial services and
mining sectors is planned, as well as a tax on certain imports,
and excise duties will be increased. However, the level of the
budget deficit has been revised for 2013 to 10.8 per cent of
GDP due to a drop in tax receipts and a higher wage bill than
initially forecast. The measures taken to improve the situation
24
© AFD / Macroeconomics and Development / June 2014
of public finances have so far been unable to reverse the trend
to any significant extent. On the basis of this diagnosis, it will
probably be difficult for the Government to reduce the
budget deficit to 8.5 per cent of GDP in 2014 as provided for
in the Finance Act.
3 / Public finances and government solvency are deteriorating
4 / A shallow banking sector still exposed
to sovereign risk
Despite the progress recorded over the 2008–2012 period,
Ghana’s financial sector remains shallow and access to financial
services is limited. The ratio of money supply to GDP, which
measures the degree of financial deepening in the broad sense,
stands at 31 per cent compared to an average 48 per cent in
sub-Saharan Africa (Figure 20). Moreover, there is a limited
use of banking services, with 30 per cent of the population
holding a bank account. [30]
Figure 20
Evolution of money supply in Ghana and
sub-Saharan Africa (% of GDP)
Ghana
Sub-Saharan Africa
60
50
40
30
20
10
2011
2009
2006
2003
2000
1998
1995
1992
1989
1986
1983
1980
0
Source: World Bank (WDI); author’s calculations.
4.1. Although on the rise, private sector
credit remains limited
Ghana’s financial system is dominated by the banking sector,
with commercial banks holding more than 75 per cent of the
financial sector’s assets. Over the last ten years, the banking
sector has developed considerably and become more
competitive. While 17 banks shared the market in 2002, 26
banks are now operating including 15 foreign banks. The latter
dominate the market and control 55 per cent of banking assets.
The level of concentration has eased considerably, given that
the five leading banks held 66 per cent of assets in 2000, 55
per cent end-2007 and 45 per cent end-2012. Historically,
before it was privatised, Ghana’s banking sector was
dominated by public banks. However, these (four of them in
2012) [31] still represent over 20 per cent of total assets of the
industry (against 40% in 2005), as well as 20 per cent of total
credit and 25 per cent of deposits.
Since the 1990s, Ghana’s financial sector has undergone major
reform, notably under the Financial Sector Adjustment
Programme (FINSAP I et II) and the Financial Sector Strategic
Plan (FINSSP I). In 1995, the first wave of privatisations was
launched. An easing of monetary policy begun in 1997 helped
to accelerate lending to the private sector. From 2001, however,
the banks deemed it less risky and more profitable to cover
the hefty financing needs of the Government and stateowned enterprises, to the detriment of private sector
financing (Figure 21). It was not until 2005 that robust growth
in private sector credit was seen. The injection of capital into
the banks so as to comply with the minimum capital
requirements, heightened competition in the banking sector
and the expansion of branch networks coupled with the
economy’s rising demand for finance helped to drive this
dynamic. However, the international financial crisis curtailed
this trend, creating a disconnect with the private sector credit
cycle (Figure 22). The credit cycle picked up again in 2009.
The prolonged easing of inflationary pressures together with
an improved business environment encouraged the Central
Bank to lower its lending rate from 18 per cent in January 2010
to 12.5 per cent in December 2011. These reductions led to
reductions in money market rates and bank rates, fostering a
revival of credit to the private sector. Private sector credit was
also boosted by the adoption of the law on the registration of
loans in 2009 and the setting up in 2010 of a credit agency with
a system of guarantees.
Financial intermediation remains limited and insufficient with
respect to the country’s potential needs. Certainly the private
[30] The rate of use of the banking system is higher than the average for Africa, which is particularly low (11% of the population).
[31] Public banks are as follows: Ghana Commercial Bank, Agricultural Development Bank, National Investment Bank and Merchant Bank.
/ Ghana: The challenges of growth faced with increasing imbalances /
25
sector credit ratio has been constantly on the rise since the
early 1990s as it now stands at 15 per cent of GDP, against 5
per cent in 1990 (Figure 21). This rate is nonetheless relatively
low compared to the rates of other African countries (cf.
Figure 13) [ 32] and the country’s potential needs. Moreover,
bank lending is highly concentrated and above all geared to
large companies. In 2012, loans to the five largest borrowers
accounted for 55 per cent of all lending. In terms of sectoral
distribution, the services sector and the international and
domestic trade sectors account for more than half of the loans
(Table 12). As for mortgage and consumer loans, these are still
in their infancy.
Figure 21
Total domestic credit and private sector credit
(% of GDP)
Private sector credit
Total bank credit
45
40
35
30
25
20
15
10
5
2010
2005
2000
1995
1990
1985
0
1980
Several factors contribute to this low level of financial
intermediation. On the one hand, the Government’s massive
recourse to borrowing on the domestic market, mainly to
finance its deficit,[33] crowds out private sector credit. Certainly,
the banks prefer to not to take the risk of lending to private
companies when they can lend to the Government a high
interest rates. On the other hand, the cost of credit is
particularly high as shown by the large spread between the
banks lending and deposit rates (Figure 24). The marked
competitiveness of the Ghanaian banking sector has not gone
hand in hand with a narrowing of the interest rate spread due
to increasing operating costs (bankers’ pay rises, high
intermediation charges). According to the IMF, overheads still
amounted to 7.3 per cent of total assets in 2011, compared to
an average 4.4 per cent in sub-Saharan African countries.
Source: World Bank (WDI); author’s calculations.
Figure 22
Volume growth of private sector credit (y-y, %)
50
30
20
10
0
Source: IMF (IFS); author’s calculations.
[32] By way of comparison, the lending rate to the private sector is 18.3% of GDP in Côte d’Ivoire, 20.8% in Nigeria, 29.6% in Senegal and 36.7% in Kenya.
[33] In 2012, the Government financed 80% of its deficit through borrowing on the domestic market.
26
© AFD / Macroeconomics and Development / June 2014
2012
2011
2010
2009
2008
2007
2006
2005
2004
-10
2003
According to financial soundness indicators, the situation of
Ghana’s banking sector as a whole has improved but still
displays significant vulnerabilities. Moreover, the situation
varies considerably depending on the individual bank, and the
financial soundness of two public banks remains a matter of
concern.
40
2002
4.2. Financial soundness indicators have
improved, but the rate of nonperforming loans remains high
4 / A shallow banking sector still exposed to sovereign risk
Table
Figure 24
Sectoral distribution of credit
(% of total credit)
12
The lending-deposit rate spread (%)
2008
2012
Lending rate
Deposit rate
35
Agriculture
4.3
4.8
Mining
2.9
1.1
Manufacturing
12
11
Construction
6.8
4.8
15
Electricity
4
2.1
10
International trade
6.5
16.4
5
Domestic trade
26.1
16.9
0
Transport
2.9
7.9
Services
23.9
26.3
Other
10.6
8.5
30
25
2012
2011
2010
2009
2008
2007
2006
2005
2004
20
Source: Bank of Ghana; author’s calculations.
Sources: Bank of Ghana; author’s calculations.
Overall, Ghanaian banks appear to be well capitalised on
average, with a total regulatory capital to risk-weighted assets
ratio of 15 per cent, which is much higher than the regulatory
level of 10 per cent (Table 13). Improvements in this area are
due to raised minimum capital requirements, which were
increased to GHS60 million (compared to GHS8 million before
2007) by the end of 2009 for foreign banks and by the end
of 2012 for banks majority-owned by Ghanaian shareholders.
Ghana’s banks enjoy high returns as shown by a ROA
bordering on 5 per cent and a ROE of nearly 35 per cent. This
robust profitability is mainly on account of the large banks, as
they are in a position to set prices on certain markets.
Figure 23
Composition of deposit banks’ credit volume
by creditor category (% of total credit)[34]
Private sector
Public sector
50
45
40
35
30
25
20
15
10
5
Source: Bank of Ghana; author’s calculations.
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
0
The quality of bank assets deteriorated in 2009, chiefly due
to the Government’s late payments to its suppliers and the
banks’ inadequate management of risk during the years of
credit expansion between 2004 and 2008. Despite the positive
trends operative since 2010, a careful eye needs to be kept on
asset quality. Certainly, although the rate of non-performing
loans (NPLs) is down from 17.6 per cent in 2010 to 13.2 per cent
in 2012, it nonetheless remains high. In addition, this reduction
partly reflects a rebound in the growth of credit since 2009
(Figure 22). [35] The Government also continues to accumulate
payment arrears, which impacts the financial health of
[34] The other sectors are financial institutions and non-residents.
[35] The growth of credit can “statistically” hide an increase in non-performing loans, particularly if these come to light tardily due to loan maturities.
/ Ghana: The challenges of growth faced with increasing imbalances /
27
The financial soundness indicators for public banks indicate a
persistently worrisome situation (Table 14). One of the banks
is insufficiently capitalised, while two banks show a very high
rate of non-performing loans (28.4% and 23.3% respectively)
and provisioning for these loans is poor.
enterprises and thus in turn that of the banking sector. The
construction and energy sectors seem particularly exposed.
Finally, the high real interest rates, which rose from 1 per cent
at the beginning of 2012 to 8.5 per cent during 2013, may
create risks of a further increase in NPLs. [36] The positive side
is the improved provision to NPLs, which has gradually been
strengthened and now stands at a satisfactory level.
Table
13 Financial soundness indicators for Ghana’s banking sector (%)
2007
2008
2009
2010
2011
2012 (Dec.)
Regulatory capital to risk-weighted assets
15.7
13.8
18.2
19.1
17.4
18.6
Regulatory Tier I capital to risk-weighted assets
13.6
12.8
17
18.6
15.5
16.4
Return on assets (ROA)
3.3
3.7
2.8
3.8
3.9
4.8
Return on equity (ROE)
35.8
30.1
23.6
28.6
27.2
34.6
Credit to total assets
50.3
52.3
43.8
40.1
37.8
42.9
Non-performing loans to total gross loans
6.9
7.7
16.2
17.6
14.1
13.2
Bank provisions to non-performing loans
-
-
68.7
70.6
76.2
77.9
Liquid assets to total assets
40.7
39.4
47.2
51.3
54.9
51
Liquid assets to short-term liabilities
54.7
52.4
62
66.6
69.6
64.8
22.3
28.4
32.7
25.4
27.4
28.9
8.1
7
6.2
4.7
3.4
3.5
Capital adequacy
Profitability
Asset quality
Liquidity
Exposure to foreign exchange risk
Share of foreign currency deposits in total deposits
Share of foreign liabilities in total liabilities
Source: IMF (GFSR).
[36] The interest rate affects the amount of bad loans in the case of variable-rate loans. Fofack (2005) states that the real interest rate is an important determinant of
bad loans in sub-Saharan African countries.
28
© AFD / Macroeconomics and Development / June 2014
4 / A shallow banking sector still exposed to sovereign risk
Table
14 Financial soundness indicators of public banks in 2012 (%)
Ghana Commercial
Bank
Agricultural Development
Bank
National Investment
Bank
Merchant
Bank
Assets
10.9
5.5
3.2
3.1
Credit
7.1
6.7
3.4
3
17.1
11
19.5
7.7
Return on assets (ROA)
7.3
2.6
-1.8
-2.1
Return on equity (ROE)
64.1
17.3
-18.2
-25.3
Non-performing loans/total loans
28.4
9.7
23.3
3.3
Provisions/non-performing loans
50
60.4
29.6
35
47.9
25.6
27.6
27.3
Market share
Capital adequacy
Capital adequacy ratio
Profitability
Asset quality
Liquidity
Liquid assets/total assets
Source: IMF (2013).
6 000
5 000
4 000
3 000
2 000
1 000
2012
2011
2010
2009
2008
2007
0
2006
According to the IMF’s assessments of the financial sector
conducted in 2011 and 2013, the supervision of the banking
sector has made notable headway over the last two years, but
the progress achieved on the regulatory front is much more
nuanced.
Central Bank credit to Government
(millions of GHS)
2005
The Bank of Ghana is responsible for the regulatory
framework and supervision of the banking sector. Its
supervisory powers for this sector have been strengthened,
particularly following the adoption of the 2004 Banking Act.
The independence and credibility of the Central Bank
nonetheless raises questions. On the one hand, the Bank’s
financing of the fiscal deficit surges during pre-election
periods (Figure 25) and in 2012 overran the statutory limits
(IMF, 2013). On the other hand, the Central bank holds stakes
in four of the entities it supervises, notably two banks.
Figure 25
2004
4.3. Supervision of the banking sector is
being enhanced, but the regulatory
framework is still incomplete
Source: IMF (IFS); author’s calculations.
/ Ghana: The challenges of growth faced with increasing imbalances /
29
4.3.1. Progress in banking supervision...
The Central Bank has significantly improved its offsite
monitoring system and its risk assessment process. The latter
now incorporates diverse indicators (capital adequacy, liquidity,
management and exposure to foreign exchange risk, etc.)
thanks to regularly submitted financial data. This information
makes it possible to assess each bank’s level of risk and guides
onsite controls (inspections carried out each year in each
financial institution). In this regard, injunctions and/or
recommendations are issued in line with the seriousness of the
breaches observed. Nonetheless, the Central Bank seems to
show a degree of forbearance toward lending institutions that
fail to comply with some of the prudential limits as it simply
issues warnings rather than impose effective sanctions (IMF,
2013).
4.3.2. ...which is of limited scope due to shortcomings
in the regulatory framework
Ghana has not adopted the Basel II standard. Initially planned
for 2012, the implementation of this mechanism is not yet
effective. Compliance with Basel II requirements would be a
significant stride forward as it would provide more in-depth
risk management in line with the level of capital.
In this context, the capacity of the Central Bank to implement
prudential regulation is limited by the gaps and inconsistencies
in the body of texts governing banking legislation.
30
© AFD / Macroeconomics and Development / June 2014
More specifically, the following aspects of regulation would
need to be changed or reinforced (IMF, 2013):
• The powers of the Central Bank need to be
strengthened so as to enable it to draft regulations and
impose administrative sanctions.
• Minimum capital requirements (increased to GHS60
million, up from GHS8 million before 2007) are still
insufficient to ride out an economic slowdown.
• Some aspects of the method for calculating the capital
adequacy ratio (CAR) are questionable. In particular,
the 50 per cent risk-weighting of export finance is too
low. Moreover, the Central Bank continues to calculate
the CAR on the basis of nominal and not paid up capital.
• Waivers are still too frequent, above all concerning
single obligor limits when state-owned enterprises
operating in the mining or oil sector are involved.
• The regulatory framework provides for no overall
action plan in the event of crisis. There is no deposit
insurance scheme or plan to halt the actions of the
different operators should a banking crisis erupt.
• Cross-border supervision needs to be deepened.
Foreign banks (mainly European, South African and
Nigerian) dominate the Ghanaian banking sector. On
this count, the Bank of Ghana could usefully collaborate
more with its regional counterparts to improve the
supervision of foreign banks.
5 / Deteriorating external accounts and rising
liquidity pressures
The widening current account deficit is a major source of
vulnerability for Ghana’s economy. The fact that the export
base is highly concentrated and that import values have risen
steeply reveals the fragility of the Ghanaian model in terms of
global trade integration. The widening current account deficit
accentuates the need for external financing of the economy
and leads to deteriorating external liquidity ratios.
Figure 27
Components of the current account balance
(% of GDP)
Current account balance
Services balance
Current transfers balance
Trade balance
Income balance
15
5.1. Despite the emerging oil sector, the
highly concentrated export base
remains a major source of vulnerability
for the economy
For many years, Ghana has run a structural current account
deficit, which has widened significantly since 2004, rising from
4.7 per cent of GDP to 12.2 per cent in 2012 (Figure 26). This
trend is attributable primarily to the structural trade balance
deficit together with the rising deficit on the services account
and income account due to payment of dividends and profits
to foreign investors (Figure 27). Finally, the current transfers
balance is positive but trending downwards mainly due to the
decline in remittances. According to IMF estimates, the current
Figure 26
10
5
0
-5
-10
-15
-20
2005 2006 2007 2008 2009 2010 2011 2012
Source: IMF (IFS); author’s calculations.
account deficit widened to 13 per cent of GDP in 2013, as a
result of the drop in gold and cocoa prices and persistent
budgetary pressures.
The trade balance deficit is the main factor behind Ghana’s
sizeable current account deficit. Like many developing
countries, Ghana’s external trade is structurally oriented to
exporting commodities and importing capital goods and
energy products. However, the country’s exports seem poorly
diversified. On the one hand, they are mainly for the European
market. On the other hand, 85 per cent of its exports involve
primary commodities (Figure 28). External trade thus remains
particularly exposed to potentially steep and unpredictable
fluctuations in world prices for its export goods. Cocoa and
gold prices are relatively volatile and since the end of 2011 these
have experienced a downtrend (Figure 29). [37]
Current account balance (% of GDP)
2
0
-2
-4
-6
-8
-10
-12
2012
2008
2004
2000
1996
1992
1988
1984
1980
-14
Source: IMF (WEO).
[37] Cocoa prices could be set to rise as demand is increasing whereas production is stagnating.
/ Ghana: The challenges of growth faced with increasing imbalances /
31
for nearly 20 per cent of total imports in 2012. [38] On balance,
it can be seen that the major share of imports comprised
intermediate and capital goods to keep abreast of Ghana’s
accelerated pace of economic growth during the second half
of the 2000s.
Figure 28
Exports between 1996 and 2012
(millions of USD)
Other
Oil
Timber
Gold
Cocoa
16
Figure 30
14
12
Evolution of trade openness, exports and imports
(% of GDP)
10
8
Exports
Imports
6
4
120
2
0
Trade openness
140
100
1996
2002
1999
2005
2008
2011
80
Source: Bank of Ghana; author’s calculations.
60
40
Figure 29
20
Gold and cocoa price trends
(2006 = 100)
Cocoa
2010
2005
2000
1995
1990
1985
1980
0
Gold
400
Note: the steep fall of ratios in 2006 is due to the revision of GDP.
Source: World Bank (WDI); author’s calculations.
300
5.2. The need for external financing is
fuelled by the wide current account
deficit
200
100
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
0
Source: Reuters; author’s calculations.
The rise in imports, which accompanied the increase in exports
(Figure 30), is mostly fuelled by capital goods imports. The
latter’s share in total imports rose over the 2000s to reach
almost 60 per cent. Petroleum product imports are the other
major component of the country’s imports and accounted
The need for external financing of Ghana’s economy is
considerable and has been trending upwards since 2009 on
the back of the widening current account deficit. As
mentioned above, the sizeable current account deficit stems
from a structural trade deficit coupled with worsening deficits
on the services and income accounts.
The external financing requirement (EFR) excluding grants
reached 14.3 per cent of GDP in 2012, compared to 7.2 per
cent in 2009 (Table 15). This level is a source of fragility insofar
as it buttresses the economy’s reliance on external sources of
finance. However, the structure of the coverage of external
financing needs has greatly improved. Non-debt-creating flows
now cover 85 per cent of EFR. In particular, FDI, which offers
[38] The rise in import of petroleum products partly stems from the need to import light crude oil to offset the cut-off of gas supply from Nigeria following the
shutdown of the West Africa gas pipeline.
32
© AFD / Macroeconomics and Development / June 2014
5 / Deteriorating external accounts and rising liquidity pressures
exposure to dips in the confidence of international investors.
Finally, debt is predominantly medium- and long-term rather
than short-term.
a stable source of financing, is on the rise in connection with
the rapidly growing oil sector and represented 8.5 per cent of
GDP in 2012. Moreover, the relatively limited share of portfolio
flows in the EFR means that Ghana’s economy has limited
Table
15 Estimate of external financing requirement and coverage (% of GDP)
2007
2008
2009
2010
2011
2012
1- External financing requirements (a+b)
-12.1
-13.6
-7.2
-9.5
-10.5
-14.3
a- Current account (excluding grants)
-9.6
-12.8
-6.5
-8.9
-9.8
-13.3
b- Amortisation of external debt
-2.5
-0.8
-0.6
-0.6
-0.7
-1
2- EFR coverage (c+d+e)
13.7
10.8
11.1
13.8
11.9
11.2
c- Non-debt-creating flows
5.1
10.2
12.2
10.4
9.3
12
FDI
3.5
9.5
11.2
7.9
8.4
8.5
Portfolio flows
0
-0.2
-0.2
1.9
0.3
2.9
Grants and transfers from public donors
1.6
0.8
1.1
0.6
0.6
0.7
d- Debt-creating flows
4.2
0.6
3.5
2.5
3
-2.5
MT and LT debt
2.8
2.4
3.7
1.2
2
1.9
ST capital
1.5
-1.8
-0.2
1.3
1.1
-4.4
e- Errors and omissions
4.4
0
-4.6
0.9
-0.5
1.7
3- Changes in reserves (increase)
-1.7
2.8
-4
-4.3
-1.4
3.1
Source: IMF; author’s calculations.
5.3. Deteriorating external liquidity
indicators
Although Ghana’s external debt is higher than the average for
developing countries (25% of GDP), it remains at a moderate
level for the time being (26.2% of GDP). In addition, the
external debt burden for the most part comprises public debt
(Figure 31) with long and medium maturities (75% of external
debt). It does not represent a major risk in terms of external
creditworthiness as most of this is debt owed by the
Government to public donors. The distribution by type of
creditor is as follows: half of the debt is held by multilaterals,
31 per cent by bilaterals and 19 per cent by commercial
creditors.
The IMF’s external debt sustainability analysis concludes that
there is a moderate risk of debt distress. However, the
projections of the debt sustainability analysis (DSA) show that
in the baseline scenario the indicator for the debt service-torevenue ratio is rising steeply and approaching its threshold
level. Furthermore, for this indicator, stress tests reveal two
sources of vulnerability: a sharp depreciation (30%) and a
decrease in non-debt-creating flows.
While the external debt ratio remains modest at this stage,
the deterioration of the current account balance has caused
external liquidity ratios to worsen. Whereas international
reserves covered more than four months of goods and services
imports in December 2010, this coverage stood at only 2.7
/ Ghana: The challenges of growth faced with increasing imbalances /
33
Figure
Figure
31
External debt
(% of GDP)
Private debt
32
Official reserves
(in billions of USD and months of imports)
In billions of USD (left-hand scale)
In months of imports (right-hand scale)
Public debt
30
6
25
4.5
4.0
5
3.5
20
4
15
3.0
2.5
3
2.0
10
2
5
1.5
1.0
1
0.5
2012
2011
2010
2009
2008
2007
2006
0
0
2005 2005 2006 2007 2008 2009 2010 2010 2011 2012
Source: IMF (IFS); author’s calculations.
Source: IMF (article IV), Bank of Ghana; author’s calculations.
months of imports at the end of November 2013 (Figure 32).
This level seems inadequate given the characteristics of
Ghana’s economy. More particularly, were gold and oil prices
to fall back to their 2009 level, this would significantly widen
the current account deficit. What is more, non-residents now
Table
hold one third of public debt (in the form of 3- and 5-year
Treasury Bills), which exposes the country to the risk of capital
flight. Should non-residents decide to redeem 50 per cent of
their bonds, international reserves would plummet by 1.4
billion dollars (equivalent to about one month of imports).
16 External vulnerability indicators
2007
2008
2009
2010
2011
2012
20.6
19.9
27.9
27.2
26.6
26.2
Short-term external debt (% of total external debt)
25
23.6
18.5
24.2
24.7
nd
Short-term external debt (% des exports)
21.1
18.8
17.2
23.8
18.9
nd
Short-term external debt (% of international reserves)
57.8
66.8
36.1
43.8
47
nd
Debt service (% of domestic revenue)
5.1
7.7
9.7
6.8
6.4
7.4
Debt service (% of export of goods and services)
3.2
4.3
4.3
4
2.9
3
Total external debt (% of GDP)
Sources: IMF (IFS), World Bank (WDI), Bank of Ghana; author’s calculations.
34
0.0
© AFD / Macroeconomics and Development / June 2014
Conclusion
Conclusion
Thanks to Ghana’s democratic consolidation and the sharp
acceleration of growth over the last ten years, the country is
regarded as a model of success on the African continent. Yet,
it must now face several challenges. Economic growth has
been accompanied by increasing macroeconomic imbalances
that are likely to jeopardise medium-term growth prospects
if they are not re-absorbed.
In the short run, Ghana therefore needs to take urgent steps
to restore macroeconomic stability. Otherwise, it will be
impossible for the country to make headway with the
diversification and structural transformation of its growth
model. The main source of vulnerability is the combined
degradation of public finances and external balances. As a
result, public debt – which had been brought down to a
modest level thanks to debt cancellations – has been rising
very rapidly since 2006. The measures taken so far have failed
to reverse this trend and several factors are likely to impede
the effective rollout of more substantive measures. On the
one hand, wage bill expenditure places a heavy burden on
budget implementation. Wage control is proving difficult in a
situation where social demands are on the rise. The adoption
of a rigorous multi-year wage policy, which is crucial if the
budget deficit is to be reduced, thus involves potential hurdles,
especially as the present Government now has only one year
to launch structural reforms before the next pre-electoral
period. On the other hand, the fall in the prices of Ghana’s
main export products (gold, cocoa) is heightening pressure
on external accounts.
Ghana is now at a decisive stage of its development process.
The Ghanaian economy has a relatively low level of
diversification and the traditional growth engines are
beginning to run out of steam. Growth is mainly driven by
primary agricultural production and the extractive industries,
and the currently high growth rates stem primarily from a
prolonged boom in commodity prices. The extraction of
agricultural and mineral resources with no national value
added, as well as the shortcomings in macroeconomic
management, could hold the economy back from a
transformation deep enough to drive sustained and inclusive
growth.
The country should thus engage in a process of structural
change that promotes new and more productive activities
and redirects resources from traditional activities to these
new activities, so as to increase overall productivity. The
integration of the extractive activities into the productive
fabric will partly determine the capacity of the Ghanaian
economy to use revenue from these resources to identify and
promote new structural growth drivers.
/ Ghana: The challenges of growth faced with increasing imbalances /
35
List of Acronyms and Abbreviations
36
AFD
Agence Française de Développement
MT
Medium term
CAR
Capital Adequacy Ratio
NDC
National Democratic Congress
CHRAJ
Commission on Human Rights and
Administrative Justice
NGO
Non-governmental organisation
NPL
Non-performing loan
CPP
Convention People’s Party
NPP
New Patriotic Party
DSA
Debt sustainability analysis
OECD
DSF
Debt sustainability framework
Organisation for Economic Co-operation
and Development
EFR
External financing requirement
PPP
Purchasing power parity
ERP
Economic Recovery Program
REER
Real effective exchange rate
FDI
Foreign direct investment
ROA
Return on assets
FINSAP
Financial Sector Adjustment Programme
ROE
Return on equity
FINSSP
Financial Sector Strategic Plan
SSA
Sub-Saharan Africa
GDP
Gross domestic product
ST
Short term
GFCF
Gross fixed capital formation
UGCC
United Gold Coast Convention
GFSR
Global Financial Stability Report
UNDP
United Nations Development Programme
GHC
Old Ghanaian cedi
UP
United Party
GHS
Ghanaian cedi
WDI
World Development Indicators
GSS
Ghana Statistical Service
WEO
World Economic Outlook
HIPC
Heavily Indebted Poor Countries
y-y
Year on year
IFS
International Financial Statistics
IMF
International Monetary Fund
LDC
Least Developed Country
LMIC
Lower-middle-income country
LT
Long term
MOFEP
Ministry of Finance and Economic Planning
© AFD / Macroeconomics and Development / June 2014
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MACRODEV (MACROECONOMICS & DEVELOPMENT)
Director of publications:
Anne PAUGAM
This collection was launched by AFD to present the work produced in the field of
development macroeconomics by AFD's Macroeconomic and Country Risks
Analysis Unit and AFD’s economists. It publishes studies that focus on countries,
regions or development-related macroeconomic issues.
The analyses and conclusions in this document are the sole responsibility of the
author and do not necessarily reflect the viewpoints of the Agence Française de
Développement or its partner institutions."
Editorial Director:
Alain HENRY
Agence Française de Développement
5, rue Roland Barthes – 75598 Paris cedex 12
Tél. : 33 (1) 53 44 31 31 – www.afd.fr
Copyright: 4th quarter 2014
ISSN: 2116-4363
Translation:
Gill GLADSTONE
38
© AFD / Macroeconomics and Development / June 2014