RaboResearch - Economic Research

Country Report Ghana

Country Report


Economic growth in Ghana has fallen somewhat, but is likely to remain relatively high. However,  high twin deficits leave the country vulnerable to a deterioration of external conditions. 

This Country Report is the outcome of an internship by Saskia Moser at the Country Risk Research team at Rabobank Nederland.

Strengths (+) and weaknesses (-)

(+)      Stable democracy

Given the strong democratic institutions, the entrenched multi-party political system and the track record of peaceful changes of power, Ghana is politically one of the most stable countries in Africa.

(+)      Generous natural endowments

Ghana’s agriculture-friendly environment has enabled it to be a net food exporter and therefore be resilient to shocks on the international food commodities markets. Furthermore, Ghana’s cash crops and mineral resources, cocoa, gold and oil are important foreign currency earners.

(-)       Persistent twin deficits

Lavish government spending in past years have resulted in structural and significant fiscal deficits, and contributed to a further deterioration of the current account deficit, rendering Ghana highly reliant on external funding.

(-)       Narrow  economic and export base

With 76% of exports represented by cocoa and natural resources, Ghana is very vulnerable to highly volatile international commodity prices. 

Key developments

1. Slowing economic growth on the back of short-term vulnerabilities

Ghana’s economy grew by 7.1% in 2013, down from 8.8% in 2012.  The modest decline in economic growth can be attributed to slower growth in the oil, manufacturing, construction and service sectors. Furthermore, higher import costs due to the depreciation of the cedi and falling gold prices also dampened economic growth. Global uncertainty as well as lower prices of Ghana’s major commodity exports were important external factors. Domestically, a significant factor was the political uncertainty surrounding the elections in December 2012, as it resulted in eight months of litigation in Ghana’s Supreme Court. Nonetheless, growth has remained broad-based. In particular the services sectors , which grew by 8.9% in 2013, did well. On the expenditure side, private consumption remained the key growth driver. 

Figure 1: Growth performance
Figure 1: Growth performanceSource: EIU
Figure 2: Public finances
Figure 2: Public financesSource: EIU

2. Imprudent fiscal policy hampers investors’ confidence and provides vulnerabilities

Ghana’s main economic concern is restoring economic stability and confidence, after imprudent fiscal management and weaker terms of trade hurt both in the past year. In recent years, the government has repeatedly missed fiscal targets: in 2012, the budget deficit came in at 12% of GDP, much higher than the target of 4.8% of GDP. Despite the fact that some measures were taken, the deficit was 10% of GDP in 2013. Public debt increased to 55.2% of GDP in 2013, up from 49.1% of GDP in 2012. The expansionary fiscal policy, together with weaker terms of trade for Ghana’s main exports (gold, cocoa) and an increase of capital imports for the nascent gas sector, resulted in an increase of the already sizeable current account deficit to 12% of GDP in 2013. In 2014, both the current account and the fiscal deficit are forecast to remain at the same elevated levels.

The expansionary fiscal policy also fuelled inflation and demand for foreign exchange, as high inflation triggered Ghanaians to prefer holding savings in foreign currency. Currency depreciation and a reduction of fuel subsidies further boosted inflation. Y-o-y inflation has been above the 9(+/-2)% target band since November 2013, with inflation increasing to 13.2% in December 2013. The cedi has been depreciating, and this accelerated in December 2013 when it became obvious the fiscal target of 9% of GDP was going to be missed. Despite a hike of the policy rate of the central bank by 200bps to 18% and capital controls, both implemented in February 2014, the cedi has continued to depreciate. 

The deterioration in investor confidence also translated to higher borrowing costs. Sales of short term bills were temporarily suspended between March and May 2014 due to low demand and authorities cancelled the issue of a domestic bond due to the high costs (yields were estimated to be as high as 30%, while previous domestic bond issue in November 2013 had a yield of 18%). Consequently, authorities have expressed the intention to tap into international markets. However, borrowing costs on these markets are likely to be high as well. Besides, a foreign issue will expose Ghana to FX risk. Ghana could relatively easily access IMF financing, but the authorities are reluctant to do so. Still, should FX reserves (currently low at around 3 month import cover) come under critical pressure, IMF financing could be a solution of last resort. 

Factsheet of Ghana
Factsheet of GhanaSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank 

Background information

Ghana is the second-largest cocoa producer in the world and the second-largest gold producer in Africa. In recent years, Ghana has also become an oil exporter. Together, these three commodities account for the lion’s share of the export basket (76%). Europe remains Ghana’s most important export market, but in recent years the importance of Asia has grown; Europe’s share of exports has decreased from 64% in 1996-2000 to 47% in 2009-2013, while Asia’s share increased from 8% to 17%. Ghana has developed very close ties with China, the largest source of Ghana’s imports and an increasingly important (concessional) lender. Agriculture and industry account for around a quarter of GDP each, while services is the largest sector making up for 50% of GDP. Ghana hosts one of the most advanced financial sectors of sub-Saharan Africa, accounting for 5% of GDP. The banking sector is well capitalized and sees strong returns, but non- performing loans are persistently high. Ghana’s largest asset is its - by African standard unique - track record of political and social stability. Since the first free elections in 1992, the political scene has been dominated by two parties, the National Democratic Congress (NDC) and the New Patriotic Party (NPP). Ghana has a the relatively high ranking and booked sustained improvement on the Corruption perception and the Press Freedom Indices. With a per capita GDP of USD 1,850 in 2013 Ghana is classified as a middle income country by the World Bank. Ghana’s progress on social development outperforms regional peers, but poverty remains high, as 29% of the population lives on less than USD 1.25 a day.

Economic indicators of Ghana
Economic indicators of GhanaSource: EIU



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