Ghana like many other countries has not been spared the current global economic crisis. The last three months have been most excruciating, with unprecedented cedi-depreciation and rising prices of goods not seen in our recent history.
The aim of this article is to offer a few recommendations on the way forward. But I am compelled by the misinformation, in both traditional and social media, about the current economic crisis’ actual causes to provide some background as well as more and better particulars for the benefit of those interested in the truth.
The few causes discussed below are not exhaustive but come to mind most easily:
- The Energy Sector Overcapacity Charges
The energy sector has been one of the major contributors to the draining of our national coffers since 2017; and is also mentioned by the World Bank as a major contributor to Ghana’s rising debt. Because of our Dumsor past, contracts were signed to ramp up the country’s energy capacity to 5,083MW at the time when peak demand was about 2700MW. Unfortunately, most of these contracts were on ‘Take or Pay’ basis – and most were also denominated in US dollars.
Hence, government had to pay for over 2000MW of energy we have not needed since 2017 to date. There are those that are yet to come on-stream, and government has been renegotiating with some of the Independent Power Producers (IPPs) to defer the deployment of their plants. But there is a looming danger, as recently Ghana was slapped with a US$170million judgement debt for cancelling the power purchase agreement (PPA) with Ghana Power Generation Company (GPGC). Excess capacity payments have costs Ghana about GH¢17billion cedis.
- The Banking Sector Clean-up
The banking sector clean-up, which was one of the IMF conditionalities, is said to have consumed about GH¢25billion and still counting. Over 4.6 million Ghanaians would have lost their savings had government not taken that action. It is also important to mention that because it was a one-off event, it wasn’t considered as part of the public debt – but has now been added. So, it is not true government was understating the public debt. It was part of the agreement to ensure Ghana exited the IMF having met all other conditionalities.
- The COVID-19 pandemic and the Russia-Ukraine war
The twin disasters of COVID-19 pandemic and ongoing Russian-Ukraine war have been the mothers of all current economic crises in the world and not only Ghana. They have thrown the world’s economy out of control – as captured by Kristalina Georgieva, the IMF Managing Director in the recent World Bank/IMF meeting in Washington DC. She said, and I quote:
“In less than three (3) years, the world has lived through shock, after shock, after shock. First, the Covid pandemic, then Russia’s invasion of Ukraine and the ensuing cost-of-living crisis.”
She said in other places the world is facing serious economic challenges, with growth trending downward while inflation is trending upward. In human terms, people’s incomes are down and hardship is up. Economies facing a downward trend include net importers of food and fuel – in Africa, the Middle East, Asia and Europe.
This was affirmed by former President John Mahama when he addressed the 24th Annual Africa Business Conference at Harvard University earlier this year. He said, and I quote: “The pandemic has had a generally deleterious effect on the economies of Africa. Data from the Economic Commission for Africa (ECA) indicate that COVID-19 has created the worst recession in 50 years for Africa, with average GDP shrinking by 3% in 2020. It has dragged about 55 million people into poverty in Africa, and exposed another 46 million to the risk of hunger and malnourishment”.
The COVID-19 pandemic’s effects on Ghana’s Economy
When COVId-19 pandemic struck, the president promised to save lives and rebuild the economy later. As a result, government ensured that public sector workers did not lose their jobs. Government also ensured that all the necessary PPEs were provided to allow all schools to return to their full sessions. It took more than a year for some countries to reopen their schools. Businesses were given support to keep operating and keep workers on their payrolls without sacking them. Electricity and water were provided for free or at subsidised rates.
All these did not come cheap. Because of the lockdown, both international and domestic commerce were disrupted. As a result, government lost about GH¢11.94 billion in revenue and had to cough up an additional GH¢14billion to support the COVID-19 fight in 2020 alone. In effect, about GH¢25.94billion was lost (or borrowed to fill the gap) in 2020 alone. The estimated loss of revenue in 2021 was about GH¢18billion. It is safe to say that the COVID-19 pandemic fight might have cost Ghana about GH¢40billion.
The effects of Russian-Ukraine war on Ghana’s economy
Russia supplies cheap energy resources to most countries in Europe and Asia, where most Ghanaians import from. With sanctions on Russia – the second-biggest exporter of crude oil in the world – crude oil prices went up from about US$62 dollars at the beginning of 2022 to over US$130 dollars per barrel in March before dropping below US$100 recently. That meant government had find twice the forex required by fuel importers to bring in the fuel. This had the potential of depleting our international reserves to dangerous levels. This jump in crude oil prices caused the cost of production across Europe, Asia and the rest of the world to shoot up very high. Cost of freight also went up astronomically.
In Ghana, the Russian-Ukraine war’s effect caused fuel prices to jump from GH¢6.0 per litre at the beginning of 2022 to GH¢17.99 per litre of petrol and GH¢23.49 per litre of diesel as at 31st October 2022. In addition, Russia and Ukraine export about 40% of the world’s grain and sunflower oil. Also, Ghana is said to import most of our iron rods from Ukraine. All these increases are being felt here in Ghana.
The rise in cost of energy resources caused serious inflationary havoc across the globe, prompting central banks across the world to increase their monetary policy rates. The increase of US interest rate also brought in its wake serious currency depreciations across the world, as a result of currency flight from the emerging markets to the US.
Many countries across the world had record-breaking inflation rates. For instance, the UK inflation figure of 10.1% in September 2022 was the highest in 40 years. The Eurozone inflation of 10% in September 2022 was the highest since creation of the Eurozone in 1999. US inflation of 9.1% in June 2022 was the highest in 41 years. Ghana’s inflation of 37.2% in September was the highest since 2001.
The world’s economic problems were compounded by rising interest rates in the US triggering currency flight out of emerging markets to the US. This has resulted in the depreciation of many currencies across the world; probably except the Russian ruble. The reason is that the US dollar is the most utilised convertible currency in the world, and the US is seen as the safest haven in the world for investors. So, it is only when the US interest rate is at its lowest that most investors move their investments outside the US to other markets.
However, when the US interest rate begins to rise (as in recent times from 0.08% in January to 3.08% in September 2022), most investors began to disinvest in other markets and convert them to dollars in order to move it to the US. The rush for dollars from emerging markets usually results in currency depreciation, as seen in recent times. In Ghana, the cedi has depreciated by about 40% since beginning of the year.
- The portion of public debt influenced by cedi–depreciation rather than additional borrowing
Another major issue that has exacerbated our crisis is the rising public debt. It is important to recall that at the end of 2016 Ghana’s public debt to GDP was 73%. It was rebasing the economy that revised the figure to 56% of GDP. Ghana did not pay down its debt, neither was it forgiven any debt. The rebasing was done to create a fiscal space for the new government to go to the capital markets to raise funds to finance its budget.
It is important to note that the NPP government’s debt management strategy since 2017 until recently had been to substitute more expensive bonds with lower expense bonds, and the savings accrued used to either support the budget or finance other programmes. Only a few bonds raised – such as the GETFUND to front-load infrastructure development (initiate close to 2000 educational infrastructure projects) for Free SHS policy and others, and the ESLA bonds just to mention two – were among the new borrowing.
It is also important to note that the increment in nominal value of the public debt does not necessarily mean additional borrowing. The external component of public debt automatically increases in cedi terms by the same percentage as that which the cedi has depreciated. For instance, at the end of 2021 Ghana’s external debt position in terms of US dollars was US$28,339.22million – equivalent to GH¢172,869.24million (about GH¢173billion) at an exchange rate of US$1/GH¢6.1. Without taking new loans, the original US$28,339.22 at an exchange rate of US$1/GH¢13.0091 as at 31st October 2022 is now GH¢ 368,667.75 (about GH¢369billion) – a difference of about GH¢195 billion due to cedi-depreciation and not to additional or reckless borrowing.
A conservative estimate from COVID-19 pandemic (GH¢40billion), Financial Sector Clean-up (GH¢25billion), Excess capacity payments from the energy sector (GH¢17billion) and portion of public debt due to cedi-depreciation in 2022 alone (GH¢195billion) indicates that about GH¢277billion of the current nominal figure of public debt has nothing to do with reckless borrowing as we are made to believe. If we are to extend this analysis retrospectively from 2017 till date, your guess will be as good as mine.
- Government/finance ministry’s loss of communication battle to speculators
In the partisan-charged political landscape we find ourselves – where competition for political power can take any form, including sabotaging the entire economy – the greatest disservice any government can do to itself is allow speculators and saboteurs to precede it in providing speculative information to the market. For instance, people in both the traditional and social media were speculating daily rates of the dollar, and misinforming people about the form of government’s debt restructuring when government had not provided details. Others were speculating about Ghana import of tomatoes worth over US$400million from Burkina Faso when even the 10th largest exporter of tomatoes in the world, Belgium, only earned US$302million in 2021.
It is therefore important for government and its Ministries, Departments and Agencies to lead in providing necessary information to the public ahead of speculators whose aim is to run down the economy for their own selfish reasons.
The way forward
In several earlier articles, I made some recommendations as to what could improve the Ghanaian economy. So, I will not repeat most of them. I will only pick few in addition to some new ones recommended below:
Halting cedi-depreciation
- There is a perception that some bank staff – from both the Bank of Ghana (BoG) and commercial banks – have been complicit in the black market trade. To cure this perception, the central bank must begin to audit all foreign-currency denominated transactions from the BoG to commercial banks, and from the commercial banks to their customers.
- Government, together with BoG and Ministry of Trade and Industry, must introduce Import Declaration Forms for importers – which should reconcile with their Customs Declaration Forms to ensure that all transfers are accounted for. In addition, introduction of electronic cards for importers to carry when travelling outside should be introduced with quarterly-fixed rates to be applied. Importers may be incentivised with favourable exchange rates for those opting for the electronic card for imports. This will reduce the demand for dollars by importers.
- The BoG must begin to close down forex bureaux that violate their guidelines. Any forex bureau that advances foreign currencies to people without a proper ID or above their daily maximum should be sanctioned.
- Totally outlaw all the black market spots. Those caught in the act should be liable to a prison term of up to 5 years
- The pricing of goods and services in foreign denominated currencies should be outlawed and enforced. A prison term of 10 years should be enforced for offenders.
- Foreigners must be banned totally from our retail sector to cure distortions in the financial services sector – where foreigners take loans at lower rates from their home countries, buy goods and come to compete with Ghanaian traders who take loans at far higher rates.
A second look at Ghana’s trade policy.
Government should take advantage of the current economic challenges to review trade policies, such as import and tax exemption policies.
- Government must review its import sector policies by ensuring that in this current situation only essential goods – and those which are either not produced or we lack the capacity to produce them here – should be allowed to be imported into the country. Taxes on imports of inputs for certain products should be waived.
- Government must redirect the 1D1F policy to concentrate on the top-10 products on Ghana’s import data that we are capable of producing here; and create incentive measures for the private sector to import the necessary equipment to take up the challenge.
- There should be a trade-off between tax exemption grant and reduced corporate tax allowance. Companies should not be granted both. At best, no company should benefit from both for more than 3 years.
- Government should have a quarterly fixed rate for the dollar, for the purpose of port clearing. This will also reduce the incidence of panic purchases ahead of arrival of goods for clearing.
- Government must establish a Commodity Price Board/Authority or the use of existing institutions to regularly collate and publish prices of foodstuffs and goods from the major market centres on a weekly or monthly basis. This is to ensure that the national market Queens do not profiteer unreasonably from the current challenges.
Other Recommendations worth considering
- Government must offload the cost of the banking sector clean-ups from its books to the central bank’s balance sheet. This is necessary to allow government some fiscal space on its debt management strategy; and also because the central bank has been managing the process and the recoveries should hence accrue to them. In addition, a portion of profits made by the Central Bank in recent times could be used to start defraying the cost.
- Once the policies listed above to halt cedi-depreciation are in full operation, the BoG must begin to revise its monetary policy downward as well as ease the capital adequacy ratio of commercial banks immediately after the festive season when demand for imports would have reduced significantly, to allow free flow of loanable funds to the market so as to boost economic activities and engender growth of the economy.
- Revise the Free SHS Policy to allow those capable to pay fees. Government can provide resources for all in the first term to ensure no one is disadvantaged. Profiling students within the first term can be done to know those who can afford to pay, and they will begin paying from the following term. Whenever a student’s circumstances change whereby they can no longer pay fees, they can write to the school formally for consideration. The alternative is to reintroduce school farms for SHS and Colleges of Education and Nursing to start farming to supplement whatever government provides. The objective of this policy should not only be for students to feed themselves, but to also learn the art of farming before graduating – which can serve as alternative source of livelihood in the future.
- Re-introduce a more acceptable form of Agyapa policy to raise the funds needed to develop our mineral deposits and other infrastructure.
- Introduce a high engine capacity vehicle policy to control importation of high fuel consuming vehicles for private use.
Concluding Remarks
The issues discussed above should provide a mental picture of how the COVID-19 pandemic and ongoing Russian-Ukraine war has affected not only Ghana but also the rest of the world. The BBC on October 17, 2022 reported that over 90 countries across the world have hit the streets protesting against rising cost of food and energy prices. So, it is democratic for anyone to criticise or even demonstrate against the current economic difficulties. However, it must be done on truth and not for personal aggrandisement or due to a pack of lies. Only the ignoramus or those bearing partisan hearts and lenses will say both the pandemic and the war have no effect on our current economic situation.
It is important to recognise as the president admitted, that we are indeed in difficult times and everybody must be on board to get out of the current economic difficulties.
I have offered my little suggestions. You can do the same rather than hitting the streets, which solves nothing but may incur additional cost to the state. Anyway, it is everybody’s democratic right to demonstrate if they choose to do so.
Assallamu Allaikum!
The writer is a Senior Economist, Office of the Senior Presidential Advisor.
