Summary
- In December 2012, Ghana’s well touted democratic credentials will be put to test. Political competition and its associated intermittent ranting and raging particularly by activities of the two leading parties, the National Democratic Congress and the New Patriotic Party has created some discomfort, but most Ghanaians and Ghana watchers believe peace and security will prevail, as has been the case in previous elections.
- In 2011 Ghana’s economy grew at 14.4 percent boosted by new oil production and a rebounded construction sector. With oil production reaching its plateau, in 2012 GDP growth is expected to decelerate to 7.5 percent.
- Monetary policy was effective in containing inflation within the single digit target of 9 percent throughout 2011. Supported by a remarkable revenue collection effort, the fiscal deficit reached 4.1 percent of GDP––in line with the government’s 2011 objective. However, due to unforeseen challenges with the implementation of ongoing salary structure reforms, the wage bill exceeded its target.
- Despite new oil exports, Ghana’s 2011 current account deficit widened due to higher import growth and a large increase in profit repatriation by extractive industries.
- Ahead of the December 2012 elections, Ghana faces the risk of continuing its cyclical high deficits. Political pressure is mounting on the government to deliver infrastructural projects and settle demands from labor unions. The rapid depreciation of the Ghana Cedi in the early months of 2012 is understood as the response to the expectation of politically driven fiscal slippages. Demands by community service organizations (CSOs) for fiscal responsibility arrangements are mounting.
Recent Political Developments
In December 2012, Ghana’s well touted democratic credentials will be put to test. Political competition and its associated intermittent ranting and raging, particularly by activities of the two leading parties, the National Democratic Congress and the New Patriotic Party has created some discomfort, but most Ghanaians and Ghana watchers believe peace and security will prevail, as has been the case in previous elections. The Electoral Commission is preparing to conduct election 2012, and all political parties have agreed to clean the existing voter registers. So far, the process of reregistering voters using a biometric technique has been generally peaceful despite a few expected, challenges at some registration points. As pointed out during President John Evans Atta Mills’ visit to the US, all eyes are on Ghana to consolidate its democratic progress through fair and transparent elections and a smooth transition of power.
Government is poised to protect the macroeconomic gains made so far, even in the face of presidential and parliamentary elections scheduled for December 7, 2012. The 2012 annual budget explicitly states the government’s commitment to ensure macroeconomic stability while maintaining a favorable investment climate. In the past, Ghana’s fiscal deficits have been particularly high in election years (figure 1), followed by painful adjustments in subsequent years. To break the cycle, the government has committed to fiscal consolidation, and the Ministry of Finance is encouraging civil society groups to develop an interparty agreement on fiscal responsibility. This April, both the President and the Finance Minster have issued statements to the effect that irresponsible election spending will not be tolerated.
Recent Economic Developments
Economic Growth
Ghana’s economy is projected to decelerate from 14.4 percent in 2011 to 7.5 percent in 2012. Growth in 2011 was driven primarily by the revised GDP in the oil sector, construction, transport, and ICT. Agricultural performance, cocoa in particular, was satisfactory with good rainfall and continued high prices. In the poorest regions of the North, rapid maize and rice production growth continued to be recorded.
On the demand side, private investment in extractive industries and construction and exports of goods and services were the main drivers of growth in 2011 (tables 1 and 2). Export receipts increased by 61 percent due primarily to increased production of cocoa and the new oil exports. Gold receipts also increased due to rising international prices for the commodity. Production levels in 2011 remained unchanged.
Ghana’s external position worsened in 2011. The current account deficit, including official transfers, widened by 38 percent in 2011. The cause was rapid increases in non-oil imports volumes (notably equipment goods) and in services and income outflows (particularly profit repatriation). These increases were partially offset by strong growth in exports receipts (cocoa, gold) and increased private remittances (US$2.4 billion). Moreover, although Ghana exported US$2.7 billion of crude oil (24 billion barrels) in 2011, it imported US$3.3 billion of oil products (up from US$2.2 billion in 2010, almost entirely the result of price increases). Thus, increased oil prices had a negative impact on the balance of payments.
The current account deficit (9.7 percent of GDP, including official transfers) was financed primarily through a net inflow of private capital investments (7.4 percent of GDP), particularly in the oil and gas sector. The gross reserves at the Bank of Ghana improved to US$5.4 billion (3.1 months of imports) in 2011 from US$4.7 billion in 2010. However, gross reserves were reduced to US$4.6 billion in January 2012 by the Central Bank to meet increased seasonal demand for foreign exchange by traders and premature redemptions by some foreign investors.
Money and Prices
Headline and core inflation (excluding energy and utilities) followed a downward trajectory throughout 2011 to reach 7.9 percent in December 2011. Food inflation was contained from 4.8 percent in January 2011 to 4.3 percent by end-year through government policy interventions. These focused on fertilizer subsidy, irrigation, buffer stock management, and seed improvement. Nonfood inflation remained high, pulled by high demand for nontradable goods and services.
Broad money (M2+) increased by 33 percent in 2011 (against 34 percent in 2010). The increase reflected growth in net foreign assets (+37% despite profit repatriation) and in domestic assets (+29%). Credit to the private sector grew by 24 percent in nominal terms. Services overall, and trade in particular, were the main recipients of increased credit.
In the last quarter of 2011, speculative investors started moving their funds out of the country, anticipating large macroeconomic imbalances in the election year and the expected completion of Ghana’s program with the IMF by July 2012. The outflows depreciated the Ghana Cedi faster than expected. This trend continued in the first quarter of 2012, as importers started holding their business capital in US$, which further depreciated the Ghana Cedi by almost 8.2 percent between end-December 2011 and end-March 2012 (figure 3).
In response, the Bank of Ghana first increased the policy rate by 100 basis points in February 2012. Thus, the 91-day Treasury bill reached 13.2 percent in April 2012, up from 10.8 percent in January 2012. Second, the Bank of Ghana directly intervened in the foreign exchange market to sell US$ to domestic money banks and foreign exchange bureaus to dampen the demand.
However, the successful subscription to the 3-year government bond in February 2012 suggests that investors are concerned primarily by short-term uncertainties, likely linked to the election calendar.
Fiscal Developments
Ghana’s fiscal deficit narrowed from 7.2 percent in 2010 to 4.1 percent in 2011, supported by a remarkable revenue performance. Tax revenue increased from 13.1 percent in 2010 to 15.4 percent of GDP in 2011. This strong performance can be attributed to an improvement in tax administration (owing to the establishment of the Ghana Revenue Authority in 2010), increased taxable imports volume, the modernization of customs valuation of goods at the border, and a decline in 2011 exemption permit approvals.
Oil tax and non-tax revenue amounted to 1.2 percent of GDP. Mining’s contribution to tax revenue increased from 0.9 percent of GDP in 2010 to 1.5 percent in 2011 due to the payment of corporate taxes by two companies after their capital allowances expired last year. Non-tax revenue more than doubled in nominal terms (1.9 percent of GDP in 2011), as government clawed in revenue from gold sales and oil-related activities.
Total expenditure was slightly above its 2011 budget target, at 23.6 percent of GDP. This performance was achieved through prudent spending management, implementing automatic cost-recovery mechanisms, and strengthening expenditure controls. The government made commendable efforts to settle past arrears to the tune of GH¢1.5 billion in 2011 (2.5 percent of GDP). With an external debt at 19.8 percent of GDP in 2011, Ghana’s risk of external debt distress is assessed to be moderate. Total public debt reached 41.5 percent of GDP in 2011.
Management of the public sector wage bill continued to pose a challenge to Government as it exceeded the budget target of 7.0 percent to reach 8.5 percent in 2011, the result of unforeseen challenges related to implementing the current salary structure reform.
Outlook
Ghana’s medium-term growth outlook remains very positive, driven by large investments in extractive industries, public infrastructure, and commercial agriculture.
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World Bank Assistance
Ghana’s IDA allocation fell in the face of newer requests. Ghana’s IDA envelope was reduced to US$285 million per year mainly because of debt relief charges, after having received US$605 million in FY11. Ghana's FY12 allocation (SDR205.8million) decreased by 9 percent from its FY11 allocation (SDR226.3million, before front-/back-loading), and the decrease is mainly driven by the changes of Ghana's FY12 allocation input parameters that are used in the rule-based Performance-Based Allocation system. In particular, four factors (higher GNI per capita, lower CPIA rating, higher grant share, and higher MDRI debt relief) contributed to allocation decrease of about 29 percent, while two other factors (FY12 IDA envelope increase and population increase) contributed to allocation increase of about 20 percent. The net result is an allocation decline of about 9 percent in FY12.
Progress on oil and gas has been slow. Commercial exploitation of oil has begun and the Petroleum Revenue Management Act was approved by Parliament in March 2011, which comprises strong transparency and executive accountability mechanisms, without earmarking revenue for specific regions.
However, equally important legislation to amend the framework for petroleum exploration and production, including the role of the state oil company Gas National Petroleum Company (GNPC) has yet to be taken up by Parliament. Legislation to create a petroleum regulatory commission has passed, but the presidency has been slow to appoint the members of the commission. A new Ghana National Gas Company (GNGC) was recently incorporated to implement the national gas infrastructure project, which is several years late.
The Ghana portfolio continues to improve its performance. The Ghana portfolio comprises US$1,494 million in 24 projects, of which US$1,159.3 million is undisbursed. The disbursed amount has been increasing since FY09, US$ 386.2 was disbursed in FY11 –the sixth largest in IDA- and we expect to reach US$450 million in FY12, a country record. The good governance indicators and improved portfolio performance allowed Ghana to absorb US$605 million during FY11, and we expect to frontload the IDA envelope this year for the available US$370 million, and if more resources are available, the pipeline will be ready to move ahead. The most recent approved operations were Fisheries (US$50 million), Ghana Statistics (US$30 million), and the pipeline of projects are as follows: PRSC8 (US$87.5 million), Commercial Agriculture Project (US$100 million), and the Public Private Partnership (PPP) Project (US$40 million).
Regional projects reflect Ghana’s role as a hub in West Africa. Ghana increased her regional portfolio to seven projects to nearly US$630 million with US$ 495 million to be disbursed, in transport, energy, trade facilitation and agriculture. Also we have an IDA guarantee that help the completion of the West Africa Gas Pipeline which connects Nigeria’s gas resources to Benin, Togo and Ghana, lowering energy production costs in Ghana.
The World Bank poverty report highlighted geographical diversities in poverty. Head count poverty had fallen from 52 percent in 1991 to 28 percent in 2006, and indications are it has fallen further since then.
Ghana’s poverty reduction has been driven by growth and not by improvement in equity. There are significant regional disparities between the northern Savanna regions (58 percent) and the rest of the country (19 percent). Internal migration has helped move the benefits of growth from the rapidly growing areas around Accra, Kumasi and Takoradi/Sekondi to other areas but this has not helped the Savanna region due in part large to the poor human capital endowment of the potential migrants from the Savanna region.
As a potential middle income country with relatively low levels of poverty (compared to its past), Ghana needs move towards to more effectively targeted program to help the poor rather than generalized programs such as energy subsidies. The World Bank is supporting Ghana’s development of a common targeting approach by all programs.
Ghana’s impressive track record on growth hides major regional discrepancies in poverty and human development outcomes. In part this is due to the failure of a centrally run locally non-responsive service delivery system. The government has recognized this problem and is moving forward on a rapid decentralization agenda. Central control aside, the institutional structure of education and health service delivery institutions are not geared towards servicing the needs of a dynamic middle income country and there is a need for outside the box thinking. Special attention is needed to help children from poorer households improve their human development outcomes.
Enrollment rates are maintained at high level, but further progress in completion, gender and geographical parity are hindered by disparities both in funding, access to education services. There are also serious deficits in learning outcomes. Deprived districts, schools serving poor rural communities continue to lack qualified teachers and have limited access to textbooks.
With middle income status skills for productivity improvement and competitiveness and higher education need to be addressed. Ghanaian universities need support to enable them to keep up with growing changes in the global economy and the technical and managerial challenges needed to keep up. The skill development system is not geared to producing the types of skills demanded by employers. Health indicators continue improving, with under-five mortality rates having declined between 2003 and 2008, dropping from 111 to 80. However, Ghana is unlikely to meet the Millennium Development Goal (MDG) targets for both child and maternal mortality.
Nutrition status among children has improved, but one in three children are still stunted: 29 percent of children under-5 years were stunted in 2008 as compared to 36 percent stunted in 2003.
National Health Insurance Scheme (NHIS) provides basic protection against the financial burdens of illness with a comprehensive package of some curative services enrolling a significant proportion of the population since its inception in 2005. However, the coverage of the poor remains low: 29 percent of the lowest 20 percent of the socio-economic group had a valid health insurance card, compared to 64 percent of the highest income group (2008). There is urgent need to improve the coverage of the poor. Rural areas also have lower coverage (43 percent) compared to urban areas (54 percent).
A Public Private Partnership (PPP) Policy was approved in June 2011 which establishes a PPP Unit within the Ministry of Finance and Economic Planning. This unit will in charge in leading the capacity building efforts to support efforts in line Ministries, develop a contingent liability management system, capital market reform and guide PPP operators. A law will be enacted that would provide coverage enough to prospective investors. The preliminary ideas have been on transport, agriculture (irrigation), water and solid waste management.
In recent years Ghana’s financial sector has grown rapidly, and increased in sophistication in terms of product offerings. While the government has instituted an impressive series of reforms to support these developments, its capacity to regulate effectively has not kept pace. The Bank is supporting government’s efforts in this regard through the Economic Management and Capacity Building Project, as outlined in last year’s FSAP process.
The government has made significant progress, but more needs to be done. In the banking sector in particular, non-performing loans remain uncomfortably high, and a clutch of banks remain vulnerable to further shocks. The level of state ownership and influence in the banking sector is also problematic. Further bank consolidation and a rationalization of government ownership should improve depth in the banking sector and reduce overhead costs. Improved risk management, along with strengthening of supporting institutions such as the credit information and insolvency regimes, should continue to ease the access to finance constraint for SMEs.
The Ghana Africa Infrastructure Country Diagnostic report estimates that raising the country’s infrastructure endowment to that of the region’s middle-income countries requires addressing both an efficiency and a funding gap of $1.5 billion per annum, highlighting the potential role of private sector participation to leverage Government’s own financial and managerial resources.
As a result of World Bank assistance and engagement, progress in Ghana has been largely positive, with notable advances in agricultural crop production, natural resources governance, land management, household electrification, ICT, primary education completion, social protection, and safe water supply. Weaker progress was registered in private sector development, transport, health, and public sector.
In the area of Private Sector Competitiveness, the World Bank’s four investment projects (Micro, Small and Medium Enterprise Project, Economic Management Capacity Building, Land Administration Program and e-Ghana) have contributed to the country’s goals by increasing private sector credit and foreign direct investment. However, credit growth has mainly benefitted consumption, and has remained costly and of short term duration. Time taken to register deeds and titles to land have also decreased substantially from 36 months to 2.5 and 7 months respectively, and this was supported primarily through the World Bank-financed Land Administration Project.
The Land Administration Project which closed in 2011 has also resulted in the strengthening and streamlining the institutional arrangements for land administration in Ghana with the passage of the Lands Commission Act 767 (2008) by Parliament on October 29, 2008. The decentralization of the deeds registry to all the nine regional capitals, under the Lands Administration Project, has brought the registration of deeds closer to the clients making it easier to access land for agricultural purposes. The eight pilot activities which includes systematic titling, customary lands demarcation, Geodetic reference network, land valuation database, land information systems, deed registration, community-based land use planning and land courts geared towards testing best practices have all yielded useful lessons for scaling-up.
In the education sector, access and completion rates have improved steadily with primary completion increasing from 80.1 in 2007 to 86.3 in 2009, but quality remains low. The improvements in access to education across the country have been supported by the World Bank-financed Education Sector project.
Progress achieved in the health sector, from 2003 -2008 was impressive: under-5 mortality was reduced from 111 deaths per 1,000 births to 80, the proportion of malnourished under-5 children was reduced from 18 to 14 percent, and the pregnancy-related mortality rate dropped from 503 to 451 per 100,000 live births. Improvements in the under-5 mortality, malnourished uner-5 children and pregnancy-related mortality have been supported by the World Bank-financed Nutrition and Malaria Control Child Survival and Health Insurance projects.
There has been significant progress in the ICT sector. The combined efforts of Government’s proactive policy and regulatory interventions, support from the World Bank Group and other development partners, and highly competitive private sector is translating into increased investment, impressive telephone penetration rate of over 80 percent in July 2011 (from 60% in 2010 and less than 3 percent in 2003), over 50 percent decrease in local and international call rates, and a threefold reduction in internet access prices from US$3 to less than US$1/hr.
The eGhana project is contributing to these achievements by supporting critical applications, skills development, and regulatory institutions.
Ghana continues to enjoy the support of a whole range of development partners, as well as nontraditional partners. The multi-donor support framework remains strong even though, ODA is expected to decline in the medium term with the production of oil and the achievement of a middle-income status. At present, official development assistance to Ghana (grants and loans) declined by 2 percent in 2010 compared to about US$2 billion received in 2009. Over the last several years, development partners have substantially increased their levels of budget support to approximately 30 percent of Official Development Aid. Actual Multi-Donor Budget Support (MDBS) in 2010 was estimated at US$326 million. The MDBS currently includes the African Development Bank, Canada, Denmark, the European Commission, France, Germany, Japan, The Netherlands, Switzerland, United Kingdom, and the World Bank.
By June 2011, IMF was considering Ghana on track to meet its immediate macroeconomic targets: positive primary surpluses from 2012, increased foreign currency reserves (4.2 months of imports by end-2012), clearance of all arrears vis-à-vis private contractors by end-2012, and contained price inflation to single digit levels. The IMF Article IV and ECF third and fourth reviews from May 2011 consider Ghana’s external and growth prospects as favorable, driven by high export prices and oil production, assuming that fiscal vulnerabilities are addressed through structural reforms.
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