A time of new potential

By Kwabena Mensah & Patrick Smith

Posted on Monday, 25 May 2009 16:02

The benefits of a decade of good economic growth are

threatened by the effects of the global crisis, but there are signs

that Ghana’s new government will boost agricultural production and win

new foreign investments on the back of its emergence as a substantial

oil and gas producer

The combination of a credible election and prices holding up for its key commodity exports ahead of the start-up of oil and gas production makes Ghana better placed than most developing countries to withstand the rigours of the global financial crisis. After one of Africa’s closest ever presidential elections – President John Atta Mills beat Nana Akufo Addo by just over 40,000 votes in the run-off election – the new government scrambled to nominate the cabinet and to appoint new heads of the parastatal companies and the regional authorities.

A former law professor at Legon University and head of the national tax authority, Mills has substantial experience, although some questioned whether he would have the grit to run the state and take unpopular decisions, especially in the midst of an international downturn. Dissidents within the new ruling party, the National Democratic Congress (NDC), tried to challenge his authority and many predicted there would be tensions between him and former president and founder of the NDC, Jerry Rawlings. So far, he has been able to consolidate his authority by defining the government’s direction under a new-ish team of ministers and technocrats.

Mills’s strategy is to treat Rawlings with respect and give him missions that do not impinge on policy. In the second week of May, Mills went on a state visit to Britain, while he sent Rawlings to represent Ghana at the inauguration of the newly-elected South African President Jacob Zuma.

Strength in exports to the rescue

Cocoa and gold are keeping
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Because his NDC party has a parliamentary majority of less than ten seats, depending on how the small independent parties vote, the President will need considerable persuasive skills to steer his legislative programme. Although the opposition New Patriotic Party (NPP) had promised to allow the Mills government a brief honeymoon after the transition, it is already stepping up the pressure in parliament.

Under the NPP government, GDP growth hit a historic high of 7.3% in 2008, but at a considerable cost, borrowing from international markets and ramping up national debt. The global financial crisis exacerbated those problems and has reduced the government’s options. Ghana’s great advantage will be its high standing with the international financial institutions, which are willing to help shore up its finances.

“The economic downturn will result in very, very serious repercussions for our economy,” Mills told a meeting at London’s Royal Institute of International Affairs on 7 May. Mills spoke of a triple threat to growth – a weakening in export markets plus a slowdown in foreign investment and in remittances from Ghanaians abroad. Although prices remain strong for Ghana’s main exports of gold and cocoa (the price of which hit a 30-year high earlier this year), there are major budgetary and balance-of-payments pressures: bankers project the government’s budget deficit at around 14% of GDP and the trade deficit at nearly 20%.

These pressures are reflected in the monetary indicators. Inflation is also heading for 20%, according to most independent economists. The cedi depreciated by about 31% against the US dollar last year and by 13.6% in the first quarter of 2009. “Already we are seeing signs of a reduction in remittances from abroad. We also expect a decline in donor support, a decline in trade,” President Mills said. The diaspora typically provides $3bn in remittances each year, about 20% of GDP.

Key to the government’s strategy will be encouraging investment, Mills told his audience in London. “It is a known fact that capital has a choice and will not go where it does not feel secure.” He added that companies should not be disturbed about the government’s decision to review contractual terms on some major projects, as this would be done openly with the idea of maximising public accountability. “If we are critically examining existing contracts, it is because we owe a duty to Ghana and our conscience so to do,” he said.

Imf and World Bank lend a hand?

After finance minister Kwabena Duffuor’s meeting with officials at the IMF and the World Bank in Washington in April, the government looked likely to secure $3.2bn in lending and investment from both institutions. The biggest part – $2.2bn from the World Bank group – would be used mainly for budget support. The remaining $1bn would be used to shore up the country’s hard-pressed foreign-exchange reserves. The Ghana team in Washington also negotiated a $500m loan to support the fledgling oil and gas industry.?

Duffuor initiated discussions on an IMF standby facility of at least $1bn over the next three years. Following the G-20 summit in London in April and the donors’ commitment to increase the allocation of Special Drawing Rights to member countries, Ghana expects to receive an initial tranche of $420m by the third quarter of this year.

But with inflation and interest rates both high and a weakened currency, it will be a tough year for Ghanaian consumers. Sharp rises in fuel and food prices were one of the reasons for voter disaffection with the incumbent NPP government, and President Mills’s NDC had pledged to restrain fuel- price rises. That could prove difficult.

Ken Ofori-Atta, chairman of the Databank brokerage house, is pushing a plan to get the economy back on its high-growth trajectory: “We need short-term money and trade finance,” he said. “So let’s tap into the IMF’s Short Term Liquidity Facility and that of the African Development Bank. We need long-term money for businesses to grow. Let’s tap into Special Drawing Rights to guarantee longer-term bond issues in the international markets. Government should create a liquidity facility for the banks such as the EDIF [Export Development and Investment Fund] to enable them to lend at sub-inflation rates to corporates and to buy long-term corporate bonds.”?

Like equities markets around the world, the Ghana Stock Exchange has slumped: the share prices of the listed commercial banks – Ghana Commercial Bank, CAL, Ecobank Ghana, HFC Bank, Standard Chartered and SG-SSB, a subsidiary of France’s Société Générale – were hit particularly badly.

Do more with less

Ofori-Atta says local businesses should be doing more to drive growth now: “With the 16% decline in our stock markets, pension and provident funds, the Social Security and National Insurance Trust should be actively buying shares, investing in mutual funds and providing liquidity to the market.” He also proposed a home-grown stimulus plan in which the Association of Ghana Industries and all private sector associations come together to prepare a private sector growth agenda to be used in government policy.

On the financing front, there is a promise of good news in banking, ICT and agriculture. $547m from the US government’s Millennium Challenge Account should start to kick in this year. Vice-president John Dramani Mahama is also spearheading the drive to set up a Savannah Agricultural Development Agency to provide finance for agricultural projects in neglected northern and western areas.

But the big questions for the future concern Ghana’s rapidly developing oil and gas industry – how soon oil exports (due to begin by 2010) will show tangible benefits for the population and how transparent the government’s management of the industry and the resulting oil revenues will be.


Kwabena Duffuor?, Finance minister

A former governor of the Bank of Ghana, Duffuor has had his hands full since taking office in January. He has had ample opportunity to blame his predecessors for the sharp depreciation of the currency and the high inflation rate, but he will soon be faced with responsibility for showing results that benefit the wider population. Duffuor should have little difficulty in securing substantial inflows from donors and foreign investors, but the private sector will pressure him to adopt an aggressive growth strategy

Joe Oteng-Adjei?, Energy minister

He Has experience in his area of responsibility, as he was director of power at the same ministry during a sustained energy crisis in the late 1990s. He now has the world of oil and gas to manage, especially relationships with the oil companies, as production kicks off in 2010. With Ghana laying claim to all gas resources associated with its oil, Oteng-Adjei wants to accelerate licensing of all prospective areas, both onshore and offshore, in the hopes that the country can get away from its over-dependence on hydro-electric power.

Gobind Nankani?, Chair of the Economic Advisory Committee

Appointed chairman of Mills’s Economic Advisory Committee, Nankani is a respected development economist. A career World Banker with experience in Asia and South America, he ended his time at the Bank as vice-chair for Africa (2004-2006) and then left to become president of the Global Development Network. In his role at the heart of the economic-policy team, he is a possible successor to Paul Acquah as governor of the Bank of Ghana.

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