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 An oil boom helped fuel five years of GDP growth above 8 percent
making Ghana an emerging market star, a stable democracy whose
population of 25 million was moving steadily into middle income
status.
It is now, however, paying a steep price for not coming through with
a new tranche of fiscal reforms. Political consensus is stymied, the
public is dismayed by rising costs and the dream of new wealth is on
hold.
Analysts put the immediate difficulty down to a delay in announcing
reforms, saying it makes it harder for the government to meet its
2014 economic targets and has increased the chance it will
eventually need a bailout from the International Monetary Fund
(IMF).
It has also created a perception of policy drift at a time of
economic trouble rather than decisive action to shore up gains made
during the boom years in which the gold and cocoa exporter started
pumping oil.
"The situation is becoming quite critical. There has been a chronic
underestimation of the seriousness of the problem by the
authorities," said Angus Downie, head of economic research at
Ecobank.
In May, faced with worsening economic indicators and rising calls
for action, the government of President John Mahama said it would
adopt a "home grown" stabilization policy rather than resort to an
IMF financial assistance program. [ID:nL6N0NZ3L1]
Such a policy would necessarily include spending cuts, steps for
increasing revenue and an answer to costly public sector wages, the
single biggest contributor to the rise of the deficit in 2012 to
11.8 percent.
The government held a strategic planning meeting last month but is
yet to announce new reforms. Instead, it is urging patience and
pointing to measures to tighten foreign exchange rules and raise
rates, coupled with subsidy cuts last year.
Officials also say a Eurobond to be issued in U.S. dollars in July
will lower debt costs, while seasonal cocoa inflows will steady a
currency that has fallen 28 percent this year, the steepest decline
in Africa. They also say that Ghana's mid-term prospects remain
strong.
PRINTING MONEY
In the meantime, ordinary people are feeling the pinch, particularly
with inflation running at 14.8 percent.
Anastancia Bokpe, who operates a restaurant in the east Legon suburb
of the capital, said she has been forced to nearly double the price
of her popular goat soup.
As a result, she fears losing the custom of the office workers,
builders and civil servants who patronize her business because they
too are under financial pressure.
"Prices of ingredients in the market have been changing almost every
month .... The only way I could still remain in business is to pass
on a fraction of the price hikes to the consumer," she told Reuters.
"We are already in a severe hardship and things are rather getting
worse."
For their part, economists lament what they say is government
indecision dating back to November's annual budget.
"There have been no fiscal reforms that suggest the deficit will
narrow significantly this year," said Yvonne Mhango of Renaissance
Capital in Johannesburg.
Authorities aborted two auctions of longer-dated bonds due to high
yields and concerns of risk-averse portfolio investors. Yields on
the weekly auction are at a three-year high.
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Central bank governor Henry Kofi Wampah said the bank was funding
the deficit but that the amounts fell within the allowed limit of 10
percent of revenue collection and any excess would be redressed by
the end of the year. "We know the government is about to issue a
Eurobond soon which we can use to replace the financing we have
made, so it's not out of the ordinary or abnormal for us to provide
the government’s financing needs at this time," Wampah told Reuters.
Carmen Altenkirch, director of Africa ratings at Fitch, said money
printing to fund the deficit would only raise pressure on inflation
and a currency that has fallen 28 percent this year.
The risk is that the government is forced to defend the currency
with still higher rates, causing inflation and a spiral that will
blunt growth projected to slow to 4.5 percent in 2014. As a result,
there are few easy options.
"The debt situation may now be so grave that the policy priority
above almost everything else should be to contain it," said Razia
Khan, head of Africa research at Standard Chartered. Mild inflation
growth might be a better policy option, she said.
POLITICAL PRESSURE
One impediment to reform is stiff competition between the ruling
National Democratic Congress (NDC) and the opposition.
Governments in Ghana, unlike in many other African states, are
regularly ejected by voters at elections. The peaceful transitions
are a source of national strength and pride but they also make
governments more vulnerable to voter sentiment.
The next election is not until 2016 but politicians say austerity is
unpopular with voters, especially given expectations of a bonanza
when oil came onstream in 2010.
Ironically, each election year also tends to see a weakening of the
fiscal position, as it does in many countries, so the window for
restoring fiscal balance is closing fast ahead of 2016.
The opposition New Patriotic Party (NPP) only narrowly lost the last
presidential election and this week it stepped up its criticism of
what it said was government economic mismanagement. At the same
time, party supporters took to the streets in its stronghold city of
Kumasi on Tuesday to protest against hardship.
"I would want to see the government under an IMF program because on
their own they haven't shown the commitment to do the right things,"
said NPP finance spokesman Mark Assibey-Yeboah.
Some commentators have called for a national consensus over fiscal
policy given the situation. But they acknowledge this is unlikely in
the political climate.
(Editing by Jeremy Gaunt)
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