The rise of West African Lion?

Many decades of political stability and a generally pragmatic government fiscal policy has made Ghana one of Africa’s strongest economies but it is still far short of maximising its potential. Youth employment is still unacceptably high and government revenues from taxation are only a fraction of what they should be. The discovery of oil and […]


Many decades of political stability and a generally pragmatic government fiscal policy has made Ghana one of Africa’s strongest economies but it is still far short of maximising its potential. Youth employment is still unacceptably high and government revenues from taxation are only a fraction of what they should be. The discovery of oil and gas will help improve national revenues but accelerated growth will still come from better exploitation of its traditional resources in agriculture, mining and light industry. Nevertheless, this West African country is well poised to join the ranks of Africa’s economic lions. Report by Neil Ford.

Many observers report that Ghana has it all. The mining and agricultural sectors have prospered from many years of political stability and improved economic management. Oil and gas has now been discovered offshore to generate more revenue for the government and feedstock for domestic industry.

Returning diaspora Ghanaians are setting up their own businesses and national infrastructure is being upgraded, often with Chinese money. Yet the government needs to keep its feet on the ground and accept that it still has much work to do. Oil money is all very well but the windfall is perhaps not as great as many believe.

Ghana’s reputation as one of Africa’s strongest economies has been built on 15 years of steady to strong economic growth, with GDP increasing by an average of 5% a year in the 1980s and 1990s. Yet perhaps its
greatest strength is that this growth stems from economic diversification rather than over reliance on a single commodity or sector. Gold mining, cocoa production and even the growing IT sector have all contributed to economic development.

Providing the revenues are well managed, the oil boom should therefore provide the icing on the cake rather than the main source of revenue. With a population of 25m, anticipated revenues of $1bn a year equate
to just $40 a year per person in Ghana. The mining and cocoa industries still generate more income for the government than oil and although this situation is not expected to last long, oil is unlikely ever to account for the bulk of state revenues.

Ghana was praised by the World Bank for using money saved through the Highly Indebted Poor Countries (HIPC) scheme to reduce poverty and spread economic development to poorer parts of the country. Indeed, it has been categorised a lower middle income country by the World Bank since 2009.

This is recognition of the economic progress that has been made over many years but also means that the country is now excluded from many sources of donor funding.

Finance minister Seth Terkper said: “As we consolidate our middle income status and these facilities become less available to us, we should be in a position to borrow effectively from the capital markets.”

Accra intends to launch another bond issue to help refinance its 2007 Eurobond and further issues could follow. The required investment should not be difficult to secure. GDP stood at $39.2bn in 2011 and Accra estimates that it achieved growth of 6.7% last year, with a forecast of 7.8% growth for 2013.

Despite such progress, the government faces a growing budget deficit as a result of increased spending. The deficit grew to 7.3% in 2012 and is forecast to widen still further this year. Accra’s view is that it is spending in order to promote future economic growth and that higher oil production will eventually balance the budget.There is some truth in this and the government’s response may also prove beneficial in the long term.

As in almost all African countries, Ghana has an inefficient tax gathering system that allows too many employed people to avoid paying income tax, while millions more remain outside the formal economy.

Revenue raising
Following the victory of John Dramani Mahama in December’s presidential election, the government has been setting out its economic strategy for the next few years. Terkper says: “We are widening the tax net and have formulated new tax policies which will be sent to parliament. We will also go to the bond markets, both the domestic and international bond markets, to get resources to implement our programmes … We have to run programmes that will fit into our status as a middle income country. This means we have to find new ways of collecting taxes and monitoring our projects to avoid wastage.” His efforts on this front may be aided by the years he spent working in the national tax agency.

Although the government appear keen to balance its books, it remains to be seen whether it will grasp the nettle over fuel subsidies. Again, in common with many other African states, a large proportion of government spending continues to be directed at reducing fuel prices for the entire population. Any attempt to end the practice generally results in widespread protests because of the impact on transport costs and on other products that are moved by truck. However, the money would surely be best used to improve health and education services, or to invest in infrastructure that would benefit the general public.

Some infrastructure and services will benefit directly from the oil boom, particularly in the form of improved access to gas and electricity. Apart from the gas supplied by the Jubilee oil project, the scheme will provide feedstock to thermal power plants.

The 400 MW Bui hydro scheme, which is being developed by Sino Hydro and which is approaching completion, will provide yet more generating capacity. Apart from aiding domestic businesses, such projects could see Ghana resume its historic role as a regional power exporter. The country is currently forced to import electricity from neighbouring Côte d’Ivoire but could secure export revenues from supplying other states through the West African Power Pool.

Although the Bui project is approaching completion, trade volumes between Ghana and China continue to rise. Bilateral trade stood at $2.3bn for the first half of last year, 71% up on the same period in 2011. In addition, Beijing provided the Ghanaian government with a $3bn loan in 2011, which will be repaid in the form of crude oil and an understanding that Chinese firms would receive contracts on government backed schemes. Even established sectors of the economy are currently performing well. With production capacity of 1m tonnes a year, Ghana is the second biggest cocoa producer in the world, after Côte d’Ivoire. However, smuggling between the two countries – in both directions depending on national prices – makes it difficult to estimate the real size of the annual harvest.

Ghanaian cocoa has traditionally enjoyed a premium over the Ivorian crop because of its higher quality but traders report that the difference between the two cocoas is shrinking, possibly the two crops are mixed as a result of smuggling. Nevertheless, Ghanaian farmers are continuing to invest in increased cocoa production because of government support for fertilisers and a state guarantee that farmers will receive at least 60% of the international value of cocoa for their crop.

The gold sector, which remains dominated by AngloGold Ashanti, Newmont and Gold Fields, has prospered on the back of the global economic crisis, as investors have sought safety in gold. International prices have doubled since 2008 and Ghanaian production has risen significantly year on year since then, reaching 100 tonnes in 2011.

The government sought to benefit in 2010 by increasing its royalty rate from 3% to 5%. Apart from the thousands of small scale artisanal Ghanaian miners, other foreign firms are now investing in the country. For instance, Viking Ashanti of Australia is developing the Akoase mine, where it hopes to increase the resource base to more than 1m ounces with further exploratory drilling this year.

The oil boom has reawakened criticism over the north-south economic split in Ghana. The government hopes to address this through improved transport links, particularly to the ports at Tema and Takoradi, although such promises have been made before. Accra expects to transfer control of the existing western, eastern and central railway lines to a public private partnership, which would be expected to upgrade the western and eastern lines, which terminate at the two ports, while also bringing the abandoned central line back into use. Almost $3bn in funding is currently being sought from the Exim Bank of China and the Commercial Bank of China for the project.

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