Wobbly economy ahead

Ghana’s economy faces downside risk and a severe battering from the slump in commodity prices on the world market, which could put the fiscal gains made over the last few months into disarray, as a further increase in the current account deficit would reduce an already low reserve buffer and trigger increased exchange rate pressure, the report card of the International Monetary Fund’s (IMF) assessment of the economy has predicted.

The situation, the Fund envisaged, could be worsened by the three-year old erratic energy supply challenges if they remain unresolved by end of the year.

Commodity exports account for 85 percent of the country’s total merchandise exports, and it is expected that a further fall in commodity prices, in particular oil, gold or cocoa, could result in a sharp contraction of exports and a further widening of the current account deficit — though part of this would be offset by lower profit and dividend payments.

The IMF, which was in the country a couple of months ago to assess the progress made in implementing the 3-year Extended Credit Facility programme, in a report to its Executive Board noted that the economy’s health now hinges on the country’s power sector amidst the decline in world crude oil, cocoa and gold prices.

It said an additional drop in gold price would also reduce production and fiscal revenue.

“Economic growth prospects will depend on how fast the ongoing electricity crisis is addressed. A new decline in commodity prices (oil, cocoa and gold) would weigh on the fiscal and external balances.

“While fiscal consolidation is on track, tighter conditions on both the domestic securities market and international capital markets may pose financing risks for the budget,” it said.

Ghana’s economy is forecasted to grow by 3.5 percent this year, following the decision by power producers to intensify the load-shedding programme in view of the low inflow of rainfall into the Akosombo Dam, which coincided with the maintenance and upgrade of some major thermal power facilities — as well as the government’s inability to procure crude oil to power the thermal plants that depend on cheap natural gas from Atuabo and Nigeria.

Last year, the non-oil economy was substantially affected by the large depreciation of the cedi and the electricity crisis, which dampened manufacturing production.

Already, preliminary estimates for the first quarter of this year show a deceleration in year-on-year growth to 4.1 from 4.5 percent in the last quarter of 2014.

The IMF added: “The services sector, in particular transport and trade, accounted for most of the growth deceleration, while growth in the agriculture and industry sectors remained subdued”.

Government’s attempts to address the constant blackouts have largely been disappointing, with the strategies largely dependent on the successful establishment of privately-owned plants.

The Power Minister Dr. Kwabena Donkor has put his job on the line if the energy situation is not fixed by end of the year — a promise that looks unlikely to be fulfilled as the date for arrival of two critical power barges have been shifted back to end-October from its original date of September, with US$50million guarantee for one of the barges yet to be satisfied.

Added to the energy crisis headache of government is declining world commodity prices, which have already forced it to cut revenue expectations from an initial figure of US$4.2billion as stated in the budget to about US$1.5billion, which Finance Minister Seth Terkper has indicated will further be cut on account of a lower than expected crude oil price.

Besides, a poor cocoa harvest and sluggish gold production have led to lower-than-projected exports, whereas non-oil imports rebounded from recent historic low levels — adding pressure to the foreign exchange market. The capital and financial accounts exhibited lower capital outflows. In line with the seasonal pattern, gross international reserves dropped by US$1.1billion by end-June to US$3.2billion, which covers about 2.1 months of imports.

These developments have exerted significant pressure on the cedi, which has experienced erratic instability since beginning of the year.

At the same time, the power crisis has impacted negatively on business and job growth, with many enterprises cutting production levels and laying-off workers.

According to the IMF the energy crisis is a major bottleneck to economic growth, while poor investment in the agriculture sectors limits job-creation for a fast-growing workforce.

It added: “Properly addressing the energy crisis, which has been hampering economic activity, with additional power generation from private-financed power plants by end-2015/early-2016 will be critical for supporting a rebound in growth next year.

“Failure to resolve the energy crisis by end of this year would most likely result in further deceleration of GDP growth — particularly in the industrial sectors.”