The Brenthurst Foundation’s recent discussion paper on how South Africa can make better choices for a prosperous post-Covid-19 South Africa was insightful and instructive, for them as for others, Ghana included. Ghana’s President, like South Africa’s, has, over the past couple of weeks, received no shortage of praise from various corners of the globe for his decisiveness, ‘rampant’ testing and general handling of the pandemic.
As the Covid-19 pandemic spreads across the continent, African policymakers are being faced with difficult decisions to ensure their economic, social and political survival and stability. The expression stuck between a rock and a hard place seems fitting but doesn’t quite do it justice; it presumes there are two options. For Africa, there are not two options, it’s just one – assuming African leaders want to deliver a high-growth future and a more effective state machinery that caters to the well-being the population. That choice is to reform.
Lifting the Lockdown, but Constraints Remain
The recent past decision by the Ghanaian Presidency to lift the lockdown has caused a lot of debate and created divides between Ghanaians. There are some who think it is the absolute wrong move and others who think it’s a necessary evil. Regardless of which side of this chasm you stand, there’s agreement that rebuilding the Ghanaian economy to a different, more prosperous place than it was before Covid-19 would require some tough choices.
Prior to Covid-19, Ghana’s economic growth was forecast at 6.8% for 2020, on the back of 7.0% growth in 2019. Driven mainly by growth in the mining and petroleum sectors in addition to non-oil growth in agriculture, the country was set to become the third fastest growing economy in Africa, behind Rwanda, Tanzania. Declining interest rate from 25% in 2015 to 15% is evidenced by the increasing consumer confidence and optimism about future economic conditions.
It is not all rosy of course. Business confidence, prior to the crisis, despite some improvements over the past four years suffered a setback on account of exchange rate depreciation with the Cedi losing 12.9% to the US Dollar in 2019. Under- and un-employment was effectively at 4.3% in 2018, and only 1 in 10 young Ghanaians are out of work – a scenario that may cause South Africans to look on in envy but the veracity of these numbers is a far reflection of the actual levels of unemployment due to poor data, poor record management and discrepancies in the formal definition of unemployment which fail to capture the complexity of Ghana’s labour force, 80% of whom work in the informal economy.
With Covid-19, Ghana will be worse off than it has been in the past 36 years. The International Monetary Fund (IMF) forecasts that Ghana’s economic growth will decline to 1.5% during 2020 and rebound to 5.9% in 2021, keeping with projections, and under the assumption that the government’s measures to manage the crisis, keep the economy going – albeit slowly -, and effectively allocate additional resources goes to plan. If not, the V-recovery predicted by the IMF might instead lead to deflated growth and a huge deficit to GDP from collapsed revenues and increased spending.
Electricity provision – or the lack of it – has not helped. Prior to the pandemic, the government’s debt owed to the Ghana Grid Company Limited (GRIDCo), the Electricity Company of Ghana (ECG), VALCO, and many other power generating companies, as of November 2019, stood at no less than Ghc1.2 billion (US$207,500,000). With government’s decision to absorb 50% of electricity tariffs during Covid-19, it is uncertain what the implication of this would be and what preparations have been made to cater for this added expense for an already notorious debtor with a rapidly inflating expense account. One can likely expect a combination of higher tariffs and taxes in the future to compensate for the short-term reliefs provided today. While suppressed oil prices will offer some respite, government must not lose sight of the importance of reforming the national power producer with minimal political interference, including for instance awarding of the ECG concession – properly this time –, and re-evaluating and renegotiating existing power generation contracts for cost-efficiency.
Much of Ghana’s projected growth was dependent on new oil discoveries, higher cocoa prices, rapid diversification driven by the flagship industrialization efforts, and the potential for increased domestic revenue mobilization efforts. Covid-19 changed the outcomes as is reflected in the IMF downgrade of GDP growth to 1.5%.
In the agriculture sector, which contributes 10% to GDP, declining value and volume of sales is beginning to negatively impact some of Ghana’s most vulnerable population – farmers – as exports grind to a halt with sea, air and land borders being restricted around the world.
A major cash crop export, cashew nuts which generated up to $980 million annually is experiencing a decline due as orders from the world’s largest importers, including India, China and Vietnam have declined, leading to a price drop from US$130 per 100kg bag of raw cashew nuts to just US$75 since the start of the year. The cocoa sector is no exception. Plunging cocoa bean prices are not only threatening revenues, of which Ghana has already lost US$1 billion in the past month and half, but also stalling the government’s current syndication process for loan facilities for the 2020/2021 crop season. This strains Ghana’s renewed commitment to improve refinement processes and guarantee that over 50% of domestically produced cocoa beans will be processed. While difficult to estimate future import/exports sales, the pandemic more broadly is continuing to disrupt global supply chains and affecting manufacturing operations around the world, a sector that contributes up to 10% of Ghana’s GDP in 2018.
The debate is not around whether Covid-19 will push the economy firmly into recession – that’s a given. The discussion is about the extent of the recession, which arguably, for the moment is likely to shrink growth at the very least to 1.5%, in the process negatively impacting the state treasury and hence its ability to respond.
The suppression of economy activity is cross-cutting affecting agriculture, industry as well as services. The decline in Ghana’s tourism industry adds to the problem. The tourism sector contributes 5.5% to GDP, being responsible for some 5.3% of total employment (or 882,000 jobs) in the country. Today, the sector is in a precarious position. Kotoka International Airport has come to a grinding halt, except for a few strategic flights. Hotels and other hospitality agents are sinking faster than can be discerned, and the question remains around the industry’s chances of full recovery, and how long that would take, without government intervention.
There are many other questions not least regarding the long-term effect on social capital – education and human development – where inequality and income disparities will dictate who is better able to utilise internet facilities or, benefit from the subsidized services that came with school attendance such as school feeding. Ghana has upwards of 80% of its economy in the informal sector many of whom need to go out and will be unable to properly observe social distancing and lockdown requirements. Should we consider that some 70% of all basic schools are public, the future output from a term or two lost in educational outcomes is concerning, much less when you add secondary and tertiary.
Without government support, none of these sectors will survive. Neither will health nor private business, especially SMMEs.
COVID-19 has laid bare the vulnerabilities of the small business sector, a majority of which depend on short-term cash-flows to fund operating expenses. In the absence of deep reforms to business regulation, taxation and incentivisation, they are unlikely to survive and further deepen the economic disruption and strain recovery efforts. Government must walk the talk of supporting private sector growth by providing the cushioning to weather this storm.
For business in general, the gapping inequality in access and comfortability is evidenced by those who still have jobs and those who do not. While there are those whose operations allow remote work, more vulnerable low-wage workers have been furloughed, lost their incomes, or forced to face the reality of impending job cuts.
Lest the gravity of the impacts of the pandemic on different sections of the economy are known, government cannot start to map out a targeted, effective response. This underscores the pressing need for up-to-date and high-quality data on various cadres of society and economic activity including inequality, trade, investment, poverty and formal unemployment. Ghana Statistical Service needs to urgently innovate around data gathering in a timely manner and on a frequent basis. Smart web applications and social media functionalities provide easy tools to do so and help empower decision making as well as serve as a repository to better deal with future black swan events – taking a leaf out of the Ghana Health Services new voracious consumption and portrayal of data for instance.
The Demand for Diversification
Ghana’s recovery is important for Africa, and vice versa. In 2018, Ghana exported and imported goods to and from the rest of Africa to the value of US$2.5 billion and US$1.2 billion, respectively. Between 2017 and 2018, world imports from Ghana fell by 7%, while imports within the continent grew by 8% and within ECOWAS by 9%. Intra-Africa exports account for 15% of Ghana’s total exports and imports for 11% of total imports for 2018.
Despite increased intra-continental trade, the level of integration in global value chains in Africa is one-third lower than other developing regions and needs to be remedied. Of Ghana’s exports to the rest of the continent, 70% are semi-manufactured gold and crude petroleum oil. Addressing and reducing the costs and bottlenecks to regional integration should be a matter of urgent priority. New investment should focus on developing more light manufacturing capabilities, industries without smokestacks and services which can create opportunities for value addition. A focus on export driven industrialization policies which worked to near perfection in East Asia will help as well. The recent global oil market price adds weight to the case for diversification away from traditional concentration in extractive sectors.
Where will this money come from? It’s not very certain, yet. Today, Africa’s external debt stock at $700 billion is more than half the continent’s GDP and in the absence of temporary, or the dream of many of Africa’s Finance Ministers’ today, complete, relief from debt repayment, some $44 billion is needed this year to service Africa’s debt, a situation that could only tip economies further into a downward spiral. This raises the stakes in Africa’s latitude for crisis response and recovery. As Ken Ofori Atta, Ghana’s Finance Minister, enviously points out, African countries are unable to provide the lavish stimulus packages that more developed countries can, as they face losses to domestic revenue, productivity and jobs, and at the same time are being held to account on servicing their debts.
Some like the G-20 and IMF have come up with moratorium and debt relief but is not enough. Africa countries, even before the pandemic faced growing concerns around rising debt and the size of growing interest repayments. More generous debt relief – if not all – would be indicative that they are taking developing countries more seriously and actually vested in their success. But, the record of corruption, looting and an inability to consistently promote policies that show increased financial independence, encourage investment, and increase productivity makes that a hard choice, understandably. Ghana will need to send stronger signals to show a full understanding of the effects of this pandemic and commitment to long-term measures of growth and stability.
Where will the money come from?
International financial institutions such as the World Bank, International Monetary Fund (IMF), and the African Development Bank are offering finance on decent terms to fight the pandemic. However, as low interest debt as it may seem, debt is debt. Should the plans to uplift the economy not succeed, Ghana will find itself grappling with unsustainable debt levels the risk of losing its fiscal and policy-making sovereignty to one lender or the other. This previses the need to not only spend cautiously but also ensure the cost of financing is as low as can be. This option presents its own challenges considering that Ghanaian bonds are trading with low liquidity and high bid-ask spreads and have subpar credit ratings (B on average). As capital market experts have pointed out on numerous occasions, Ghana’s capital markets (bonds and equities) are poorly developed with fairly rudimentary financial instruments. As such, Ghana loses out on cheaper debt sources, such as bonds, and except these financial markets improve, there is little hope for better and cheaper financing, or sustaining debt.
Aid to Ghana –how much now and how much required?
Over the past five years, Ghana has received on average $1.2billion in net official development assistance and official aid, a small portion of its $65 billion GDP. Should the pandemic shave off 5.3% of GDP as projected, Ghana will lose some $15billion, or GHC 85billion in 2020 economic output alone (2018 prices). The IMF two weeks ago released $1billion to Ghana to address the urgent fiscal and balance of payments needs that Ghana is facing amid the pandemic.
Evidently, Ghana is unlikely to get all the aid needed to fill the yawning hole that Covid-19 will create. Globally, aid flows could diminish as donors focus resources inward and to more humanitarian assistance. Greater reliance on self-generated solutions and effective use of funding from bilateral agreements and development partners will be instrumental to safeguarding economic and political stability.
To develop Ghana’s economy at a rate quick enough to keep pace with its rapidly expanding population, projected to double by 2050, large injections of foreign and local direct investment will be needed. Yet, in 2018, FDI flows to Ghana was just under $3billion, or 9% of the sub-Saharan total, and 0.3% of the global total of $1.2 trillion. There is an increasing need for custom-made policies to attract international market actors and overcome daunting domestic deficiencies that may prevent the seamless incorporation of foreign and local firms, and their ability to become success stories.
The Role of Remittances
Prior to the pandemic, official remittances to sub-Saharan Africa amounted to a record $48 billion in 2018, $15 billion more than net FDI inflows in the same year. This does not include the millions that make their way across the globe through informal channels and the goodwill of travelling family and friends. As the pandemic spreads, remittances from diaspora communities are expected to fall by 20% due to layoffs, delayed salary payments and uncertainty around future incomes in Europe, USA and Middle East where most of the live and work.
Given the role and magnitude of remittances, and the impact it’s had on reducing poverty and inequality, governments – as well as populations that depend on this – face tremendous challenges ahead. Government no longer has the cushion that alleviates the stress for social welfare and income transfers, and people have little access to previously incomes. The demand on government to provide relief will become enormous and likely allow more populist rhetoric and exacerbate existing ethnocentric dissent. Priorities around allocations of donor aid and Covid-19 financial relief packages may need to be reconsidered to compensate for losses in remittance support.
Tough choices await, a non-negotiable imperative for action
On the bright side, it should be noted that Africa has already, and thankfully, shown some resilience with the various more localized pandemics like Ebola, or HIV AIDS and Ghana played a huge part in the response activity. Coming up with solutions is not beyond us.
The decision that must be taken now is one that will shape Ghana’s trajectory for decades to come.
There is no decision that will come at zero cost, politically or economically. What is a given, though, is that the pandemic demands an economic response in the magnitude of the disruption it has caused. Any less and Ghana will be shooting itself in the foot.
There are no simple, silver bullet solutions either. Turning this crisis into an opportunity will involve a series of difficult political trade-offs and tough resource choices that prioritize much-needed economic policy reforms and puts jobs and growth before political dogma and vested interests. For that, seven themes should inform Ghana’s next development steps.
The Author, Marie-Noelle Nwokolo is a researcher at the Johannesburg-based think tank, the Brenthurst Foundation. She writes in her capacity as an inquiring Ghanaian. For more insights, subscribe and stay tuned for her upcoming blog, https://noellewonders.com/