BY SAM AMAN
Sam Aman is a first-year IDEV student on the SAIS Europe campus.
Overview
With roughly 1,700 confirmed cases spanning 12 of its 16 regions, Ghana currently trails South Africa and Cameroon as Sub-Saharan Africa’s third most impacted country with regard to the COVID-19 pandemic. The country has bet on a mass test-and-trace model and displays the continent’s highest per capita testing rate,[1] which it has used to begin easing lockdown measures in major cities. The pandemic comes on the heels of years of strong growth in Ghana, bringing uncertainty to a previously favorable outlook for the country.
Sub-Saharan Africa is projected to have its first year of contraction in 25 years at the regionwide level as a result of the COVID-19 pandemic. While the latest forecasts do not predict contraction for Ghana this year, the country's forecasted real GDP growth in 2020 was revised down substantially from a projection of 5.8% to just 1.5% in the International Monetary Fund’s latest World Economic Outlook.[2] This would be the lowest growth registered since 1983. Furthermore, it would almost certainly entail a contraction of per capita GDP, considering that Ghana's 2.2% GDP growth in 2015 pushed per capita growth below zero that year.[3] Poverty in the country is likely to increase disproportionately to the decrease in per capita GDP. Given the high concentration of Ghanaian workers in the informal sector, particularly in informal wholesale/retail trade, ongoing restrictions and depressed economic activity risk hitting those already vulnerable particularly hard.
IMF projections for 2021, however, have in fact been revised upward, from 4% to 5.9% growth, though much of this increase is likely a reflection of the lower base from which it will grow. While strong growth, fiscal consolidation, and macroeconomic stabilization over the last three years have created a bit of a buffer, Ghana's economy is nonetheless poised to experience significant disruption in the near term.
Trade Projections & Impacts
One of the most immediate effects of the crisis will stem from its impact on global commodity prices and demand, as the performance of Ghana’s outward-facing sectors will have a significant ripple effect on domestic activity. Ghana's economy has become increasingly export-oriented, with exports in 2018 accounting for over 35% of GDP, a higher proportion than the average for lower-middle-income countries and for any region except Europe [Figure 1]. Meanwhile, the country's export composition is highly concentrated [Figure 2], and increasingly so in primary commodities, with gold, oil, and cocoa together making up over 80% of all export earnings. The fate of these three products will be of paramount importance, though their projections vary considerably.
Oil has seen plunging prices and a collapse in global demand, which are sure to cause serious disruption in Ghana. Oil accounted for just over 30% of export revenues in 2018. More than half went to China alone, and while China’s economy is not expected to contract in 2020, a massive decrease in Chinese oil demand in the first three months of this year is certain to vastly decrease Q1 export earnings. This impact will only be exacerbated should China see a second wave of COVID-19 and a sustained decrease in oil demand. Ghana’s 2020 budget was drawn up assuming an average oil price of $62.60 per barrel for the year, which now lies outside upper bound of the 95% confidence interval in IMF’s latest projections [Figure 3]. A sudden drop in demand combined with a price war between Saudi Arabia and Russia early this year pushed Brent prices down to a low of $22.74 on March 31, though OPEC has agreed upon a production cut in response. Still, it is unclear to what extent a production cut can mitigate an unprecedented drop in demand, and the Ghanaian Ministry of Finance's calculations estimate a shortfall in oil receipts of 5.7 billion cedis, or just over $1 billion, should prices average $30 for the year.[4]
Gold may potentially serve as a lifeline for Ghana during this crisis given its attractiveness as a safe haven asset in times of financial calamity, particularly as a hedge against mounting inflationary pressures around the world. The metal accounted for just over a third of exports in 2018. Prices have been on an upward trend since 2016 and on April 14 of this year reached a high of nearly $1,745 per troy ounce[CS1] .[5] Projections are for a further increase throughout 2020 and 2021.[6] This is likely to provide a buffer against declining petroleum earnings, though a potentially important mitigating factor is at play. While the crisis positively impacts demand for Ghana's gold, it may, at least in the near term, negatively impact Ghana's ability to supply it. The closure of air routes around the world has left stockpiles idle at Accra's international airport, ultimately delaying whatever windfall may come Ghana's way.[7] Should the supply chain disruptions cause a sustained localized glut, a significant differential between global prices and those received by Ghanaian miners is likely to emerge.
Cocoa accounted for nearly one-fifth of Ghana's export earnings in 2018 and has seen global prices fall already by about 20% since COVID-19 began spreading in February. With chocolate consumption expected to be hit by falling disposable incomes in Europe and North America, and with a significant portion of demand traditionally linked to travel and tourism,[8] most indices project further decline [Figure 4]. The immediate impact on producers will likely be mitigated by the fact that the majority of Ghana's 2020 harvest has been pre-sold by COCOBOD, the state-run cocoa board. Still, the roughly 800,000 rural households engaged in the cocoa sector are vulnerable, with lower poverty rates than non-cocoa rural households but with a high proportion concentrated just above the poverty line.[9] Depressed export earnings stemming from a sustained decrease in global cocoa demand would thus likely have a direct impact on the incidence of poverty in rural areas.
A potential upside for Ghana may be in the composition of its export markets. In the IMF's latest World Economic Outlook, of all major economies, India and China are the only ones not expected to see contractions this year, with India coming out the most unscathed with projections of 1.9% GDP growth in 2020. India and China represent, respectively, Ghana's #1 and #2 export destinations. Together they purchased nearly 34% of Ghana's exports in 2018. As a crude measure, the projected 2020 GDP contraction in Ghana’s top ten export markets in 2018, weighted by the share each economy represented among the top ten in that year, stands at -2.57% [Figure 5], while the figure for Sub-Saharan Africa stands at -3.33% [Figure 6]. In 2021, the weighted growth discrepancy closes, standing at 5.92% for Sub-Saharan Africa and 5.99% for Ghana.
Investment
Foreign direct investment in the country is nearly certain to fall over the next year and a half, though by how much is unclear. UNCTAD's latest assessment predicts that the COVID-19 pandemic will prompt a global decline in FDI of 30-40%.[10] This would be of similar magnitude to the global financial crisis of 2008, which saw world FDI inflows plunge by 41.6% from 2008 to 2009, though inflows in Ghana fell by only 12.6%.[11] This came right on the heels of Ghana's first oilfield discovery in 2007, however, making it difficult to ascertain the impact the crisis would have had otherwise. Still, without a similar buoy this time, the 12.6% figure can with near certainty be taken as a floor for the pandemic's drag on FDI inflows this year.
Domestic investment is expected to decline as a whole, with preliminary projections placing 2020 gross capital formation at 12.3% of GDP, down from 16.2% in 2019.[12] The entirety of the decrease should take place on the private investment side, whereas government fixed capital formation is projected to increase from 1.8% to 2.2% of GDP, likely as a function of urgent spending on improvements to health infrastructure. The Central Bank has, however, been quick to act and has already announced cuts to both interest rates and the primary reserve requirement to boost liquidity, potentially mitigating the negative shocks to private investment.[13] Gross capital formation is expected to rebound to nearly pre-COVID levels in 2021, at 15.5% of GDP.
State Response & Fiscal/Monetary Impacts
[10] Ghana's cedi started 2020 off with strong gains against the dollar and by early February was the world’s best-performing currency, though depreciation has since erased all gains [Figure 7]. With the expected decline in export earnings, further depreciation is likely, exacerbated by a fall in capital inflows as planned investments are put on hold. While this should be attenuated to an extent by declining import volumes—with container arrivals at Ghana's ports having already fallen by a third as of March 30—a pronounced depreciation is possible. This could make exports more competitive, which would bode well for exports of gold, whose short-run demand is very price-elastic, particularly in India, Ghana's largest gold market.[14] The impacts on exports of oil are more uncertain given its notably low short-run price-elasticity of demand.[15] A strong depreciation would, however, have substantial and unambiguous debt implications in the future, as roughly half of Ghana's public debt is foreign currency-denominated [Figure 8].
Among the most immediate impacts of the crisis will be on fiscal space in Ghana as government revenues fall significantly. In addition to reduced petroleum receipts, an important second channel will be through tax receipts, which will be dragged down both by a reduction in import duties and by reduced conventional tax revenues. The latter will stem from a combination of less wealth to tax, planned tax relief as part of the government's stimulus package, and a likely decrease in compliance. Ghana's revenue to GDP ratio already puts it in the lowest quartile in Sub-Saharan Africa before any COVID-19 shocks [Figure 9].
Spending, meanwhile, will need to be significantly ramped up in a number of areas, key among them health. Government health expenditure in Ghana is low, standing at roughly $640 million in 2017, or 1.09% of GDP, far below the world average and slightly below both SSA and LMIC averages.[16] A joint analysis by the Ghanaian Ministries of Finance and Health has estimated just the initial cost of Ghana's immediate health response to the outbreak at $100 million, indicating that public health expenditure by the end of this year—and likely into next—will be substantially higher than average.[17] The World Bank has, however, approved a financing package of $35 million for emergency medical support along with $65 million for longer-term health capacity building.[18]
The negative shock to revenues and positive shock to expenditure will almost certainly require temporarily suspending the 5% deficit ceiling imposed by Ghana's 2018 Fiscal Responsibility Act. IMF projections place the 2020 deficit at 9.5% of GDP, though the Fund announced on April 13 the approval of a $1 billion disbursement in the form of direct budget support.[19] The decision to channel the disbursement entirely through the government budget likely reflects a considerable degree of confidence in Accra's capacity to respond. The Ghanaian government has been among the quickest on the continent in implementing a COVID-19 response, both in terms of instituting lockdowns and in terms of rolling out alleviation measures. These include tax forbearance and government absorption of water bills for all and electricity bills for the poor—as well as 50% of electricity bills for the non-poor.
Conclusion
While the resulting fiscal gap promises to be formidable, particularly in the face of the shocks outlined above, Ghana has spent recent years building a track record for responsibility and accordingly finds itself well positioned for financing support in the near term. This, together with the country’s solid macroeconomic fundamentals and good governance, bodes relatively well for Ghana’s ability to weather the current storm, despite the inevitable uncertainty that is to come.
References
[1] Asiedu, Kwasi Gymafi. (April 20, 2020). “Ghana Has Become the First African Country to Lift its Coronavirus Lockdown.” Quartz. https://qz.com/africa/1841212/ghana-lifts-coronavirus-lockdown-as-testing-ramps-up/
[2] International Monetary Fund (2020). “World Economic Outlook: The Great Lockdown.” Washington, DC. https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weoapril-2020, Page 24.
[3] World Bank Development Indicators Database. (2020). “Ghana.” and International Monetary Fund. (2020). “World Economic Outlook: The Great Lockdown.”
[4] Ofori-Atta, Ken (March 30, 2020). “Statement to Parliament by the Minister of Finance on the Economic Impact of the Covid-19 Pandemic on the Economy of Ghana,” Ministry of Finance of the Republic of Ghana. https://www.mofep.gov.gh/news-and-events/2020-03-30/statement-to-parliament-on-economic-impact-of-the-covid-19-pandemic-on-the-economy-of-ghana, Page 12.
[5] World Gold Council. (2020).
[6] Economy Forecast Agency. (2020). “Gold Price Forecast.”
[7] Reid, Helen and Lewis, Jeff (March 31, 2020). “Subsistence miners lose out as coronavirus crushes local gold prices,” Reuters. https://www.reuters.com/article/healthcoronavirus-mining-artisanal/subsistence-miners-lose-out-as-coronavirus-crushes-localgold-prices-idUSL8N2BN670
[8] Jaiswal, Sweta (April 15, 2020). “Cocoa ETF to Face the Bitter Coronavirus Blow as Demand Wanes,” Zacks Investment Research. https://www.zacks.com/stock/news/873162/cocoa-etf-to-face-the-bitter-coronavirusblow-as-demand-wanes?cid=CS-ZC-FT-etf_news_and_commentary-873162
[9] Kolavalli, Shashidhara and Vigneri, Marcella. (2017). The Cocoa Coast: The Board-Managed Cocoa Sector in Ghana. International Food Policy Research Institute (IFPRI). https://doi.org/10.2499/9780896292680, Page 135.
[10] United Nations Conference on Trade and Development (2020). “Impact of the COVID-19 Pandemic on Global FDI and GVCs: Updated Analysis,” Investment Trends Monitor. https://unctad.org/en/PublicationsLibrary/diaeiainf2020d3_en.pdf, Page 4.
[11] World Bank Development Indicators Database. (2020).
[12] International Monetary Fund (April 13, 2020). “IMF Executive Board Approves a US$1 Billion Disbursement to Ghana to Address the COVID-19 Pandemic.” Press release. https://www.imf.org/en/News/Articles/2020/04/13/pr20153-ghana-imf-executiveboard-approves-a-us-1-billion-disbursement-to-ghana-to-address-covid-19
[13] Ofori-Atta, K. (March 30, 2020). Page 5.
[14] Kanjilal, Kakali and Ghosh, Sajal (2014). "Income and Price Elasticity of Gold Import Demand in India: Empirical Evidence from Threshold and ARDL Bounds Test Cointegration," Resources Policy. Vol 41. https://doi.org/10.2499/9780896292680, Page 141.
[ 15] Caldara, Dario; Cavallo, Michele & Iacoviello, Matteo (2016). “Oil Price Elasticities and Oil Price Fluctuations,” United States Federal Reserve. http://dx.doi.org/10.17016/IFDP.2016.1173 , Page 13.
[16] World Bank Indicators Database. (2020).
[17] Ofori-Atta, K. (March 30, 2020). Page 13.
[18] World Bank (April 2, 2020). “World Bank Group Supports Ghana’s COVID-19 Response.” Press release. https://www.worldbank.org/en/news/press-release/2020/04/02/world-bankgroup-supports-ghanas-covid-19-response
[19] IMF. (April 13, 2020).
Additional Sources
Geiger, Michael Tobias; Gui-Diby, Steve Loris; and Marchat, Jean Michel Noel (2019). “Ghana - Economic Diversification Through Productivity Enhancement.” World Bank. Washington, DC. http://documents.worldbank.org/curated/en/292511575924848299/Ghana-Economic-Diversification-Through-Productivity-Enhancement
International Monetary Fund (2019). “Ghana: 2019 Article IV Consultation.” Washington, DC. https://www.elibrarhttps://www.flickr.com/photos/132466470@N05y.imf.org/view/IMF002/28568-9781513523347/28568-9781513523347/28568-9781513523347_A001.xml
World Bank, International Monetary Fund (2019). “Ghana - Joint World Bank-IMF Debt Sustainability Analysis: 2019 Update.” Washington, DC. http://documents.worldbank.org/curated/en/107291558383900674/Ghana-Joint-World-Bank-IMF-Debt-Sustainability-Analysis-2019-Update
PHOTO CREDIT: Free use image from Canva Pro.