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“Ghana faces a stubborn fi scal defi cit and the longer-term
challenge of reducing the country’s reliance on a small number
of exports,” says Murega Mungai, trading desk manager at AZA,
Africa’s largest nonbank currency broker. “Fiscal and economic
reforms should be top of the agenda in this election year in
order to sustain the economy and minimize shocks that come
with election periods.”
Ghana’s losses in oil revenues in the fi rst quarter of
this year were partially off set by a price surge in gold,
however, says Ucheaga. As of August 7, 2020, gold rose
to $12,079.90 an ounce, its highest level since 2011.
Ghana is among the few African countries that
benefi t from a diversifi ed commodity export market.
Before the advent of oil, Ghana’s traditional export
basket was dominated by gold and cocoa, of which
it is the world’s second-largest producer. Mungai
believes further diversifi cation would help the coun-
try achieve more-seamless revenue streams when the
main sectors are hit. The government should focus
its efforts on encouraging investors to put money
into these other sectors through subsidies, rebates and
other tools, he argues.
“There is an increasing need for diversity in the
economy, as reliance on a few commodities leaves the
country vulnerable to price declines as well as crop
failure,” Mungai says. Deciding on what industry or
industries Ghana should diversify into is a challenge,
however. While gold may serve as a lifeline during the
current crisis, given its attractiveness as a safe haven asset
in times of fi nancial stress, “there is a need for diversity
of the economy from cocoa and gold.”
Ucheaga expects growth to come largely from agri-
culture, noting that the industrial sector will see declin-
ing growth. The services sector, he says, “will see the
steepest decline in growth this year, as discretionary
service off erings will see very little demand.”DEFICIT DILEMMAS
The government, however, must make sacrifices,
Ucheaga says. As it did in 2019, he expects Ghana
this year will reduce its investment in the Petroleum
Holding Fund and increase its allocation to the
Annual Budget Funding Amount, to make up for weaker
government revenue.
“The savings lost today can always be recovered in the future,
when oil prices fully recover and the budget defi cit falls below
5% of GDP, which is the legal threshold in the country,” he adds.
“Lower oil revenue means weaker foreign exchange earnings,
which will severely weaken the currency and cause the balance
of payment surplus which Ghana enjoyed last year to come
under threat,” says Ucheaga.Higher government spending in response to the pandemic
has “exacerbated the substantial drop in domestic revenue
resulting from the pandemic and falling oil prices,” the Bank
of Ghana said in its June Fiscal Developments Report. “Going
forward, fi scal policy will largely depend on how these two
reinforcing factors evolve. The expanding defi cit and the pri-
mary defi cit would exert pressure on the public debt stock, and
alongside lower growth projections
for 2020, may pose debt sustainability
risks over the medium term.”
A wider defi cit means the country
would need to borrow more. The gov-
ernment has drawn up a 2020-2023
Medium-Term Debt Management
Strategy (MTDS), aimed in part at
achieving a proper mix of external and
domestic resources. Its gross fi nancing
requirement in line with the MTDS
for 2020 is estimated at 67.67 billion
Ghanaian cedi ($11.73 billion). The
net budget fi nancing is 18.88 cedi, or
4.7% of GDP. This year, the govern-
ment plans to issue or reopen medium-
to long-term instruments—bonds
maturing at two to 20 years (three-,
five-, seven-, 10-, 15- and 20-year
bonds)—and refinance some of its
maturing treasury bills and bonds.
“The major problem of overborrow-
ing from the domestic market is that
this will crowd out the citizens from
accessing funds from fi nancial institu-
tions, hence limiting capital to the pub-
lic for more production, and stagnating
the economy,” Mungai warns.
The government can absorb the
debt, Ucheaga says, but removing
subsidies could kick-start inflation.
“Subsidies are best removed when
the economy is stable,” he argues,
“not when the economy is tanking. I
believe the government will make the
right decision to continue carrying the burden, which is both
politically and economically right.”
One such area of subsidy is Akufo-Addo’s campaign prom-
ise made years ago to off er free high school education, later
extended to include technical and vocational schools. While the
program has started, full coverage and sustainability will be key.
“The government will have to keep carrying the subsidies,
not just because it is an election year but because it is the most
humane thing to do in this diffi cult year,” says Ucheaga. ■September 2020 | Global Finance | 57SECTION NAME
STORY NAME TK | By Name TktktktkMungai, AZA: Fiscal and
economic reforms should
be top of the agenda in this
election year.Ucheaga, EUA Intelligence:
Losses in oil revenues in the
fi rst quarter of this year were
partially offset by a price surge
in gold.