Ghana - Economy

A large amount of remittances come in from Ghana’s extensive diaspora, much of which is invested in the booming property sector in the main cities. Remittances from overseas workers are economically important, and declined 30 percent between December 2008 and January 2009, double the median change over the four years 2005-2009. The drop in remittances caused layoffs in the banking sector as well as a dearth of foreign exchange available to the government.

Despite positive economic developments and poverty reduction, critical food security and nutrition challenges persist in Ghana, with the greatest burden in the three northern regions (Upper East, Upper West, and Northern Regions). As many as 1.2 million Ghanaians were considered food insecure in 2014, and chronic undernutrition, though decreasing in the past five years, still affects about one quarter of Ghanaian children under five. Ghana has also reduced the prevalence of underweight in children under five from 25 percent in 1998 to 13 percent in 2011.

Until recently one of the fastest growing economies in the world, Ghana’s GDP growth rate slowed in 2015 to 3.9 percent. The country’s economy is highly dependent on the export of primary commodities such as gold, cocoa, and oil, and consequently remains vulnerable to potential slowdowns in the global economy and commodity price shocks. Attracting foreign direct investment (FDI) continues to be a stated priority for the Government of Ghana (GOG), given the urgent need to restore the country’s economic momentum and overcome an annual infrastructure funding gap of at least USD 1.5 billion.

Ghana suffered serious economic instability and decline from the mid-1960s through the early 1980s, with state control followed by a prolonged period of "muddling through" characterized by import substitution, a restrictive foreign exchange regime, quantitative restrictions on imports, price controls, and a major role for the state in production. The deterioration was reversed in 1983 by the adoption of a package of economic reforms, supported by the World Bank and the International Monetary Fund. Major components included liberalization of exchange rate policy, privatization, and reforms in fiscal, monetary, and trade policies.

Ghana had a good road network but due to inadequate or no maintenance, by 1984, the condition of about 70% of the rural roads had deteriorated to such an extent that only four-wheel drive vehicles could transit. Not only was accessibility to most remote areas impeded, transport costs also soared. For example, a study by MOFA indicated that poor roads account for up to 70% of the difference between farm gate price and the retail price of some commodities. With rehabilitation and maintenance of feeder roads, farm to market transport cost on poor roads could be reduced sigrificantly. Since 1983, feeder roads rehabilitation and maintenance have been accorded top priority in Ghana's Economic Recovery Program (ERP).

Ghana‘s growth, after the economic collapse in the 1980s, has been relatively good – averaging about 3 percent in real per capita terms and with less volatility. However, most of this growth has been due to factor accumulation, with limited improvement in efficiency: over the entire period 1970-2005, growth in the labour force accounted for roughly two-thirds of Ghana‘s overall growth, with growing capital stocks adding another third. Indeed, the evidence points to a decline in total factor productivity (TFP) – a measure of the efficiency at which labour and capital are being used to produce goods and services – over this period. This situation seems to be changing: total factor productivity has begun to play more of a positive role in Ghana‘s growth since the early 2000‘s, rivalling the contributions of growth in labor and capital inputs.

John Agyekum Kufuor took office in 2000. The economy performed well under the Kufuor administration, but Ghana's fundamental vulnerabilities remained. Solid macroeconomic management coupled with major debt relief, large inflows of donor resources, and relatively high cocoa and gold prices have been the keys to the steady improvements in real GDP growth, which in 2004 topped 5% for the first time in a decade and reached an estimated 6.2% in 2006. Further debt relief, continued large aid inflows, favorable commodity prices, and $4 billion in gross annual remittances--this figure includes remittances from individuals as well as non-governmental organizations (NGOs) and embassies; individual remittances were estimated at about $1.9 billion in 2008--put Ghana in a stronger balance of payments position.

Ghana was recognized for its economic and democratic achievements in 2006, when it signed a 5-year, $547 million anti-poverty compact with the United States' Millennium Challenge Corporation. The compact focuses on accelerating growth and poverty reduction through agricultural and rural development. The compact has three main components: enhancing the profitability of commercial agriculture among small farmers; reducing the transportation costs affecting agricultural commerce through improvements in transportation infrastructure, and expanding basic community services and strengthening rural institutions that support agriculture and agri-business. The compact is expected to contribute to improving the lives of one million Ghanaians.

Ghana's stated goals are to accelerate economic growth, improve the quality of life for all Ghanaians, and reduce poverty through macroeconomic stability, higher private investment, broad-based social and rural development, as well as direct poverty-alleviation efforts. These plans are fully supported by the international donor community.

Key economic challenges include: overcoming infrastructure bottlenecks, especially in energy and water; poor management of natural resources; improving human resource capacity and development; establishing a business and investment climate that encourages and allows private sector-led growth, and privatizing remaining state-owned enterprises, several of which are significant budget liabilities.

Ghana’s economy has always been dependent on a small number of key exports principally gold and cocoa, although more recently it has developed a burgeoning service sector. Gold dominates the mining sector and contributes 30% of foreign exchange earnings. Ghana also produces diamonds, manganese and bauxite. Ghana is also a major cocoa producer. In 2006, with an output of 740,000 tonnes, it has retained its position as the second largest producer in the world, a position it had not held for 3 decades before 2003. Cocoa production is subject to volatile prices and the vagaries of the weather. This makes the economy vulnerable.

Ghana has made noteworthy progress in promoting development on both the political and economic fronts. Although the economy has grown at a reasonable rate over the last decade, continuing at this pace will not deliver the ?Asian Miracle-type? pace of transformation that Ghana seeks, even with the discovery and production of oil. Indeed even the current economic growth situation remains precarious. Growth and structural change have been mainly driven by public investment (financed from aid), whereas private investment (particularly the efficiency-seeking type) has been slow to respond.

Increased inflation and devaluation of the Ghanaian cedi since late 2013 dampened the earlier macroeconomic success story – inflation hit 19.2 percent in March 2016 – the highest since early 2010. In April 2015, the GOG signed a three-year $918 million extended credit facility agreement with the International Monetary Fund (IMF) in an effort to stabilize Ghana’s struggling economy. In September 2015, Ghana’s debt to GDP ratio rose above 70 percent. The Ghanaian currency, the cedi, lost almost 32 percent of its value in 2014 and slid another 15 percent in 2015.

Any attempt at industrialization must include increasing production of electricity. In spite of the strides that Ghana has made since 2000 in terms of growing and modernizing the economy, electricity production per capita has declined over the period. The supply has not kept pace with the demand.

The nation suffered severe power outages in 2015, negatively affecting business and industry. Under the ongoing IMF program, Ghana’s inflation, currency, and debt are beginning to stabilize but it will be critical that Ghana adheres to program guidelines to ensure long-term economic success. New power plants are coming online in 2016 that will help meet consumer and business demand and ameliorate the power outage issue. The nation is preparing for national presidential elections in November 2016.

The supply of power has not kept pace with the demand. This is evident from the declining electricity production per capita. Meanwhile, high transmission and distribution losses cause the effective supply to economic agents to fall significantly short of the production capacity that exists. Just as important, the available power supply is highly unreliable, with frequent and prolonged outages disrupting production, damaging equipment, and forcing firms to rely on generators to provide standby power.

Ghana‘s power generation compares favourably with low-income countries in Africa, while its progress in expanding coverage is particularly impressive. Ghana‘s 44 percent coverage rate in 2003 was already three times the average among low-income African countries, while the 66 percent rate achieved in 2010 placed Ghana above the 60 percent average among Africa‘s middle-income countries. Viewed from another perspective, Ghana‘s installed generation capacity of 132 MW per million-population in the mid-2000s greatly exceeded the 24 MW per million average among low-income African countries, but fell significantly short of the 796 MW per million average among middle-income African countries.

The frequency of power outages in Ghana is quite high when compared with the medium and long term target groups. The average number of power outages per month in Ghana is about 11, compared with about 5 for Cape Verde and Botswana and much lower in other comparator countries.

Ghana‘s challenges in the power sector go well beyond power outages. More importantly, in recent years Ghana‘s power system has suffered huge financial losses through underpricing. As demand has grown beyond what the hydro generators at the Akosombo Reservoir can supply, Ghana has initially relied on oil-based thermal generators to fill the gap. The much higher (and rapidly rising) costs of oil-based thermal power, together with slow adjustments in power tariffs, have created a financial deficit from underpricing equal to 1.9 percent of GDP in 2009.

Despite the current macro-economic challenges, Ghana’s abundant raw materials (gold, cocoa, and oil/gas), good governance, political stability, and policy reforms makes it stand out as one of the better locations for investment in sub-Saharan Africa. Among the promising sectors are agribusiness, food processing, downstream oil, gas, and minerals processing, as well as the energy and mining-related services subsectors.

Ghana has a relatively diverse and rich natural resource base. Minerals--principally gold, diamonds, manganese ore, and bauxite--are produced and exported. A major oil discovery off the coast of Ghana in 2007, the Jubilee Field, began production of oil and gas in December 2010, and is now producing approximately 85,000 barrels per day. This discovery has led to significant international commercial interest in Ghana. Some industry experts believe that within 5 years, Ghana is likely to be the third-largest producer of oil in West Africa. Timber and marine resources are important but declining resources.

Despite the oil and mineral wealth now being exploited, agriculture remains a mainstay of the economy, accounting for more than one-third of GDP and about 55% of formal employment. Ghana’s primary cash crop is cocoa, which typically provides about one-third of all export revenues. Other products include timber, coconuts and other palm products, shea nuts, and coffee. With donor support, Ghana also has established a successful program of nontraditional agricultural products for export including pineapples, cashews, and peppers. Cassava, yams, plantains, corn, rice, peanuts, millet, and sorghum are basic foodstuffs grown for local consumption. In addition to domestic produce, fresh vegetables are also imported from Burkina Faso. Fish, poultry, and meat also are important dietary staples.

Ghana's industrial base is relatively advanced compared to many other African countries. However, additional scope exists for value-added processing of agricultural products. Industries include textiles, apparel, steel (using scrap), tires, flour milling, cocoa processing, beverages, tobacco, simple consumer goods, and car, truck, and bus assembly. Industry, including mining, manufacturing, construction and electricity, accounts for about 30% of GDP.

With higher commodity prices, gold, cocoa, and oilare the top three export revenue earning sectors for Ghana. The country's largest source of foreign exchange is remittances from workers abroad.