Ghana, a country once described as Africa’s shining star by the World Bank, is facing one of its worst economic crises in decades after defaulting on its debts and reaching a preliminary agreement on a $3bn IMF bailout last December.
Despite being a major cocoa producer and leading exporter of gold, rents, fuel and transport prices have risen, and about a quarter of the population live below the poverty line, according to the United Nations Development Programme and the Ghana Statistical Service.
Kojo Ababio, who works as a data analyst in Ghana’s capital, Accra, used to live comfortably with his family of five. But in recent months, he has struggled to cope with Ghana’s worsening economic crisis.
Ababio says he cannot cope with the constant price increment of essential commodities. Moreover, he pointed out that caring for his family is even more challenging now than a year ago.
“Looking at the situation, you need to work extra hard, do other things to add up to your business to be able to make money to take care of the family,” Ababio said on ‘Inside Politics’, a political show on CNN.
A report by Sarpong Capital, an independent investment banking and capital markets firm based in Accra said 2022 ended with much uncertainty for the Ghanaian economy.
“Four months on, things appear clearer but not necessarily encouraging for the near term,” Sarpong Capital said.
IMF bailout struggles to impact
Analysts say not much progress has occurred since Ghana announced it was returning to the International Monetary Fund (IMF) to secure a bailout and restore some level of confidence in the economy.
“An air of lethargy dominated Q1 2023; uncertainties around debt restructuring and the direction of macroeconomic fundamentals impacted businesses,” Sarpong Capital said.
It added, “Completion of the Domestic Debt Exchange Programme in February 2023 ushered in a lower interest rate environment with treasury bill rates dipping to around 20 percent.”
John Gatsi, a professor at Kwame Nkrumah University of Science and Technology, a public University of Ghana said the country is facing its worst run of poor economic conditions in decades.
“We are in a high inflation regime right now and this affects food items and imported items all together,” Gatsi told CNBC.
Lost glory days
According to a World Bank report, Ghana’s GDP per capita grew by an average of 3 percent per year over the past two decades, putting Ghana in the top ten fastest-growing countries in Sub-Saharan Africa (SSA).
World Bank noted that the country’s poverty rates more than halved between 1998 and 2016, and the extreme poverty rate declined from 36.0 percent in 1991 to 8.2 percent in 2016.
The country’s economic successes came to the limelight when President Nana Akufo-Addo took power in January 2017 and increased net primary school enrollment rate from 62.5 percent in 2000 to 86.0 percent in 2019.
He also brought down inflation from 15.4 percent to 7.9 percent by the end of 2019 and remained in single digits until the pandemic hit in March 2020.
“The growth that we experienced around 2017 to 2019 was actually coming from the oil sector,” Daniel Anim Amarteye, an economist with the Accra-based Policy Initiative for Economic Development, told Al Jazeera.
“We were so excited that the economy was growing, but we couldn’t devise strategies to ensure that the growth reflects in the other sectors of the economy,” he said. “For instance, we neglected the agriculture sector, and we couldn’t do any meaningful value-added investment in that sector. The government became complacent.”
According to the United Nations Food and Agriculture Organization, agriculture represents 21 percent of Ghana’s GDP and accounts for more than 40 percent of its export earnings. At the same time, it provides more than 90 percent of the food the country needs.
“Over the years, the government failed to invest in increasing output in the agricultural sector that will eventually lead to economic growth and transformation and food security. We are a major cocoa-growing country, but we didn’t pay attention to increasing yields to translate into more foreign exchange earnings to drive economic growth and employment,” Amarteye said.
A nation in crisis
Experts say the government took certain political and economic decisions that would have eventually exposed the weaknesses in the system even without those external factors.
“High recurrent expenditure levels and expanding finance costs with subpar revenues have resulted in huge deficits, particularly following the COVID pandemic,” Sarpong Capital said.
For instance, to fulfil one of Akufo-Addo’s most expensive campaign pledges, his government launched a free education programme in public high schools nine months after he took office. It also provided free meals to students at primary and secondary levels.
Also, in 2017, the governing New Patriotic Party scrapped what it called 15 “nuisance taxes”. These included the 17.5 percent value-added tax on financial services, real estate and selected imported medicines. They also reduced import duties on spare car parts, abolished the 1 percent special import levy and the 17.5 percent VAT on domestic airline tickets.
“This brought a massive reduction in government revenue,” Williams Kwasi Peprah, a Ghanaian associate professor of finance at Andrews University in Michigan, told Al Jazeera.
“To make up for the revenue shortfall, the government adopted borrowing. This increased Ghana’s bond market activities domestically and externally and, as a result, a high debt-to-GDP exposure, leading to the current debt unsustainability levels,” he added.
From August 2017 to December 2018, Akufo-Addo’s government spent more than $2.1bn on what it called the “banking sector cleanup”.
The central bank said some banks were insolvent and were operating on life support, putting the interests of depositors at risk. The cleanup saw a reduction in the number of banks from 33 to 23 while more than 340 other financial institutions, such as savings and loans companies, had their licences revoked.
The government aimed to restore confidence and reposition the banking sector to support economic growth.
“The financial sector cleanup also cost the country more than anticipated in attaining a robust financial sector before 2022,” Peprah said.
He said the discovery of two more oilfields in 2019 led to the anticipation of more revenues.
The government responded by issuing more domestic and external bonds, increasing its debt and raising spending on interest payments, social programmes and employment.
In 2017, the government also restored allowances for trainee nurses and teachers. President John Mahama lost to Akufo-Addo in the 2016 election partly for suspending those allowances two years earlier. They put a huge strain on the public purse. For the nurses’ allowances alone, the government paid more than $2.5 million annually.
“That was a poor political and economic decision the Akufo-Addo government made at that time because the country was faced with revenue challenges,” said Kwasi Yirenkyi, a financial analyst with Accra-based Data Crunchers. “The government was spending more than it was receiving, and at the same time, it failed to widen the tax net. We were slowly heading for disaster.”