What’s the Matter With Ghana?

The jewel of Africa has lost its shine!

“The discovery of oil off Ghana’s coast has raised questions about whether Ghana can escape the ‘resource curse’”, wrote BBC, a British newspaper in a classic 2010 article, “where discoveries of valuable commodities fuel conflict and corruption instead of funding development.”¹ Five years later, that simple assessment has turned into a self-fulfilling prophesy.

Sometimes one can spot an economic crisis from afar: abandoned building projects, relentless power cuts, high unemployment rate, you name it. Ghana has plenty of these issues. Its problems, however, grew more dramatic last June. In that month, a torrential rain flooded Accra, its capital. The rainstorm caused an explosion at a gas station in that city and claimed up to 200 lives.²

From stuff to fluff

It should be noted here that Ghana could ill afford this kind of disaster at this time. The West African country was an economic success stories just a few years ago.³ Not anymore. One big mistake the current government made – a mistake that made things to go wrong in the country – was to ratchet up spending on salaries and fuel subsidies. Unfortunately for the country, when commodity prices began to fall, the country started to implode under the weight of its economic problems.⁴ The country was forced by these problems to reach out to IMF for a bailout. Luckily for them, the organization agreed to lend the country almost $1 billion last February.⁵

In 2011, Ghana’s public debt was about 43 percent of the country’s GDP. By the end of this year, it could reach 70 percent of its GDP. When oil began flowing in the country in 2011, its annual growth topped 15 percent. But, given its current economic problems, it may dip to 3.5 percent. It will not be an exaggeration to say that Ghana will breach its budget-deficit target of 6.5 percent of GDP by the end of this year. And the cedi is currently on a free fall, with no sign of ending.⁶

So far this year Ghana’s currency, the cedi, has fallen over 25 percent of its value. One of the reasons for this is that investors have continued to shun its bonds. Broadly speaking, since 1992, the cedi has lost over 99 percent of its value against the dollar. And for the quarter of Ghanaians who live in poverty, inflation, which is now at 16.9 percent, has continued to make life a misery. The traders at Ghana’s marketplaces don’t see a quick end to the country’s current problems.⁷ In their views, business has completely dried up. To get the country back on track, President John Mahama will need to reign spending on those things that gobble up the government tax receipts, particularly on salaries and fuel subsidies. This will, however, be a difficult decision for him given that he seeks re-election in 2016: Ghana’s leaders have a history of splurging in election years.

From the economic standpoint, Ghana ignored its structural problems when the economy was rising. Now these problems have metastasized to a crisis level. Most of Ghana’s foreign earnings come from cocoa and gold, at least before its discovery of oil in commercial quantity. Yet, the government has not done much to improve the sector, abandoning it when prices fall or crops fail. Given that its successive governments failed to save during the boom years, it is not surprising that the country is addicted to IMF loans. As a matter of fact, Ghana has turned to IMF for help no fewer than 16 times since 1966.⁸ The country’s infrastructural shortages which are costing lives as well as dollars was thus exposed by a crippling power crisis and seasonal floods.

Corruption is also a growing concern in the country. The country recently drafted an oil bill for managing the oil sector. However, its Parliament had continued to criticize the bill for handing too much power to the country’s oil minister. Their concern may be reasonable, given that a similar issue is also a major problem in corruption-prone Nigeria. Meanwhile, Ghana’s oil production has continued to increase. But so also is the country’s scope for mismanaging the oil revenue.

References

¹Ghana Oil Begins Pumping for First Time. (2010, December 15). BBC, Retrieved July 28, 2015 from http://www.bbc.com/news/world-africa-11996983.

²Ghana: The Mighty Fallen. (2015, June 20). The Economist.  Retrieved July 29, 2015 from http://www.economist.com/news/middle-east-and-africa/21654648-africas-former-jewel-struggles-regain-its-gleam-mighty-fallen.

³Minter, A. (2015, April 10). Ghana's Success Story Goes Dark. Bloomberg View. Retrieved July 30, 2015 from http://www.bloombergview.com/articles/2015-04-08/ghana-s-success-story-goes-dark.

⁴Ghana: The Mighty Fallen, op. cit., p.50

⁵Ibid, p. 50

⁶Ibid

⁷Ibid

⁸Ibid