This edition of the Ghana Economic Update is the second edition of the annual series on Ghana’s economic prospects. Every issue includes both a broad overview of the country’s macroeconomic, political, and structural dynamics, and a section dedicated to one particular issue. This update focuses on Ghana’s international competitiveness and the policies that will help it to shift it into a higher gear.

Overview

Ghana missed its 2016 fiscal target by a large margin, reversing the progress made in fiscal consolidation in 2015. The fiscal deficit rose from 6.3 percent of GDP in 2015 to an estimated 8.7 percent in 2016, which was significantly higher than the target of 5.3 percent. The fiscal slippage was due to revenue shortfall and to overspending ahead of the December 2016 elections. This worsened an already exacerbated debt situation, as Ghana’s public debt stock reached US$29.2 billion, or 73.1 percent of GDP, in 2016, with significant exchange rate risks due to its high external debt (40.1 percent of GDP) and liquidity and rollover risks from its high short-term debt (11.9 percent of GDP). In addition to the fiscal deficit, new arrears of GH¢5.1 billion (3 percent of GDP) were accumulated during 2016, pushing the stock of domestic arrears to an estimated GH¢7 billion (4 percent of GDP). These additional fiscal liabilities were accumulated while the Government was still grappling with a large stock of financial deficit in the state-owned energy sector.

The 2017 budget announced by Ghana’s newly elected government aims to achieve gradual fiscal consolidation in 2017 and a sharper expenditure adjustment in 2018. The budget target for the 2017 fiscal year is set at 6.5 percent of GDP and is supported by an ambitious revenue increase, including from oil revenue, of 2.1 percent of GDP. Tax revenue is projected to rise because of a reduction in import exemptions, improved tax compliance, and overall increased economic activity. Public expenditures are expected to be slightly higher in 2017, driven mainly by the higher allowance made for the clearance of arrears and projected higher interest payments. Hence, the projected rebound in economic growth and revenues will be essential to achieve the targeted fiscal balance.

The medium-term growth outlook is positive and mainly driven by the expected rise in oil prices and increase in oil production. Economic growth is projected to rebound to 6.1 percent in 2017, as the Tweneboa, Enyenra, Ntomme (TEN) oil field has its first full year of operation, and as oil and gas production in the Sankofa field starts later in the year. Growth in the services sector is expected to remain robust in 2017, supported by improved and more stable power supply. Nevertheless, reduced government consumption and lower capital spending under the planned fiscal consolidation, along with weakness in cocoa prices, could hinder non-oil sector growth. The growth rate is forecasted to remain around 6 to 7 percent in the medium term.

However, Ghana’s economic prospects depends decidedly on whether the new government can restore fiscal discipline and regain investor confidence. Fiscal discipline and transparency will be needed to achieve macroeconomic stability, debt management and market credibility. Restoring the fiscal consolidation process is essential for ensuring Ghana’s public debt sustainability. To curb the accumulation of new debt, the Government will need to achieve a sufficient primary fiscal surplus. Improving macroeconomic conditions should also reduce financing costs over the medium term.

A difficult external environment may complicate the stabilization process. Ghana’s medium-term growth prospects are still subject to external risks, including a further deterioration of commodity prices. Recent terms-of-trade shocks have highlighted the country’s macroeconomic vulnerabilities. They have also underscored the urgency of building fiscal buffers and promoting economic diversification to improve the economy’s resilience to further terms-of-trade shocks and help to mitigate the negative impact of an anticipated decline in oil production after 2021. Stronger efforts are needed to unleash the private sector’s potential outside the extractive sector to enhance Ghana’s economic resilience.

Ghana’s business environment and competitiveness fall short of their potential. Ghana has been generally stagnant or declining in areas of competitiveness and business reform over the last few years. The World Bank’s Doing Business Report and the Word Economic Forum’s Global Competitiveness Index (GCI) tell a similar story of Ghana’s relatively good performance against the West Africa average but a significant drop compared to its own performance 8 years ago or benchmarked against comparator countries. Although Ghana is one of the regional leaders in overall Doing Business rankings, its inability to sustain reforms severely affects its competitiveness globally.

The country’s macroeconomic challenges have had a significant impact on the private sector’s competitiveness. Over the past five years, the primary constraints to growth within Ghana’s private sector have remained consistent, with low access to credit, unreliable power supply and high utility tariffs being the consistent of the top five constraints. The private sector performance was further weakened by lower key export commodity prices and a severe energy crisis in 2014. In the last 3 years, energy rationing, high inflation, high borrowing cost, energy costs and higher value-added taxes (VAT) have increasingly crowded out the private sector.

Despite a focus on private sector development Ghana’s national development strategy, international as well as national surveys indicate significant challenges to private sector growth. The complex challenges faced by the private sector in Ghana are exasperated by the lack of an effective dialogue between the private and public sectors on how best to prioritize dynamic constraints, identify practical solutions and monitor the progress of reforms. Low levels of coordination and inclusiveness in the policymaking process have limited opportunities to demand that the Government undertake the types of wider growth-supporting reforms that the private sector needs to become and remain competitive in the global economy.

The success of the business regulation reform relies on establishing dialogue mechanisms with clear rules of accountability and systematic monitoring of progress. Inviting inputs on priority reforms from private sector stakeholders will be essential to build confidence and trust in the public-private dialogue.

Political commitment to the business reform agenda is a first-order priority. A positive early step would be to reenergize Ghana’s dialogue and reform mechanisms for private sector development; this would be widely welcomed by the private sector. Ghana also needs to develop the ability to prioritize, design, plan and implement business reform programs based on broad stakeholder engagement.