Ghana: 2021 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Ghana

1. Ghana entered the COVID-19 pandemic with a favorable economic outlook. Before the pandemic hit, the economy had been expected to grow at 5.8 percent in 2020. The authorities had maintained macroeconomic stability following the successful completion of the Extended Credit Facility program in 2019. An extensive banking sector cleanup, together with an improved supervisory and regulatory framework, had laid the foundations for financial stability.

Abstract

1. Ghana entered the COVID-19 pandemic with a favorable economic outlook. Before the pandemic hit, the economy had been expected to grow at 5.8 percent in 2020. The authorities had maintained macroeconomic stability following the successful completion of the Extended Credit Facility program in 2019. An extensive banking sector cleanup, together with an improved supervisory and regulatory framework, had laid the foundations for financial stability.

Context

1. Ghana entered the COVID-19 pandemic with a favorable economic outlook. Before the pandemic hit, the economy had been expected to grow at 5.8 percent in 2020. The authorities had maintained macroeconomic stability following the successful completion of the Extended Credit Facility program in 2019. An extensive banking sector cleanup, together with an improved supervisory and regulatory framework, had laid the foundations for financial stability.

2. The government’s response to the pandemic helped save lives and safeguard livelihoods. To contain the spread of COVID-19, the government implemented social distancing restrictions, including a partial lockdown in April 2020 and school and border closures. Growth slowed, food prices spiked, and exports were affected by a large decline in oil prices. However, a major monetary and fiscal policy relaxation cushioned the pandemic impact on economic activity.

Ghana: Covid-19 cases

(New daily confirmed cases per million, 7-day rolling average)

Citation: IMF Staff Country Reports 2021, 165; 10.5089/9781513590066.002.A001

Sources: Our World in Data and IMF staff calculations.

3. Against this difficult background, a general election was held in December 2020. President Nana Akufo-Addo was re-elected for a second term, but neither major political party gained a majority in Parliament, which is evenly split.

4. An economic recovery is underway, but fiscal rigidities and debt vulnerabilities have increased. The rebound in activity coincided with the gradual easing of social distancing restrictions and the launch of an ambitious vaccination campaign. Government policies contributed to a record 2020 fiscal deficit, a sharp increase in public sector debt, and rising debt service costs. The 2021 budget undertook a difficult but important shift towards medium-term fiscal consolidation. The economic impact of the pandemic is fueling social demands on the government to reverse the decline in living standards and address youth unemployment.

5. The 2021 Article IV consultation focused on the impact of the COVID-19 pandemic and discussed policies for a sustainable recovery. The consultation follows the US$1 billion emergency support provided under the Rapid Credit Facility in April 2020. In a challenging context, the authorities only followed part of the past 2019 Article IV advice (Annex I).

Policy Response to COVID-19

6. The authorities took several fiscal, monetary, and regulatory measures in 2020 to mitigate the social and economic impact of the pandemic (Figure 1 and Annex II):

  • Health spending increased by about GHS 2 billion (0.5 percent of GDP), partly financed by the World Bank, to: (i) provide PPE, medical equipment and treatment; (ii) procure testing kits; (iii) initiate community engagement; (iv) build health infrastructure; and (iv) quarantine inbound travelers. In addition, the government also recruited 37,000 health workers and granted an income tax waiver and life insurance to government health personnel.

  • Fiscal support, amounting to GHS 6.8 billion (1.8 percent of GDP), included: (i) subsidized water and electricity tariffs to households and provision of food packages and hot meals; (ii) soft loans to SMEs; (iii) security-related spending, including evacuations of Ghanaians abroad; (iv) seed funding for a new development bank; (v) payments to contractors; and (vi) transfers to statutory funds. The authorities also launched the ambitious, four-year Ghana CARES program to support the economic recovery.

  • Monetary policy easing, with the Bank of Ghana (BOG) cutting the policy rate twice—by 150bps in March 2020, and another 100bps in May 2021—and lowering reserve requirements from 10 to 8 percent. The central bank also increased lending to government by 4.4 percent of GDP, including 2.6 percent of GDP under the new Asset Purchase Program (APP).

  • Relaxation of macro and micro-prudential requirements, with the BOG halving the capital conservation buffer to 1.5 percent, easing loan provisioning and classification rules, suspending bank dividend distributions, delaying new capital requirements for special deposit-taking institutions (SDIs), and taking steps to promote digital payments. Individual banks also unilaterally extended temporary moratoria for specific loans and sectors.

Figure 1.
Figure 1.

Ghana: Impact and Recovery from COVID-19

Citation: IMF Staff Country Reports 2021, 165; 10.5089/9781513590066.002.A001

SSA Frontier Markets: Covid-19 support packages

(Percent of GDP)

Citation: IMF Staff Country Reports 2021, 165; 10.5089/9781513590066.002.A001

Sources: IMF Fiscal Monitor April 2021. Group averages weighted by country GDP.

7. These measures contributed to a record fiscal deficit and sharp increase in public debt in 2020. On a cash basis, the budget deficit including energy and financial sector costs, rose from 7.5 percent in 2019 to 15.2 percent of GDP last year. As a result, public sector debt rose from 63 percent of GDP to 79 percent of GDP. The government also incurred additional arrears-financed spending for 2.1 percent of GDP.

Recent Economic Developments

8. The pandemic had a severe impact on economic activity, but a recovery is underway:

  • COVID-19 cases peaked in July 2020, and again in a more deadly second wave in early 2021. Ghana was the first country to receive a COVAX vaccine shipment in early March and had administered 852,047 vaccines by early May (2.8 percent of population). However, the rollout has been constrained by vaccine availability through the COVAX facility, which led government to procure additional vaccines from costlier sources.

  • Growth slowed from 6.5 percent in 2019 to 0.4 percent in 2020, due to lower mining production and the impact of COVID-19 restrictions, equivalent to an income per capita decline of 1.7 percent. Poverty increased, and half of all households reduced food spending during the partial lockdown. However, the economy avoided the contractions seen across the region. Growth should rebound to 4.7 percent in 2021, supported by a strong cocoa season and a recovery in mining and services, although the government fight against illegal mining may affect small-scale gold production while delayed well-drilling will continue to affect oil production this year.

  • Inflation spiked to double digits in April 2020 because of rising food prices due to the lockdown, before falling to 7.5 percent (y-o-y) in May 2021 (Figure 2). Pressures from higher fuel and import prices and budget revenue measures could push inflation to 9.6 percent by the end of 2021, before returning to target next year.

  • External financing conditions tightened at the start of the pandemic, but as global liquidity surged, Eurobond spreads stabilized close to their pre-pandemic levels. Ghana returned international markets in March 2021 with a US$3.025 billion Eurobond, but at higher interest rates and shorter maturities than before the pandemic.

  • Domestic financing conditions in 2020 were also tested with several uncovered auctions, recourse to BOG financing and non-competitive issuances, and domestic arrears accumulation, despite a strong uptake of government bonds by local banks and nonbanks.

  • The current account deficit widened to 3.1 percent of GDP in 2020, with the decline in oil exports offset by higher gold prices, stable remittances, and import contraction due to weaker demand and COVID-19-related trade disruptions. The deficit is projected to decline to 2.2 percent of GDP in 2021 as the pickup in oil prices offsets a gradual resumption in imports.

  • The cedi depreciated 3.9 percent against the US dollar in 2020, less than in 2019, due to lower FX demand, structural reforms (including higher use of forward FX auctions), and BOG intervention. It remained stable in the first half of 2021, as portfolio inflows resumed.

  • Gross international reserves rose from US$6.6 billion in 2019 to US$7 billion in 2020, and are expected to reach US$7.5 billion (3.2 months of imports) by end-year.

Figure 2.
Figure 2.

Ghana: Recent Economic Developments

Citation: IMF Staff Country Reports 2021, 165; 10.5089/9781513590066.002.A001

Real GDP Growth Projections in Sub-Saharan Africa

(Percent)

Citation: IMF Staff Country Reports 2021, 165; 10.5089/9781513590066.002.A001

Sources: Ghanaian authorities, IMF April 2021 WEO database, IMF staff estimates.

Ghana: Eurobond Spreads at Issuance

(Percent)

Citation: IMF Staff Country Reports 2021, 165; 10.5089/9781513590066.002.A001

Source: Ghanaian authorities, L.S Treasury, and IMF staff calculations.

Outlook and Risks

Ghana: Key Macroeconomic Indicators, 2019–25

article image
Sources: Ghanaian authorities; and Fund staff estimates and projections.

Cash basis, excluding domestic arrears of 2.1 percent of GDP in 2020.

9. The baseline scenario assumes a V-shaped economic recovery, gradual fiscal consolidation, and an exit from monetary easing. Supported by expansion of extractive industries—including a gradual start of oil production in the Pecan field from 2024 onwards—but also by the CARES program and the wide-ranging digitalization reforms, annual growth would average 5.2 percent over the medium term. The authorities would pursue the fiscal consolidation path envisaged in the 2021 budget, implying a 9 percent of GDP primary balance adjustment based on revenue measures in 2021 and expenditure cuts in 2022–24 that would result in a primary surplus by 2024. Public debt would peak at 87.4 percent of GDP in 2024, and gross financing needs would average 22 percent of GDP. The baseline scenario assumes continued access to international markets and no further recourse to central bank financing, allowing inflation to remain close to target, while gross reserves would gradually decline below three months of imports coverage.

10. These projections are subject to significant uncertainty (Annex III):

  • The pace of economic recovery depends on the evolution of the pandemic. Faster vaccination will accelerate the recovery, especially in services. However, new COVID-19 waves— including from more transmissible variants—could trigger additional restrictions. These could slow economic activity, increase spending needs, lead to social tensions, and, ultimately, possibly delay fiscal consolidation and exacerbate debt vulnerabilities.

  • Debt rollover difficulties could constrain budget financing and hurt growth. Slow progress towards fiscal adjustment or tighter global financing conditions could undermine investor confidence and result in portfolio outflows and higher sovereign yields, which would also affect banks’ balance sheets given their large exposure to the sovereign. In this regard, the expected domestic market capacity to absorb new government debt may not fully materialize. Regional security concerns could also create additional spending pressures. In this context, budget financing could become challenging, requiring sharp spending cuts that hurt growth, further BOG support that could feed depreciation and inflation pressures, and new domestic arrears.

  • Higher-than-projected contingent liabilities could further worsen the debt outlook. Energy and financial sector cleanup costs added 7 percent of GDP to public debt over the past three years. Higher than expected costs from these sectors, but also materialization of liabilities in the SOE sector, could burden public finances in the medium term and increase public debt.

  • Climate change could reduce growth and exacerbate economic inequality. More extreme weather is contributing to shorter growing seasons and, together with deforestation, could limit land suitable for cocoa production. Droughts could also affect hydropower generation and water resources in the Volta basin, which are shared with neighboring countries.

  • On the upside, structural transformation and new oil or mining discoveries could boost medium-term growth and tax revenues over the baseline. Export-oriented industrialization would support job creation, reduce poverty, and diversify the economy, which would help mitigate the impact of commodity terms-of-trade shocks on growth and the current account.

Ghana: Public Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2021, 165; 10.5089/9781513590066.002.A001

Sources: IMF staff projections.

11. Alternative scenarios based on different fiscal consolidation trajectories illustrate pitfalls and opportunities:

  • An ambitious scenario assumes stronger fiscal consolidation, with additional revenue measures of 2.4 percent of GDP from 2021 to 2023 over the baseline, for an overall fiscal adjustment of 3.4 percent of GDP per year over the period. Public debt would peak at about 85.7 percent of GDP in 2024 and then decline decisively. Debt-service indicators would improve, but annual gross financing needs would still remain around 20 percent of GDP. A stronger fiscal contraction would have a negative short-term effect on growth, but would decrease bond spreads and government borrowing costs. The current account would improve through lower import demand. The consolidation would also allow a shift in the policy mix over the medium-term, with a more relaxed monetary policy stance which would cut domestic debt service costs and spur private-sector credit growth.

  • In contrast, a downside scenario reflects the baseline revenue projections but assumes that the planned spending cuts would not be implemented, in line with the experience of some countries in similar fiscal situations. Public debt would reach 91 percent of GDP in 2025, with gross financing needs rising to 26 percent of GDP. The expansionary fiscal stance would push growth temporarily above the baseline, but would also lower reserves, weaken the exchange rate, increase borrowing costs, crowd out private-sector credit, and keep inflation above target.

Ghana: Gross Financing Needs

(Percent of GDP)

Citation: IMF Staff Country Reports 2021, 165; 10.5089/9781513590066.002.A001

Sources: IMF staff calculations

Authorities’ Views

12. The authorities broadly agreed with the outlook and risks, and underscored the importance of balancing fiscal consolidation efforts with growth-enhancing expenditures aimed at supporting the economic recovery whilst mitigating the impact of the COVID-19 pandemic. Faced with an unprecedented pandemic, the government took extraordinary measures to save lives and protect livelihoods, albeit at a high fiscal cost. The authorities view the Ghana CARES program as the propelling anchor for a broad-based, inclusive and sustainable economic recovery. Recent high-frequency indicators already point to a recovery underway. The authorities expect that their structural transformation and digitalization agenda, which is fast becoming embedded in their development framework, will accelerate Ghana’s growth potential over the coming years, as well as create jobs, reduce corruption and boost tax revenues.

Capacity to Repay the Fund

13. Ghana’s capacity to repay is adequate under the baseline (Table 6).1 Following the April 2020 RCF disbursement, the total amount of outstanding credit from the Fund reached SDR 1.459 billion (197.8 percent of quota and 30.1 percent of gross international reserves) at end-2020. While repayments to the Fund are projected to rise over the medium-term, peaking at SDR 239.1 million in 2026, under the baseline scenario they would remain below 1.1 percent of exports, 4.6 percent of gross international reserves and 5.9 percent of external debt service.

Table 1.

Ghana: Selected Economic and Financial Indicators, 2019–25

article image
Sources: Ghanaian authorities; and Fund staff estimates and projections.

The CPI was rebased in September 2019. The historical figures reflect assumptions by IMF staff.

Including public enterprises.

Excludes discrepancy.

Includes Energy Sector Levy Act bond.

Does not subtract liabilities from currency forwards or swaps with residents.

Table 2a.

Ghana: Summary of Budgetary Central Government Operations, 2019–25

(GFS 2001, Cash Basis, Percent of GDP)

article image
Sources: Ghanaian authorities; and IMF staff estimates and projections.

Revenues in staff’s presentation differ from those of the authorities as the presentation reports net of retentions.

Payments of cash arrears and promissory notes to statutory funds.

Table 2b.

Ghana: Summary of Budgetary Central Government Operations. 2019–25

(GFS 2001, Cash Basis, GHS Millions)

article image
Sources: Ghanaian authorities; and IMF staff estimates and projections.

Revenues in this presentation differs from the authorities’ as it is net of retentions of the revenue agency.

Payments of cash arrears and promissory notes to statutory funds.

Table 3.

Ghana: Monetary Survey, 2019–25

article image
Sources: Ghanaian authorities; and Fund staff estimates and projections.

Include public enterprises and local governments.

Including valuation and Open Market Operations (OMO).

Excludes foreign currency deposits.

Includes foreign currency deposits.

Table 4.

Ghana: Balance of Payments, 2019–25

article image
Sources: Ghanaian authorities; and Fund staff estimates and projections.

The Fund’s disbursements to be used for budget support are included after 2017.

Includes foreign encumbered assets and oil funds.

Excludes foreign encumbered assets and oil funds.

Does not subtract liabilities from currency forwards or swaps with residents.

Table 5.

Ghana: Financial Soundness Indicators

article image
Source: Ghanaian authorities.
Table 6.

Ghana: Indicators of Capacity to Repay the Fund

article image
Sources: IMF staff estimates and projections.

Total debt service includes IMF repayments.