Ghana’s economic rebirth could be under threat in 2008 as inflation soars and the county’s fiscal deficit rises. The country’s minister of finance and economic planning talks about how such challenges will be met. Writer Charlie Corbett.

The Republic of Ghana’s turnaround from highly indebted, financially mismanaged stere­o­type of post-war African failure to poster boy for African economic rebirth has been astonishing.

Since 2001, the country has slashed its national debt, brought inflation under control and achieved steady gross domestic product growth of about 6% a year. Exports of gold and cocoa may have shored up growth, but the government’s extensive financial sector reforms have assured that it is sustainable.

As a result, last year Ghana became one of the first sub-Saharan African countries to successfully complete a sovereign Eurobond. The 10-year, $750m deal attracted support from investors across the globe and was heavily oversubscribed. Ghana’s minister of finance and economic planning, Kwadwo Baah-Wiredu, says it is his priority to invest the money effectively and transparently.

“We’ve invited our investors to visit Ghana,” he says. “We need to build trust and confidence and let them know their money is going towards rebuilding the country.”

Top of Mr Baah-Wiredu’s ‘to-do’ list is solving the country’s energy crisis. There is a chronic shortage of electricity in Ghana and the government will be investing a considerable amount of money in powering the nation.

The 400-megawatt Bui Dam hydro-­electric project is a joint venture with Chinese construction company Sino Hydro and will cost $622m to complete. The government of Ghana is putting $60m towards the project, as part of its $460m commitment to investment in energy. Aside from that, $200m of the Eurobond will be spent on roads and $90m on railways. “Apart from health and education, infrastructure is a key priority,” says Mr Baah-Wiredu.

Fiscal deficit

The discovery of significant reserves of oil off Ghana’s coast in November last year provided yet another boost to the nation’s long-term economic outlook. The drillers say the oil fields have the potential to produce 120,000 barrels per day by 2010. Mr Baah-Wiredu, however, is careful not to overplay Ghana’s most recent ace.

“We must look at the oil find as additional to the needs of the nation,” he says. “The cocoa industry must grow, as must the bauxite industry, diamonds, manganese and all those other activities. We shouldn’t make the mistake of leaving everything else and just focusing on the oil.”

One thing the government has been forced to focus on in 2008 is the soaring price of food. Ghana, like many of its sub-Saharan peers, is a net importer of staple foods. High prices have forced the government to subsidise food, to quell potential social unrest, and as a result the country’s fiscal deficit is growing.

“We need more food, to produce bio-fuels. Maize needs to be produced on a commercial scale. We need to have the commodities futures and trading markets,” says Mr Baah-Wiredu. “We shouldn’t kid ourselves. All the developed countries that have invested in biofuels are not going to stop. It’s an opportunity for us to cash in and be part of the international community.”

Economic hurdles

The big question on investors’ lips, however, is: can Ghana continue this run of economic success? The inflation rate is high at 18.3% and Ghana’s fiscal deficit was up to 9% of GDP at one stage this year as a result of subsidies on fuel and food.

“There is a clear consensus: Ghana does face a very difficult period over the coming months,” says Razia Khan, Standard Chartered Bank’s London-based regional head of economics for Africa. Ghana’s success has led to complacency, she adds. In 2006, the government increased the pay of public servants so that the public sector wage bill became the largest single public expenditure item for the government. Previously it had been the interest bill on domestic debt.

Such a decision threatened to increase the fiscal deficit significantly, but drought followed by flooding in 2007 made matters considerably worse.

“Growth was still sustained, despite the crisis, but it came at the cost of a blowout of the fiscal deficit,” says Ms Khan. “Then in 2008 things went completely wrong in terms of a doubling of oil prices from the year before. Ghana was forced to introduce an oil subsidy because fuel prices had gone beyond a level any voters could tolerate.”

Ghana’s currency, the cedi, has also depreciated 16% in 2008, which will only add to the pressure on inflation as the cost of importing fuel and food goes up and up.

Optimistic outlook

Looking ahead, there are good grounds for optimism. The planned sale of Ghana Telecom to UK-based Vodafone is expected to raise $900m for the government, and there is also talk of another Eurobond to raise a further $300m.

Even without counting oil, Ghana is a compelling investment story. It is the world’s second largest producer of gold as well as the second largest exporter of cocoa.

For Mr Baah-Wiredu, this is not enough. “We should also be able to assemble parts for mobile phones and computers. It should not always be done elsewhere and exported to us. The same goes for software,” he says.

Ghana’s financial sector reforms will act as a template for other developing African nations. More needs to be done, however. “Ghana needs to deepen its secondary capital markets; reform small and medium-sized enterprise finance, microfinance and rural banking; and increase the private-sector role in the pension and insurance systems,” a recent IMF report says.

Mr Baah-Wiredu will look to continue the hard work. “Every manager must look at fundamentals,” he says. “What are your revenues and expenditures and how are they affecting the private sector? We need to ask ourselves: ‘what can we do to improve the business climate?’”

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