Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
CommentJuly 28 2014

Fiscal mismanagement is hurting Africa

Countries in Africa, including Ghana, Kenya and Zambia, are battling with wide fiscal deficits brought about by grand spending plans. 
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

Three years ago, Ghana was the toast of Africa. Newfound oil, gold, cocoa and a booming services sector powered its economy, which for a short time was the fastest-growing in the world, according to some estimates. This, together with its increasing democratic maturity, turned it into a poster child for the ‘Africa rising’ narrative.

Yet the story has since turned sour. Ghana’s currency has plummeted since 2011; this year alone, it has depreciated 30% versus the dollar. This will probably be the third year running in which the budget deficit is about 10% of gross domestic product (GDP). Growth has slowed and people are suffering from fuel shortages.

Ghana’s crisis stems from bad fiscal and monetary policies. The government has been on a spending binge in the mistaken belief that revenues from commodities exports would be sustained. Instead, oil output has been significantly below expectations, while gold and cocoa prices have dropped. The central bank was arguably too late to rein in soaring liquidity by tightening monetary conditions. Had it acted faster, it could have reduced demand for imports and thus bolstered the currency.

Ghana might be an extreme example of economic management gone wrong in sub-Saharan Africa, but it is not the only one. Several countries, including Kenya and Zambia, are battling with wide fiscal deficits brought about by grand spending plans. Moreover, debt levels are rising, often much faster than economic growth. Senegal’s debt-to-GDP ratio is now similar to what it was before the country was given debt relief in the mid-2000s. Ghana’s ratio is forecast by Fitch to be 61% at the end of this year, up from just 30% in 2009.

Foreign investors remain bullish about Africa. As The Banker went to press, they had just placed a huge $4bn of orders for a $500m Eurobond from Senegal. And Ghana is still confident about tapping the international capital markets later this year.

But it will not take long for sentiment to turn negative if investors feel that fiscal deficits and debt levels are getting out of control. If that happens, the ‘Africa rising’ narrative could prove to be all too short-lived.

Was this article helpful?

Thank you for your feedback!

Read more about:  Africa , Analysis & opinion , Comment , Africa , Ghana