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AfricaJune 30 2011

Ghana keen to diversify while the going's good

Ghana is making plenty of effort to diversify its economy, not least by developing its manufacturing and service industries. But cocoa, gold and oil will have the biggest impact on the economy in the coming years, so for now the country is reaping the benefits of high global prices for these commodities.
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Ghana keen to diversify while the going's good

Commodities have been the mainstay of Ghana’s economy for decades. The country is the world’s second biggest grower of cocoa and derives about 40% of its gross domestic product from agriculture. In recent years, the mining sector has contributed to just under half of export earnings, thanks largely to high prices for gold, of which Ghana produces more than any African country except South Africa.

The start of commercial oil production in December 2010 has increased the importance of commodities to Ghana. This will only be emphasised further when a gas industry is established, which is expected in the next two years.

However, in Ghana’s commercial agricultural sector, cocoa still dominates. The government has put much effort into increasing output, which is expected to reach 1 million metric tonnes in the 2011-12 season, says Kwabena Duffuor, the country's finance minister. This would compare with about 700,000 tonnes a few years ago and 900,000 tonnes in 2010-11. It would also see the country catching up with Côte d’Ivoire, the world’s largest exporter of cocoa, which grew 1.35 million tonnes during the last season. This expansion in output, as well as high prices, led to Ghana’s export revenues from cocoa totalling $860m in the first quarter of 2011, up from $683m in the same period of 2010.

Ghana's government dismisses claims that the growth of cocoa exports is linked to the Côte d’Ivoire’s four-month political crisis that followed its elections in November, leading to a virtual shutdown of the economy. Instead, it says, output has risen because of better productivity, a result of investments in farming infrastructure, including irrigation and storage facilities.

Making farming a business

Despite the cocoa sector’s strong performance in recent years, Ghana is still a long way from realising its agricultural potential, particularly with regards to other crops. Less than a quarter of its arable land is thought to be cultivated and yields are lowered by most farming being rain-fed and carried out by smallholders. “Although there have been some initiatives, Ghana can produce much more than it is doing right now,” says Gilbert Hie, head of SG-SSB, a Ghanaian subsidiary of Société Générale.

Efforts to boost productivity have been hampered by a tendency among Ghanaians to view farming as a subsistence activity, with little priority given to developing large-scale agriculture. “We’ve tended to see agriculture more as a way of life than as a business,” says Stephen Kpordzih, head of Agricultural Development Bank (ADB), a government-owned development and commercial bank in Ghana.

Recently, however, there have been improvements. Placing import tariffs on some cereals has boosted local production. Supply of rice, for example, has increased by about 30% since last year. But Ghana's government is mainly trying to develop infrastructure and encourage better methods of farming. “In the last budget, the focus was on a few areas,” says Mr Duffuor. “One of them was the modernisation of agriculture. We have been dependent on subsistence and rain-fed agriculture in the past. We’re moving away from that, making sure we develop commercial farming where we have a lot of small dams supporting the farmers. We’re also encouraging more use of fertilisers.”

Further challenges

Banks are also crucial, given the need among farmers for credit. Many lenders have until now been wary of the sector, which is reflected by the fact that one bank, ADB, dominates, providing more than 50% of total agricultural lending. “There are challenges with financing agriculture,” says Simon Dornoo, managing director of Ghana Commercial Bank. “Historically, banks have tended to shy away from it. There are risks – it’s rain-fed. But as the government invests in infrastructure and machinery to create large commercial farms, that should attract banks.”

Private equity investment could also help. Foreign investors in Ghana are increasingly looking at agriculture, says Ken Ofori-Atta, executive chairman of Databank, a local investment bank. Others agree, stating the sector is one of the most promising in the country.

Mining attraction

Ghana has long been a favoured destination for mining companies, which the government has actively courted. Many are attracted by its political stability and efficiency relative to other countries in west Africa. A general corporate tax rate of 25% and a lack of windfall taxes, despite the high commodity prices of the past 18 months, also help, say analysts. “Successive governments have gone out of their way to make it a friendly place for investors,” says Kwame Addo-Kufuor, vice-president of corporate affairs at AngloGold Ashanti, which operates two gold mines in Ghana and, since its inception in 2004, has invested $770m in the country. “Its tax regime is very competitive by today’s global standards,” he adds.

Mining has accounted for the bulk of Ghana’s exports over the past decade. In the first quarter of this year, gold exports alone totalled $1.2bn, while overall exports were $3bn. Although gold dominates the sector, the country also produces substantial amounts of bauxite, diamonds and manganese.

Oil companies have been quick to move into Ghana since its offshore Jubilee field was discovered in 2007. Among them are the UK’s Tullow Oil, which operates the field and holds a 36.5% stake, and US firms Kosmos Energy and Anadarko, which each have a shareholding of 23%.

Despite a dispute last year that caused ExxonMobil to back out of buying Kosmos’ stake of the field for $4bn after the government (which holds 14%) opposed the deal, analysts have been impressed by Accra’s handling of the oil industry. They say that the development of the Jubilee field in the space of just three years is a testament to the government’s support of the field’s operators.

While oil’s importance to the economy is likely to grow, it is not expected by analysts to crowd out the mining and agricultural sectors. This is mostly because production from the Jubilee field, thought to hold at least 1 billion barrels, will be capped at 120,000 barrels a day for at least two years, far below the output of producers such as Nigeria and even Gabon. Emphasising this, exports of crude totalled $484m in the first quarter of 2011, 40% of the value of gold sales in the country for the same period.

Exchange activity

Some foreign commodity companies are represented on Accra’s stock market. AngloGold Ashanti dominates the exchange, making up 64% of its 20bn cedis ($13.2bn) capitalisation. “The listing allows the Ghanaian people to be part of the company’s performance,” says Mr Addo-Kufuor.

Tullow, which is listed in London, is the latest company to raise equity locally. In late May it announced a secondary listing of 4 million shares – 0.45% of its share capital – on Ghana’s stock exchange. The deal, which will be closed in July, is expected to raise 124m cedis. As with AngloGold, it said it wanted Ghanaians to be able to have direct exposure to the company.

Besides equity listings, there are few ways for that to happen as Ghana’s corporate bond market is all but non-existent. Banks are encouraging more local funds to increase their exposure to corporate firms, but the country’s debt investors are unlikely to be able to fund the large capital expenditure needs of oil and mining companies any time soon.

Ghana is keen to diversify its economy as far as possible. The government says its efforts will not slow down now that the country has become an oil exporter. Even in commodities there is a push to increase production of crops such as rice and soya beans, and minerals other than gold. But for the near future at least, gold, cocoa and oil are set to lead Ghana’s economy.

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