Ghana: fiscal tightening can’t be delayed forever - Capital Economics
Africa Economics

Ghana: fiscal tightening can’t be delayed forever

Africa Economics Update
Written by Virag Forizs

Victory for Nana Akufo-Addo in Ghana’s presidential election this week increases the likelihood of fiscal stimulus in the near term, which would support the economic recovery. But the precarious state of the country’s public finances mean that austerity is likely to become the order of the day before long.

  • Victory for Nana Akufo-Addo in Ghana’s presidential election this week increases the likelihood of fiscal stimulus in the near term, which would support the economic recovery. But the precarious state of the country’s public finances mean that austerity is likely to become the order of the day before long.
  • The elections contested between President Nana Akufo-Addo of the New Patriotic Party (NPP) and his predecessor John Mahama of the National Democratic Congress (NDC) resulted in the re-election of the incumbent with 51.6% of votes. (See Chart 1.) The two rivals faced off for a third time in a country with strong democratic institutions and a history of tight races between their parties, which have alternated in power since 1992.
  • The economic backdrop to the polls is not as poor as other parts of the world, with the hit to the economy from the COVID-19 pandemic having been relatively modest. GDP fell by 3.2% y/y in Q2, compared to much larger contractions in Nigeria and South Africa, of 6.1% y/y and 17.1% y/y respectively. (See Chart 2.) And survey data point to a strong rebound in activity in Ghana; the whole economy PMI remained elevated in November. (See Chart 3.)
  • President Akufo-Addo campaigned on promises of fiscal loosening, which would stimulate Ghana’s economy further. The $17bn (about 7% of GDP a year), three-year economic recovery plan reportedly involves infrastructure spending as well as the expansion of social programs and benefits. At the same time, we expect inflation to drop back next year, allowing the Bank of Ghana to provide additional monetary stimulus. The policy rate will probably be lowered by 100bp, to 13.50%, by end-2021. (See Chart 4.)
  • The prospect of a COVID-19 vaccine will give another boost to growth. While the authorities have so far not reached advanced purchase agreements with major vaccine manufacturers, Ghana could draw on the multilateral COVAX facility which aims to vaccinate 20% of participating countries’ populations by end-2021. As vaccine distribution gets underway (probably around mid-2021), any remaining virus containment measures will probably be lifted.
  • Indirect benefits from vaccines will probably filter through before widespread vaccine roll-out in Ghana. The country’s terms of trade are likely to improve next year. We expect oil prices to rebound, with gold and cocoa continuing to trade at elevated levels, which could boost export revenues by nearly 2.0%-pts of GDP relative to this year. (See Chart 5.) A return of tourists would further improve Ghana’s current account position, which is likely to post a shortfall equal to around 3.5% of GDP this year. All told, we think that following growth of 3.0% this year, GDP will expand by around 7.0% in 2021. (See Chart 6.)
  • Beyond next year, however, the new government will have to confront the poor state of public finances. Ghana ran large budget deficits even before the pandemic struck, and has been assessed by the IMF to be at a high risk of debt distress. According to the central bank, public debt surpassed 70% of GDP in September following the issuance of $3bn-worth of Eurobonds in February. Meanwhile, Ghana has not joined debt relief initiatives like the G20’s Debt Service Suspension Initiative.
  • Some of the promised spending initiatives will probably be pushed through next year, but sooner than later fiscal consolidation will return to the agenda. President Akufo-Addo envisages reducing the budget deficit from 11.4% of GDP in 2020 (as projected by the Ministry of Finance) to 8.3% in 2021, and below the 5% of GDP limit set out in fiscal responsibility legislation by 2022. (See Chart 7.)
  • In addition to meeting the country’s fiscal rule, the possibility of tapping international bond markets to finance the deficit is likely to compel the government to demonstrate its commitment to rein in public debt. For our part, we expect that the public debt-to-GDP ratio will begin to drop back after peaking around 72% this year. (See Chart 8.)
  • That said, failure to enact sufficient measures to put the debt trajectory on a sustainable path is a distinct possibility. We estimate that stabilizing the debt-to-GDP ratio will require an improvement in the primary budget balance by about 5-6% of GDP. Short of that, servicing large external debts (about two-thirds of total public debt) could become a problem if borrowing costs rise amidst growing investor concerns.

Chart 1: Presidential Election Results (% of Votes)

Chart 2: GDP (Q2, % y/y)

Chart 3: Whole Economy PMI

Chart 4: Consumer Prices & Policy Rate

Chart 5: Change in Net Export Incomes Caused by Commodity Price Moves (% of GDP)

Chart 6: GDP (% y/y)

Chart 7: Budget Balance (% of GDP)

Chart 8: Public Debt (% of GDP)

Sources: EC Ghana, IHS Markit, MoF, Refinitiv, Capital Economics


Virág Fórizs, Africa Economist, virag.forizs@capitaleconomics.com