Ghana’s solution for their falling oil revenues is through diversification into other underdeveloped sectors in order to have an inflow of sources when the major sectors are being hit.
Before the first COVID-19 case – Ghana was already going through an economic shock – dealing with a decline in commodity prices, strengthening of the financial conditions and facing trade disruptions with China. Then the oil crash hit.
Ghana, which is known as the second biggest economy in West Africa was forecasted to grow at its slowest rate in the past 37 years.
President Nana Addo Akufo-Addo commented on the economic situation after he was renominated by the New patriotic Party on June 27: “We did not plan for this unthinkable crisis, but we did prepare our economy well for tougher times”.
2020 is also an election year for Ghana.
The elections will take place in December where both a new president and new members of the parliament will be elected. However, Ghana’s current economic rut has worsened in face of the COVID-19 pandemic and oil price volatility – extending far beyond a political transition.
The country’s struggle is clearly mirrored in the income and economic growth, leaving the budget deficit to double the initial forecast – erasing years of progress.
Three years of fiscal gains and more than 6% GDP expansion, under the International Monetary Fund (IMF) programme are now been completely reversed. The IMF programme ended in April 2019 which was the 16th bailout plan from the lender based out of Washington.
The bank of Ghana had to adjust the GDP forecast for 2020 from 6.8% to between 2% and 2.5% – whilst the World Bank and the IMF downgraded Ghana’s 2020 forecast to only 1.5%.
In order to regain the lost growth and reboot its roaring expansionary engine Ghana needs to then find new sources for its economic growth.
The global slump in crude oil price gave Ghana a chance to reassess its dependence on the export of the fossils and its actual vulnerability to price fluctuations. The same commodity that had fuelled Ghana’s vast expansion in prior years was now its Achille’s heel.
The oil exports from Ghana accounted for 20% of the foreign exchange earnings as the oil sector expanded by 3.5% all the way to 15.1% in 2019, supporting a price rebound form its lows in 2014.
The World Bank estimated the current account surplus for Ghana to be 0.1% in the first half of 2019 which is supported by the conditions which are favourable to the main commodities: gems, gold, cocoa and oil.
The surplus from the commodities and the inflows in both the capital and financial accounts have resulted in the overall surplus in the balance of payments of almost 2% of the GDP.
The losses in oil revenue in the first quarter of the year were partially offset by the increase in price of gold.
Ghana is part of the few African countries that benefit from having a diversified commodity export market as Ghana is the world’s second largest producer of gold and cocoa.
For Ghana to successfully hedge any one dependency on its commodity exports, in the future, the country must seek to achieve greater diversification. Further diversification would enable the country to achieve more revenue streams when the major sectors are hit.
The government ought to encourage investors to invest into other sectors through heavy subsidies and favourable tax benefits. Very attractive sectors for diversification are the agricultural and the service sectors, as Ghana has a number of big advantages over other countries in the region in terms of geography, institutions and human capital.
Now is the time for major restructurings.
The economy is already beaten, bad news keep rolling in and uncertainty is at its highest in a decade. Gold might have saved the day – this time around – but it might not be the case next time.