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Country Report

Ghana

February 2007

The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom

Ghana at a glance: 2007-08

OVERVIEW The president, John Agyekum Kufuor, and his New Patriotic Party (NPP) government will continue to focus on delivering an improvement in the standard of living and carrying out donor-supported economic reforms. However, in the face of ongoing corruption allegations and attempts by the opposition National Democratic Congress (NDC) to discredit the NPP, the government will struggle to show that its policies have delivered results, and the ruling party may face internal divisions over the nomination of its presidential candidate. In contrast, the NDC has displayed surprising unity in nominating John Atta Mills as its presidential candidate and appears focused on the forthcoming elections. The NDC has strong support in northern Ghana, and the outcome of the presidential and legislative elections, which are due in 2008, will be close. On the plus side for the government, real GDP growth is forecast to remain strong and the government has expressed its commitment to increasing the growth rate further. Against the background of a stable inflation rate and a steady cedi, this will allow the NPP to campaign on a sound macroeconomic record. However, there are fears that election-related and other expenditure commitments may push the budget further into deficit, storing up potential problems.

Key changes from last month

Political outlook • As expected by the Economist Intelligence Unit, the NDC has selected John

Atta Mills as its presidential candidate for the 2008 election. Mr Mills secured 81% of delegates� votes at the annual party congress.

Economic policy outlook • There has been no major change to our economic policy outlook.

Economic forecast • There has been no major change to our economic forecast.

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Ghana 1

Country Report February 2007 www.eiu.com © The Economist Intelligence Unit Limited 2007

Contents

Ghana

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2007-08 7 Political outlook 8 Economic policy outlook 10 Economic forecast

13 The political scene

18 Economic policy

24 The domestic economy 24 Economic trends 26 Infrastructure 27 Mining

29 Foreign trade and payments

List of tables 10 International assumptions summary

13 Forecast summary

14 Fomena by-election result

20 Government fiscal balance

20 Fitch long-term sovereign credit ratings for African countries

23 West African Monetary Zone (WAMZ) convergence criteria

24 Real GDP growth by sector

26 Inflation, 2006

28 Production of major mining companies and mines in Ghana, 2005

29 Tourist arrivals and receipts

List of figures 13 Gross domestic product

13 Consumer price inflation

Ghana 3


Ghana February 2007

Summary

The president, John Agyekum Kufuor, and his New Patriotic Party (NPP) government will focus on delivering an improvement in the standard of living and carrying out donor-supported economic reforms. However, in the face of ongoing corruption allegations and organised labour protests over wages, the government will struggle to show that its policies have delivered results. Further challenges for the government will come from the opposition National Democratic Congress (NDC), which appears more unified and ordered as it focuses on regaining the presidency in the 2008 election. The NDC has strong support in northern Ghana, and the outcome of the presidential and legislative elections will be close. Positively for the government, real GDP growth is forecast to remain strong. Against the background of a stable inflation rate and a steady cedi, this will allow the NPP to campaign on a sound macroeconomic record. However, there are fears that election-related expenditure may push the budget further into deficit, storing up potential problems.

The NPP has comfortably held the Fomena parliamentary seat in a by-election, although the result was fiercely contested by the NDC amid accusations of electoral malpractice. The NDC has nominated former vice-president John Atta Mills as its candidate for the 2008 presidential election. Several senior NPP politicians have suggested that they will contest the NPP presidential nomination, prompting fears of rifts in the party.

The government has released its 2007 budget, focusing on raising the rate of real GDP growth through improving the business environment (tax cuts) and targeted government spending. The government has announced that some of the additional funding costs will be financed by an international bond issue. The Bank of Ghana has announced that the cedi will be redenominated.

Government estimates in the 2007 budget have indicated that real GDP growth has exceeded forecasts and has been strongest in the industrial and services sectors. Bank of Ghana figures reveal that inflation unexpectedly increased in December 2006, to 10% year-on-year. Electricity shortages have continued to plague the local manufacturing and mining sectors.

The Bank of Ghana has released ambitious tourism targets for 2007. The government has reiterated its desire to make Ghana a regional hub for financial services.

Editors: Ewan Wheeler (editor); David Cowan (consulting editor) Editorial closing date: February 5th 2007 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

The political scene

Economic policy

The domestic economy

Foreign trade and payments

Outlook for 2007-08

4 Ghana


Political structure

Republic of Ghana

Unitary republic

A new constitution, based on the US model, was approved by referendum in April 1992

Parliament; 230 members elected by universal suffrage every four years

December 2004 (presidential and parliamentary); next elections due in December 2008

President, elected by universal suffrage for a maximum of two four-year terms; John Agyekum Kufuor was sworn in on January 7th 2001 for the first time; he secured re-election in December 2004 for a second and final term

Cabinet, appointed by the president in January 2005; last major reshuffle took place on April 27th 2006

New Patriotic Party (NPP), the ruling party; National Democratic Congress (NDC), the main opposition party; other parties include People�s National Convention (PNC), Convention People�s Party (CPP), United Ghana Movement (UGM) and National Reform Party (NRP)

President John Agyekum Kufuor Vice-president Alhaji Aliu Mahama

Communications & technology Mike Ocquaye Defence Kwame Addo-Kufuor Education, science & sports Pap Owusu Ankomah Energy Joseph Kofi Adda Finance & economic planning Kwadwo Baah-Wiredu Fisheries Gladys Asmah Food & agriculture Ernest Debrah Foreign affairs, regional integration & Nepad Nana Addo Danqua Akufo-Addo Health Courage Quashigah Information & national orientation Kwamena Bartels Interior Albert Kan Dapaah Justice & attorney-general Joe Ghartey Land, forestry & mines Dominic Fobih Local government, rural development & environment Stephen Asamoah Boateng Manpower, youth & employment Boniface Saddique National security Francis Poku Ports, harbours & railways Christopher Ameyaw Akumfi Public-sector reform Paa Kwesi Nduom Tourism & diaspora relations Jake Obetsebi Lamptey Trade, industry, private-sector development & presidential special initiatives Alan Kyeremanten Transport Vacant Works & housing Hackman Owusu-Agyemang

Paul Amoako Acquah

Official name

Form of state

Legal system

National legislature

National elections

Head of state

Central bank governor

Main political parties

National government

Key ministers

Ghana 5


Economic structure

Annual indicators

2002a 2003a 2004 a 2005 b 2006b

GDP at market prices (C bn) 48.9 66.2 79.9 96.3 109.7

GDP (US$ bn) 6.2 7.6 8.9 10.6 12.0

Real GDP growth (%) 4.5 5.2 5.8 5.8 6.0

Consumer price inflation (av; %) 14.8 26.7 12.6 15.1 a 10.9a

Population (m) 20.8 21.2 21.7 b 22.1 22.6

Exports of goods fob (US$ m) 2,015.2 2,562.4 2,704.5 2,802.2 a 3,658.7

Imports of goods fob (US$ m) 2,707.0 3,232.8 4,297.3 5,345.4 a 6,346.8

Current-account balance (US$ m) -31.9 302.3 -315.9 -811.6 a -569.0

Foreign-exchange reserves excl gold (US$ m) 539.7 1,352.8 1,626.7 1,752.9 a 2,015.8

Total external debt (US$ bn) 7.0 7.6 7.0 7.3 3.7c

Debt-service ratio, paid (%) 5.4 11.4 5.1 6.1 3.1

Exchange rate (av) C:US$ 7,932.7 8,677.4 9,004.6 9,072.5 a 9,174.8a

a Actual. b Economist Intelligence Unit estimates. c In 2006, as part of the multilateral debt relief initiative and the heavily indebted poor countries initiative, Ghana's stock of external debt was subject to a substantial write-off.

Origins of gross domestic product 2005 % of total Components of gross domestic product 2003 % of total

Agriculture, forestry & fishing 36.1 Private consumption 77.4

Industry 25.2 Government consumption 11.5

Manufacturing 9.1 Gross domestic investment 22.9

Services 29.8 Exports of goods & services 40.3

Imports of goods & services 52.2

Principal exports 2005 US$ m Principal imports 2005 US$ m

Gold 945.8 Non-oil 4,218

Cocoa beans & products 908.0 Oil 1,217

Timber & products 226.8

Main destinations of exports 2005a % of total Main origins of imports 2005a % of total

Netherlands 12.8 Nigeria 14.0

UK 8.2 China 12.5

US 6.5 US 6.2

Belgium 6.0 UK 5.5

France 5.5 Netherlands 4.2

a Based on partners� trade returns; subject to a wide margin of error.

6 Ghana


Quarterly indicators 2004 2005 2006 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 QtrCentral government finance (C bn) Revenue & grants 7,401.8 5,338.3 6,836.0 7,219.9 8,862.2 5,817.0 8,867.8 7,280.1Expenditure & net lending 7,970.1 5,705.1 7,786.9 8,430.9 7,783.4 7,472.2 8,525.9 9,805.5Balance -568.3 -366.8 -950.9 -1,211.0 1,078.8 -1,655.2 341.9 -2,525.4Prices Consumer prices (Accra; 2000=100) 222.2 236.1 253.7 256.6 256.0 264.7 279.2 285.2Consumer prices (% change, year on year) 12.2 14.1 16.2 14.9 15.2 12.1 10.1 11.1Financial indicators Exchange rate C:US$ (av) 9,043.5 9,058.6 9,073.7 9,067.0 9,090.8 9,123.0 9,154.0 9,197.7Exchange rate C:US$ (end-period) 9,054.3 9,075.5 9,074.9 9,086.5 9,130.8 9,138.8 9,191.0 9,209.5Deposit rate (av; %) 13.3 11.4 10.5 10.3 8.5 9.3 9.3 9.5Discount rate (end-period; %) 18.5 18.5 16.5 15.5 15.5 14.5 14.5 14.5Treasury bill rate (av; %) 16.4 16.5 16.3 14.4 12.4 10.2 9.5 10.0M1 (end-period; C bn) 13,745.3 13,007.0 12,633.2 12,962.0 14,707.5 14,859.5 14,242.5 n/aM1 (% change, year on year) 28.2 29.3 16.4 18.0 7.0 14.2 12.7 n/aM2 (end-period; C bn) 25,645.0 24,656.0 25,389.5 25,272.2 28,041.8 29,428.7 26,998.0 n/aM2 (% change, year on year) 27.4 24.7 20.2 16.0 9.3 19.4 6.3 n/aGSE all-share index (end-period;

1990-93=100) 6,799 6,454 5,863 4,878 4,769 4,764 4,833 4,948Sectoral trends Gold price, London (US$/troy oz) 434.0 427.1 427.3 439.5 485.6 554.0 627.4 621.5Cocoa beans price, New York & London

(US$/tonne ) 1,607.4 1,677.8 1,544.7 1,491.6 1,464.6 1,555.9 1,584.1 1,617.5Foreign trade (US$ m)a Exports fob 664.5 730.8 716.4 676.6 678.4 963.6 895.4 1,108.5 Cocoa beans 179.4 305.8 254.3 176.1 172.2 360.1 262.8 381.3 Gold 219.5 222.9 231.2 225.6 266.1 293.9 320.5 369.2Imports fob -1,225.9 -1,175.8 -1,266.9 -1,488.3 -1,414.3 -1,465.7 -1,460.3 -1,680.4Trade balance -561.4 -445.0 -550.5 -811.7 -735.9 -502.1 -564.9 -572.0

Foreign reserves (US$ m) Reserves excl gold (end-period) 1,626.7 1,439.8 1,347.8 1,525.4 1,752.9 1,697.9 1,823.6 1,635.2

a Balance-of-payments basis.

Sources: IMF, International Financial Statistics; Bank of Ghana, Quarterly Economic Bulletin; Statistical Bulletin; Ghana Stock Exchange.

Ghana 7


Outlook for 2007-08

Political outlook

During their second term in office, the president, John Agyekum Kufuor, and his New Patriotic Party (NPP) government are intensifying their focus on the need to deliver an improvement in the standard of living of ordinary Ghanaians and on carrying out donor-supported economic reforms. As the NPP�s first term in office failed to deliver these changes, or a noticeable reduction in poverty, the government is under considerable pressure to produce results in its second term, failing which it may be voted out at the next elections, which are due in December 2008. The pressure is likely to intensify as the issue of how much progress has been made in developing the economy is becoming a national preoccupation as Ghana celebrates the 50th anniversary of its independence in 2007. There are concerns that the government will resort to more populist policies, including high-profile prestige projects such as building sports stadiums or a second international airport. Although this may secure it a limited �goodwill� vote, the long-term economic benefits would be questionable.

Election preparations are taking place within the two main parties. The NPP has yet to nominate its presidential candidate, although as many as 14 politicians have declared an interest in representing the party at the polls. As no date has been set to choose a candidate, and as a decision is not expected until the second half of 2007, campaigning by so many senior NPP figures appears a somewhat undignified scramble for power and may alienate the electorate. However, attempts by Mr Kufour to thin down the number of candidates at the party conference in January may backfire as those whom he did not recognise as meeting his leadership criteria, such as the vice-president, Alhaji Aliu Mahama, may begin openly to criticise the government. Such cracks in the NPP would be in addition to an increasingly perceptible split between the president and several former ministers who were removed in a reshuffle in April 2006.

The opposition National Democratic Congress (NDC) has had an easier time in selecting its candidate for the 2008 presidential election. An acrimonious party congress in 2005, involving allegations of the use of violence and intimidation by supporters loyal to the former president, Jerry Rawlings, and leading to the creation of a splinter party, had led to expectations of similar in-fighting. In particular, there were fears that Mr Rawlings might attempt to impose his will on delegates over the presidential nomination. However, partly because the main dissenting voices have left the NDC, and partly because the party hierarchy strove hard to ensure that the 2006 congress, held in December, presented a united front on the issue, Mr Rawlings�s favoured candidate, John Atta Mills, was comfortably nominated as the party�s presidential contender. This apparent unity among the NDC is a relatively new development and may presage a more media-savvy and less bellicose campaign.

However, with the election still almost two years away, it is unclear if Mr Mills will be able to unseat the ruling NPP. Mr Mills was defeated in both the 2000 and the 2004 presidential elections, and his chances in 2008 are tainted by these defeats. In addition, the criticisms of his age (62), state of health and lack

Domestic politics

8 Ghana


of charisma that were voiced during the nomination process are bound to be raised during the election campaign. In a bid to counter this, the NDC will continue to seek to discredit the NPP on as many issues as possible. In particular, it will seek to build on the popular discontent created by the rises in fuel prices that followed the removal of government subsidies in 2005 and public-sector strikes in 2006. The NDC will also try to ensure that controversy does not die away over corruption allegations against the government, as well as over recent legislation that allows Ghanaians not living in the country to vote in the 2008 elections. The latter issue is particularly important to the NDC: the legislation could deliver an increase in the NPP�s support base, as the business- and investor-friendly policies of the NPP are likely to be more in tune with the overseas diaspora. The NDC has indicated in the strongest terms that it would oppose any attempt by the government to implement the law in 2008.

However, the NDC�s ability to deliver a decisive blow to the NPP is hindered by the fact that its two decades in power, particularly the closing stages of its final term of office in 1996-2000, were clouded by concerns over its record on economic management and by outstanding allegations of corruption. The NPP has declared that it wants to make the elections a direct comparison between the NDC�s record in government in 1992-2000 and its own record in 2000-08. Furthermore, allegations of human rights abuses committed by the NDC government deter many voters from supporting the party. Even so, the NDC�s popularity remains strong, particularly in the north, and, despite abuse allegations and the potential for splinter parties to reduce the NDC vote, the Economist Intelligence Unit expects the outcome of the 2008 polls to be close.

Ghana will continue to play a leading role in regional affairs. Mr Kufuor is a prominent spokesman for the region; in January he was elected chairman of the African Union (AU). Ghana is positioning itself as a key proponent of the New Partnership for Africa�s Development (Nepad) and is promoting adherence to Nepad�s underlying principles, such as good governance and the process of peer review, having been one of the first countries to undergo a peer-review examination, in April 2005. The committee�s provisional conclusions were broadly positive, and it is claimed that Ghana�s co-operation played an important part in helping to jump-start the peer-review process. Mr Kufuor will maintain good relations with Ghana�s major trading partners and donors.

Economic policy outlook

Although the government has announced that it will not renew its poverty reduction and growth facility (PRGF) following its expiry in October 2006, we do not expect economic policy to change significantly over the forecast period. As underlined in the IMF review of the PRGF in June, Ghana has had a relatively good record of policy implementation in recent years, and will seek to remain in favour with donors by continuing to push ahead with economic reform, led by improvements in fiscal discipline and good governance. The government also confirmed, when presenting the 2007 budget, that it will opt for the IMF�s policy support instrument (PSI), in which no financial support is given but policy implementation is closely monitored as a signal to donors that

International relations

Policy trends

Ghana 9


the country remains on track. This is likely to ensure a continuation of the current goals of strengthening public expenditure management and increasing revenue to ensure that the fiscal deficit remains relatively low. Although the government will seek to maintain macroeconomic stability under the PSI, there is likely to be a change of emphasis, with an increasing focus on the creation of wealth through accelerated economic growth and less priority given to economic stability. The government has a target of 8% annual growth in the medium term, but would like to achieve at least 6.5% in the immediate future. It aims to do so partly by improving the business environment through lowering taxes and extending credit and support for the private sector. It also plans to raise expenditure on poverty reduction and infrastructural improvement.

In recent years the government has used the net domestic debt/GDP ratio as its fiscal policy anchor, rather than any particular spending targets or budgetary deficit. A low fiscal deficit has been important, largely in the battle against inflation, and it has allowed the Bank of Ghana (BoG, the central bank) to reduce interest rates. Moreover, the government has steadily reduced the budget deficit, from 9.7% of GDP in 2000 to 2.1% of GDP in 2005. Although greater control of expenditure (despite some slippages) has been a key element in reducing the deficit, revenue growth!from domestic sources and from high levels of donor support!has probably been more important. However, there are signs of a change in the emphasis of government policy. This was apparent from the recent Ghana Poverty Reduction Strategy II, agreed by the IMF, which shifted the focus away from macroeconomic stability and towards a strategy that is likely to see a rise in government spending in order to drive growth.

This change in policy is likely to have implications for the fiscal balance. Although it appears from recent government statements that much of the financing for this strategy is to come from external concessional loans and the international capital markets, we believe that the improved fiscal discipline of recent years will slip as the limited capacity of the government impedes its ability to control spending. On the expenditure side, the gap between fiscal policy formulation and implementation was underlined by the 2007 budget. In this, the government provided details of the much-heralded spending increases in 2006, which, in contrast to programmed increases in capital investment, saw a large rise in recurrent expenditure (caused by salary increases), while capital investment decreased. On the revenue side, although domestic revenue growth is expected to continue, it is likely to slow from the high rates of recent years, especially as both the 2006 and 2007 budgets included substantial tax cuts for individuals and businesses. As a result, domestic revenue will be insufficient to fund the spending commitments under the government�s strategy.

In addition to the planned increases in capital expenditure, with elections approaching in 2008!and following strikes by doctors and teachers earlier this year!the government will face substantial pressure to boost public-sector wages, especially in 2007, and to provide support for businesses. If it gives in to this pressure, this is likely to exacerbate the budget deficit. The government has already undertaken, in the 2007 budget, to carry out a comprehensive review of the public-sector pay structure, with a view to making it more competitive with the private sector. We estimate that the fiscal deficit will be 4.8% of GDP in

Fiscal policy

10 Ghana


2007, but that it will fall fractionally in 2008, to 4.6%. Following the expiry of the PRGF, the government has said that it will seek to borrow externally from the commercial debt markets in order to fund the deficit.

The BoG has had two competing and partly contradictory monetary policy aims in recent years. The first, which has been the main focus of monetary policy, has been to restrain liquidity growth, with the aim of reducing the average annual inflation rate to single digits. This has been carried out by increased sales of foreign exchange!although this has led to real appreciation of the cedi!and also by tighter financing of the fiscal deficit. The reduced deficit has been funded primarily through the issuance of Treasury bills, rather than more expansionary forms of credit to the public sector. As shown by the decline in inflation in 2006, this policy has largely been a success, even though the government narrowly missed its single-digit inflation target for the year.

Nonetheless, perhaps owing to increasing pressure from the government, which has one eye on boosting economic growth ahead of the 2008 elections, the BoG has been lowering interest rates to ensure increased lending to the private sector. In contrast to the monetary policy aim of reducing inflation, this has an expansionary effect on the money supply. The political pressures on the BoG have been apparent, as it cut interest rates at various times in 2006 on the grounds that inflation was on a downward trend, even though the declines have been modest and the inflation rate has remained in excess of the BoG�s stated target. Although we believe that the timing of the steady cuts in interest rates since mid-2005 has been premature, the BoG may even consider further reductions in 2007 as long as inflation continues on its broad downward trend.

Economic forecast

International assumptions summary (% unless otherwise indicated)

2005 2006 2007 2008

Real GDP growth World 5.0 5.4 4.8 4.8

OECD 2.5 3.0 2.3 2.4

EU27 1.6 2.7 2.3 2.1

Exchange rates ¥:US$ 110.1 116.2 114.3 99.8

US$:� 1.246 1.256 1.342 1.363

SDR:US$ 0.677 0.678 0.654 0.640

Financial indicators ¥ 2-month private bill rate 0.00 0.28 1.09 2.09

US$ 3-month commercial paper rate 3.38 5.04 4.99 4.85

Commodity prices Oil (Brent; US$/b) 54.7 65.3 58.8 57.4

Cocoa (US cents/lb) 69.8 72.1 73.0 71.5

Gold (US$/troy oz) 445.0 604.5 635.0 650.0

Food, feedstuffs & beverages (% change in US$ terms) -0.5 16.1 4.5 -1.2

Industrial raw materials (% change in US$ terms) 10.2 50.1 -0.5 -13.2

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

International assumptions

Monetary policy

Ghana 11


Although the global economy is growing rapidly, tighter policies in the developed economies are likely to cause world GDP growth (on a purchasing power parity basis) to slow from 5.4% in 2006 to 4.8% in both 2007 and 2008. Continued uncertainty on global markets and the weakness of the US dollar will keep the price of gold high, at a forecast average of US$635/troy oz in 2007 and US$650/troy oz in 2008. Cocoa prices are forecast to fall fractionally over the outlook period, from 72.1 US cents/lb in 2006 to 71.5 US cents/lb in 2008. Continued high global demand and a lack of spare production will mean that international oil prices will remain reasonably high by historical standards, at an average of US$58.8/barrel, in 2007. Increased production and reduced demand should ensure that oil prices fall further in 2008, although they will remain high, at an average of US$57.4/b.

Despite a drought, which led to power shortages during the third quarter of 2006 that affected mining output and are likely to have increased production costs for the industrial sector, Ghana�s real GDP growth is estimated to have been both broad-based and robust, at 6% for the year as a whole. We expect this trend to continue over the forecast period. Following a record year for cocoa production in 2005/06 (October-September), we expect continued strong growth in the cocoa sector, and in the agricultural sector in general. However, the outlook for industry is mixed. Manufacturers will continue to struggle, owing to the strong exchange rate, high inflation and growth in imports. High gold prices and new investment in the mining sector are expected to lead to a substantial rise in gold output. The services sector is likely to record strong growth, particularly in telecommunications, transport, tourism and government services. Construction should also post robust growth, driven by donor- and government-funded infrastructure projects for the 2007 50th anniversary of independence celebrations and the Africa Nations Cup football tournament in 2008, as well as housing development. Overall, we expect the current rate of real GDP growth to be maintained during the forecast period, with the economy set to grow by just over 6% in both 2007 and 2008.

Unexpectedly, the year-on-year rate of inflation edged up fractionally in December to 10.5%, despite having been on a downward trend for most of 2006. The rate averaged 10.9% for the year as a whole. Despite the fall in the inflation rate in 2006, a number of factors will make it difficult for the central bank to achieve its 2007 inflation targets of 7-9% at year-end and an average rate of 8.8%. These include expected tariff increases for utilities, notably within the power sector, as low water levels have led to reduced hydroelectric production at the Akosombo dam; an expected loosening of fiscal policy that may include public-sector pay increases; and the BoG�s pursuit of lower interest rates that resulted in a drop of 2 percentage points in the prime rate at the end of 2006. However, on a positive note, offsetting these pressures slightly will be the effects of slightly lower international oil prices and a stable currency. Overall, the inflation rate will fall fractionally to average 9.9% for the year. By 2008 we anticipate that the expected loosening of fiscal policy, combined with lower interest rates, will have had a noticeable inflationary effect, with the inflation rate forecast to climb to an average of 10.5% for the year.

Economic growth

Inflation

12 Ghana


The apparent use of a stable cedi as an anti-inflationary tool, particularly in 2005, has eroded the competitiveness of non-traditional exports and increased the volume of imported goods. These factors contributed to the large current-account deficit in 2005. The real effective exchange rate increased in value by over 10% during 2006. Although currency stability broadly continued, the cedi declined in real terms against the US dollar, possibly heralding a softening of the BoG�s policy, in a bid to relieve pressure on the export sector in order to boost growth. Nevertheless, given rising remittances and high global prices for gold and cocoa, we expect inflows of foreign exchange to be strong. We forecast that the cedi will fall back only modestly against a weak US dollar, to average C9,328:US$1 in 2007. An expected strengthening of the US dollar is likely to lead to a faster depreciation in the value of the cedi in 2008, which we forecast will average C9,656:US$1 for the year. However, given Ghana�s limited foreign-exchange reserves, its high dependence on commodity exports and the fact that demand for foreign exchange is structurally higher than supply (owing to the economy�s import dependence and small manufacturing base), the cedi will remain vulnerable to external shocks, which could lead to a sharp collapse in its value, as occurred in 2000 and 2002.

The confusion behind Ghana�s current-account data was underlined when!following the latest statistical bulletin from the BoG, which reported a current-account surplus in the first half of 2006!the 2007 budget revealed that the Ministry of Finance and Economic Planning expects that final data will show a significant rise in the current-account deficit for 2006 as a whole. Exports appear to have performed fairly well over the year, owing to higher revenue from cocoa production, which!in line with BoG figures!tends to be concentrated in the first half of the year, and also from gold mining. However, it is clear that imports rose dramatically, owing mainly to power shortages caused by low water levels at hydroelectric dams, which increased reliance on expensive imported oil. The current account in 2006 was supported by rising remittances and donor grants, which boosted current transfers. Overall, we estimate that the current account will post a deficit of the equivalent of 4.8% of GDP for 2006, an improvement from the 7.6% deficit recorded in 2005.

Assuming a return to normal weather conditions, we expect a lower current-account deficit in 2007. A modest rise is forecast in overall exports; the mining sector is again expected to be crucial, with large increases in the value of gold exports as production from the Ahafo mine attains its optimum level and prices reach a forecast US$635/troy oz. Imports are also set to rise modestly, owing to mining developments and robust domestic demand. However, to some extent, the high level of imports will reflect goods in transit to neighbouring countries as uncertainty over the political situation in Côte d�Ivoire leads shippers to use Ghana�s ports. In addition, 2007 will be the first full year in which Ghana benefits from the reduced interest payments resulting from the multilateral debt relief initiative (MDRI), which will offset increased profit remittances from mining companies on the income account. As a result, we forecast that the current-account deficit will fall to 4% of GDP. In 2008 a probable slight further rise in the price of gold should help to support the current account and, with strong real GDP growth forecast, the deficit should equal 3.9% of GDP.

Exchange rates

External sector

Ghana 13


Forecast summary (% unless otherwise indicated)

2005 a 2006 b 2007c 2008c

Real GDP growth 5.8 b 6.0 6.2 6.1

Gross agricultural production growth 4.1 b 5.7 5.9 5.9

Consumer price inflation (av) 15.1 10.9 a 9.9 10.5

Consumer price inflation (year-end) 14.8 10.5 a 10.4 10.8

Short-term interbank rate 14.9 10.6 9.9 10.7

Government balance (% of GDP) -2.1 b -4.9 -4.8 -4.6

Exports of goods fob (US$ bn) 2.8 3.7 3.9 4.2

Imports of goods fob (US$ bn) 5.3 6.3 6.5 6.9

Current-account balance (US$ bn) -0.8 -0.6 -0.6 -0.6

Current-account balance (% of GDP) -7.6 -4.8 -4.0 -3.9

External debt (year-end; US$ bn) 7.3 b 3.7 d 4.0 4.3

Exchange rate C:US$ (av) 9,072.5 9,174.8 a 9,328.3 9,656.2

Exchange rate C:¥100 (av) 8,242.1 7,894.4 a 8,164.9 9,680.4

Exchange rate C:� (year-end) 10,770.7 12,184.2 a 13,183.2 12,983.5

Exchange rate C:SDR (year-end) 13,050.4 13,801.2 a 14,854.5 15,196.4

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d In 2006, as part of the multilateral debt relief initiative and the heavily indebted poor countries initiative, Ghana's stock of external debt was subject to a substantial write-off.

Ghana Sub-Saharan Africa

Gross domestic product(% change, year on year)

Ghana Sub-Saharan Africa

Consumer price inflation(av; %)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

20

02

03

04

05

06

07

08

5.0

10.0

15.0

20.0

25.0

30.0

20

02

03

04

05

06

07

08

The political scene

The latest parliamentary by-election was held on January 23rd in the Fomena constituency. The seat became vacant upon the death of the ruling New Patriotic Party (NPP) incumbent, Akwasi Afrifa, who had represented Fomena in parliament since 1996. Fomena is situated in an NPP stronghold in the south of the country, and is regarded as one of the party�s safest seats. It was therefore no surprise that the NPP candidate, Nana Abu Bonsra, won 9,525 votes, or 81.8% of the total valid votes cast. The candidate of the leading opposition party, the National Democratic Congress (NDC), Grace Ampofo, polled 2,003 votes, 17.2% of the valid votes, while Augustina Kyei of the Democratic People�s Party (DPP) polled just 110 votes, 0.9% of valid votes.

Parliamentary by-election held in Fomena

14 Ghana


Fomena by-election resulta Candidate Party Vote (no) Vote (%)Nana Abu Bonsra New Patriotic Party 9,525 81.8Grace Ampofo National Democratic Party 2,003 17.2Augustina Kyei Democratic People's Party 110 0.9

a 11,785 votes (11,638 of which were valid) were cast, with overall turnout 69%.

Source: Government of Ghana website: www.ghana.gov.gh

Although the NPP was widely expected to retain the seat, the scale of its victory was a positive sign for the ruling party. Mr Bonsra received 1,318 more votes than Mr Afrifa polled in 2004, when he defeated an independent, George Kofi Tieku, who had received 4,096 votes. The NDC polled 2,009 votes in 2004, when its candidate was John Toku, six more votes than in the by-election. However, it would be wrong to read too much into the by-election result. The Fomena contest followed the same pattern as the four other by-elections held since the 2004 election. In all of these, the incumbent party was successful, with three seats retained by the NDC and one retained by the NPP.

However, with the December 2008 general election looming on the political horizon, the by-election campaign was characterised by rising tensions between the NPP and the NDC. A dispute between the two parties flared over the status of two of the 45 polling stations, at Dadwen and Kyekyewere. The NDC did not campaign in these areas, believing that they should be in the Obuasi constituency, which adjoins Fomena. To confuse matters further, the two areas in question had also been given Obuasi electoral code numbers. When the NDC was informed by the National Electoral Commission (NEC) that the two polling stations in question were indeed in the Fomena constituency and had never been a part of Obuasi, it accused the NPP of electoral manipulation and vowed to challenge the outcome of the poll. The NEC went on to explain that the anomaly in the code numbers had been in place since 2000 and was not a new development. Despite the apparent local acceptance of the result and the scale of the NPP victory, the NDC has kept up pressure on the ruling party, claiming that it had arranged Mr Afrifa�s funeral rites to take place only three days before the poll, in a bid to capitalise on a strong sympathy vote.

The unwillingness of the NDC to accept the result of the vote does not bode well for the general election. The bickering between the parties has given Ghanaians the first taste of what can be expected when significantly more will be at stake for both parties. With the general election likely to be subject to further complications, such as the potential implementation of the Representation of the People Amendment Act (ROPAA), the results in a number of seats are likely to be contested and the overall outcome may even be disputed (the NDC had threatened to contest the 2004 result). This is likely to place unprecedented pressures on the electoral institutions.

Preparations by political parties for the 2008 election have already begun in earnest. In December the NDC nominated John Atta Mills as its presidential candidate at its annual conference at the University of Ghana, Legon. Mr Mills was vice-president under the former president, Jerry Rawlings, and was the

Tensions build between parties

NDC nominates John Atta Mills as presidential candidate

Ghana 15


unsuccessful presidential candidate in 2000 and 2004. As expected, Mr Mills defeated the three other NDC hopefuls, Ekwow Spio Garbrah, Eddie Annan and Alhaji Iddrisu Mahama. However, the scale of his victory was a surprise, given a keenly contested campaign in which Mr Spio Garbrah, in particular, seemed to have considerable support. In the end, Mr Mills secured 81.4% of the votes cast, and Mr Spio-Garbrah was second, with only 8.7% of the vote.

It is unclear why the vote was so heavily in Mr Mills�s favour. Historically, Mr Rawlings has had a significant influence on the proceedings at the NDC congress and has been important in deciding the presidential nomination. His support was instrumental in securing the nomination for Mr Mills in both the 2000 and 2004 elections. This led to defections from the NDC and contributed to the formation of splinter parties in 2000 and 2005. However, in the latest nomination process Mr Rawlings claimed that he would be neutral and did not vote in the ballot. Furthermore, for the first time, the NDC vote took place by means of a secret ballot, decreasing the ability of Mr Rawlings and others to exert influence over the process. However, given the extent of Mr Rawlings�s previous control over party delegates and the size of Mr Mills�s victory, it seems likely that, despite rumours of a rift after the last election, Mr Rawlings did indeed support Mr Mills. Even so, judging from local media reports, this does not mean that the relationship between the two is as close as previously. Additionally, it seems clear that Mr Mills now enjoys very strong grassroots support within the NDC that he perhaps did not have in previous elections.

It is unclear if strong backing for Mr Mills within the NDC will translate into the wider national support needed to bring him to power in 2008. The nomination process brought to light several issues that will be brought up again in the presidential campaign. Foremost among these are Mr Mills�s health and age, issues brought into the spotlight by Mr Spio-Garbrah�s campaign. There have been allegations in the local media that illness forced Mr Mills to seek medical treatment in South Africa in November 2006. Although Mr Mills has denied this, the issue of his health is certain to return as the 2008 election draws closer.

Another issue!this time in favour of Mr Mills and the NDC!is that of corruption, which all candidates for the NDC nomination campaigned against. Although recent allegations of corruption have tainted the public perception of the ruling NPP, Mr Mills is unblemished by similar scandals. One NPP parliamentarian, Paul Appiah Ofori, even remarked that that the NPP might wish that Mr Mills was its candidate, given his credentials on corruption. Mr Appiah Ofori noted that the NPP has undertaken detailed investigations in order to try to find some evidence linking Mr Mills to a corruption scandal, but with no success. However, Mr Appiah Ofori�s comments have been ridiculed by many within the NPP, where he is seen as something of a maverick.

The most positive factor for the NDC that has arisen from the nomination process is that the party appears to have recovered a sense of unity and of purpose in a bid to secure victory in 2008. In contrast to previous party congresses, which have been rancorous and divisive, there was a clear effort on the part of the NDC to appear united. This was even indicated by the name of the congress, which was entitled �Unity for Victory 2008�. After the result was

Mr Mills�s health will be an issue in 2008

The NDC appears united

16 Ghana


announced, the four contenders celebrated together as Mr Mills proclaimed: �This is a victory for all the four of us and for the NDC.� Mr Mills was also conciliatory in this acceptance speech, arguing that the successful election of a flag-bearer for the NDC was just the first phase of the struggle to win back power. This apparent unity is part of a more media-savvy campaign by the NDC, amid fears that public perceptions of it as an intolerant, divided and often bellicose party have hampered it in the last two elections. This has included appeals by Mr Mills to the media to be objective in its coverage of the NDC.

Shortly after the NDC nominated its presidential candidate, the NPP held its annual congress, at Koforidua on January 5th-7th. However, with almost two years left in government, the NPP aimed to use the congress to publicise its performance since winning the 2000 elections, rather than to nominate its presidential candidate. The NPP has not yet set a date for the nomination of its next leader. This is partly because the president, John Agyekum Kufuor, fears becoming a lame-duck leader if the party nominates his successor too soon, but partly also because the NPP�s rules state that candidates must resign if they are to stand for the party leadership. Fourteen senior figures, including several cabinet members, have already confirmed that they wish to stand, thus making it impractical for the nomination process to occur too soon. The main aspirants to have declared that they would like to stand for NPP party leader are:

• Nana Addo Danqua Akufo-Addo, minister for foreign affairs, regional integration and the New Partnership for Africa�s Development (Nepad);

• Yaw Osafo-Maafo, former minister for education, science and sports;

• Hackman Owusu Agyemang, minister for works and housing;

• Kwame Addo-Kufuor, minister for defence;

• Alan Kyeremanten, minister for trade, industry, private-sector development and presidential special initiatives;

• Alhaji Aliu Mahama, the vice-president; and

• Dan Botwe, former general secretary of the NPP.

However, with the 2008 elections looming and so many candidates wishing to gain an advantage in the leadership campaign, it did not take long for the issue of who would be the party�s candidate to take centre-stage at the congress. Mr Kufour was virtually forced into addressing the succession issue, urging candidates not to jump the gun in starting their campaigns or to engage in negative campaigning that could upset the wider party. In a bid to downplay accusations of arrogance directed at the NPP by local media, Mr Kufour also warned candidates that it is the Ghanaian people, and not just NPP members, who elect the president. Consequently, he urged delegates to ensure that they choose a candidate with national appeal.

Some analysts argued that these latter comments may have been a reference to Mr Kyeremanten, the trade and industry minister, who had previously been thought to be Mr Kufour�s favoured candidate. Mr Kyeremanten is from the

The NPP also holds its congress

Leadership election dominates proceedings

Mr Kufour delivers a snub to Mr Kyeremanten

Ghana 17


Ashanti tribe, which forms the backbone of NPP support, and, echoing the president�s thoughts, there are fears within certain sectors of the NPP that nominating an Ashanti, although appealing to the party�s rank and file, may not appeal to the wider voter. Also in a further perceived slight to Mr Kyeremanten, Mr Kufour argued that some of the presidential aspirants are not sufficiently groomed in the party�s traditions and political leadership to vie for the presidency. The president said that, after his generation of leaders, the next in line are people like �Nana Akufo-Addo, Hackman Owusu-Agyemang, Yaw Osafo-Maafo and Kwame Addo-Kufuor.� Mr Kufour drew a clear distinction between this immediate succession group and the next generation of NPP leaders, which, in his view, include �Alan Kyeremanten and Dan Botwe�.

The relegation of Mr Kyeremanten from the list of immediate successors has led some analysts to believe that Mr Kufour is supporting Mr Akufo-Addo�s bid for the nomination. The theory is that Mr Kufour wants to stop Mr Osafo-Maafo or Mr Botwe from gaining the nomination. Mr Osafo-Maafo and Mr Botwe were removed from the cabinet in Mr Kufour�s April 2006 reshuffle. The reasons for their removal are unclear, although there is speculation that they are now working in opposition to the president. With this in mind, in order to ensure the defeat of the Osaafo-Maafo/Botwe faction of the party, some analysts believe that Mr Kufour is looking for a candidate with support beyond the core Ashanti faction, whose vote he already believes can be relied on. The president is believed to feel such a candidate may be Mr Akufo-Addo, who is from the Akyem tribe, and has strong personal support within the party.

Mr Kufour�s comment not only relegated the ambitious Mr Kyeremanten to part of the �next generation of NPP leaders� but also omitted any mention of the vice-president, Mr Mahama, who has declared that he is interested in gaining the nomination. It is widely perceived within the NPP that Mr Mahama was selected as vice-president to gain votes for the party in the north of the country and from Muslims, who are under-represented in the NPP, rather than because he is a credible political heavyweight. Nevertheless, it was clear at the party congress that Mr Mahama had a considerable number of followers, with a lot of support from northern delegates. Although the Economist Intelligence Unit does not believe that he will gain the nomination, his solid level of support may make him an important figure in determining the ultimate winner of the process; alternatively, if the NPP is unable to thin down the field of potential contenders, the 5-10% of the delegates that Mr Mahama is said to command could mean that he figures prominently in any run-off.

Although the theme of the NPP congress at Koforidua was �Moving Forward in Unity�, the party appears to have come out more damaged than it went in. The language used by Mr Kufour as well as by another party grandee, John Mensah, in writing off some candidates, although it had the aim of uniting the party around fewer potential contenders, could lead some hopefuls to come out in open opposition to the government. In contrast to the ease with which the NDC selected its candidate, the NPP nomination process is in danger of being seen as an unseemly scramble for power. The youth wing of the NPP, especially those in the Ashanti region, have already come out against Mr Kufour�s

Mr Akufo-Addo gains support

Mr Kufour snubs the vice-president

Divisions widen within the NPP

18 Ghana


comments, declaring that the country needs a young, dynamic leader instead of the older party man outlined by the president. In particular there appears to be support among the youth wing for Mr Botwe, not only highlighting support for the former general secretary, but also highlighting the split between the Osafo-Maafo/Botwe wing of the party and supporters of the president.

Tensions in the north of the country have continued to simmer in the region around Yendi, when a house belonging to a prominent member of the Andani royal gate was set on fire after an Abudu festival. There are increasing fears that the tribal dispute in Yendi may spread. Media reports have talked of an increase in the stockpiling of arms in the Bimbilla district and its surrounding communities in northern Ghana, following the interception by the police of 2,500 shotgun cartridges being smuggled into the area by two men from the Konkomba tribe. The Konkomba tribe has an ongoing dispute with the Nanumba tribe, which is also based in the Bimbilla region. Anecdotal evidence suggests that the Nanumbas are the original settlers, while the Konkombas are economic migrants who have ended up with fewer land rights and without the legal right to nominate and select their own chiefs. Recent insecurity has been attributed to a disagreement over trading relations between Konkomba farmers and Nanumba marketers that led to a further dispute over land rights. Worryingly, the two groups are allied to the Abudus and Andanis, and hence any conflagration in either Bimbilla or Yendi has the potential to ignite wider unrest, reaching into Togo. Disputes between the Konkomba and Nanumba resulted in open warfare between the two tribes in 1981 and 1994.

Although such events are often portrayed in the local media as ethnic clashes, they often have fundamental underlying causes. These were highlighted by the chairman of Northern Ghana Aid (NOGAID), Mustapha Ahmed-Sanah, in a recent speech at an educational programme organised by NOGAID to mark the Eid ul-Adha festival. Mr Ahmed-Sanah said that frequent conflicts in northern Ghana are the product of poverty, illiteracy and the underdevelopment of human and natural resources in the area, instead of arising solely from the tribal factors that are often stressed.

Economic policy

The Ghanaian economy�s high level of dependence on a limited range of commodities!notably cocoa and gold!and the fact that the rate of poverty remains very high is the subject of an intense national debate as the country moves towards the 50th anniversary of its independence, which will officially be celebrated in March. With such a high level of public interest and debate on the issue, in recent months it has become clear that the New Patriotic Party (NPP) government is slowly shifting the focus of its economic policy away from the theme of its first term in office, achieving macroeconomic stability, towards trying to put the economy on a higher growth path that will enable the country to meet the Millennium Development Goals (MDGs) and to achieve its stated aim of ensuring that Ghana becomes a middle-income country by 2015. However, in its efforts to achieve this, the government is keen that it does not undermine the strong economic fundamentals of recent years.

Tensions rise in the north

Independence anniversary provides backdrop for policy

Ghana 19


It was against the background of this change in emphasis of economic policy that the government released details in November of its �Golden Jubilee� budget for 2007. In line with the more growth-oriented policy, the finance minister, Kwadwo Baah-Wiredu, presented a budget based on a real GDP growth target of 6.5-8% in 2007, significantly higher than the 5.4% growth that the country has averaged over the last five years. To achieve this goal, the government outlined two basic tenets of policy in the coming year and beyond. Firstly, the government is keen to improve the environment for private-sector business, through a combination of less government interference, improved regulation and infrastructure development. Secondly, however, the government is to increase spending in targeted areas, with the aim of reducing poverty.

One of the first steps towards achieving the first goal!and a central element of the 2007 budget!was a series of tax reductions, or abolitions, designed to help the private sector. In particular:

• withholding taxes on dividends and rent were reduced from 10% to 8%;

• capital gains tax was reduced from 10% to 5%;

• the National Reconstruction Levy was abolished; and

• tax relief was awarded to venture-capital funds, while pharmaceutical companies were given value-added tax (VAT) relief.

The overall thrust of these changes is to build on reductions in corporate income tax that have reduced the benchmark tax rate by 7.5 percentage points over the last five years. However, this time, rather than a blanket reduction, the cuts are aimed at priority sectors in order to boost private-sector growth. The lower taxes are also designed to increase investment into Ghana, by bringing its tax rates more closely into line with those of other Sub-Saharan governments.

One potential problem for the government is that, by reducing tax rates, it is relying on a sharp pick-up in the overall growth rate to offset the revenue losses caused by the tax cuts. This would appear achievable, given the strong growth in domestic revenue in recent years, but there are some concerns highlighted in the recent budget data. Total government revenue (domestic revenue plus grants) grew by 30% in 2004 and 14.8% in 2005, with the main source of revenue growth being domestic revenue, which increased by 38% and 22% for the respective years. However, this trend changed in 2006. Although the budget estimates strong total revenue growth of 15.5%, this was driven by proceeds from the multilateral debt relief initiative (MDRI), which represented 7.7 percentage points of the growth in revenue and contributed to an overall-growth in grants of 26.7%. Furthermore, the planned pick-up in domestic revenue sources did not occur, and revenue from domestic sources came in 7.1% lower than the government had budgeted for the first three quarters of 2006. The government will thus have to hope that, with the economy continuing to grow strongly, domestic revenue growth will pick up again in 2007.

Tax reductions are a key part of the budget

Domestic revenue growth has been strong in recent years

20 Ghana


Government fiscal balance (C bn unless otherwise indicated)

2006 (budget) 2006 (estimate) 2007 (budget)Revenue 34,135 32,649 46,477 Domestic 26,439 25,421 37,532 Other (incl grants) 7,696 7,228 8,945

Expenditure 43,468 41,357 54,315Overall budget deficit (% of GDP) 4.5 4.9 3.2Domestic debt (% of GDP) 8.7 10.1 7.9

Source: Ministry of Finance.

Given the government�s spending commitments and tax reductions for 2007, it is likely that it will have to secure other forms of financing. The government is already exploring a number of options; notably, it is at an advanced stage in terms of planning to raise money on the private international debt markets (November 2006, Economic policy). The government, advised by Citigroup, is expected to issue a sovereign bond worth up to US$500m, either towards the end of the first quarter or during the second quarter of 2007. This would be a hugely important step for Sub-Saharan Africa, making Ghana the only Sub-Saharan country, other than South Africa, to enter the international capital markets since the largely unsuccessful forays by Nigeria and Côte d�Ivoire in the late 1970s and early 1980s. This debt was eventually defaulted on and then restructured as Brady bonds. In the case of Côte d�Ivoire, these are still outstanding, although the Nigerian government has made significant advances towards a debt buyback deal with its private creditors.

Fitch long-term sovereign credit ratings for African countries Rating OutlookWest Africa Nigeria BB(-) StableGhana B(+) PositiveBenin B StableCameroon B StableThe Gambia CCC StableOther Sub-Saharan African countries South Africa BBB(+) StableNamibia BBB(-) StableUganda B StableMalawi CCC Positive

Source: www.fitchratings.com

The government is also likely to seek to borrow at concessional rates from bilateral and multilateral donors, led by China, which has already announced that it will finance and build a US$600m hydroelectric dam at Bui. Negotiations with China are continuing over extending the loan facility, which is likely to be up to 70% on conditional terms. Ghana is likely to increase its borrowing from other bilateral lenders, such as India and Japan, and traditional multilateral lenders, such as the World Bank and the African Development Bank.

Shortfall to be financed by bond sale and new borrowing

Ghana 21


The government has had a setback recently in securing additional external funding, as the Millennium Challenge Account (MCA) initiative of the US president, George W Bush, seems under major political threat. Under the MCA, the US had awarded Ghana US$547m in aid, to be spent largely on agricultural development and transport infrastructure (November 2006, Economic policy). However, following the US mid-term elections in November 2006, in which Mr Bush lost control of the US Senate and House of Representatives, it looks unlikely that Ghana will receive the full amount. In announcing the MCA, Mr Bush had said that he would ask Congress for US$5bn per year to fund the scheme but, owing to spending restraints, he requested just US$3bn for it for 2007. Furthermore, an article in January in a US newspaper, The Wall Street Journal, suggested that the actual amount allotted to the MCA could be as little as US$1.2bn. This would significantly reduce the funds delivered to Ghana.

The main problem for the government, however, may not be its ability to raise revenue, either domestically or internationally, but how it spends the money, and whether it can achieve a reduction in poverty. In particular, in recent years two problems have become apparent. Firstly, the government has proved unable to spend its capital budget. The government has blamed a delay in planned privatisations, the revenue from which it had earmarked for capital spending. However, even before 2006, increases in capital spending had slowed from the rapid rises of 98% in 2003 and 67% in 2004 and, as a proportion of total government spending, capital spending rose only fractionally from 37% in 2004 to 39% in 2005. Furthermore, in the latest figures for 2006, revealed in the 2007 budget, the government admitted that investment outlays for the first three quarters of the year came in 19.6% under the level programmed in the 2006 budget. The government�s claims regarding delayed privatisations have some credence but, in general, large increases in capital investment by many Sub-Saharan African governments have failed to occur in recent years. This reflects their limited capacity to oversee and implement large projects.

Secondly, and crucially, much of the increase in spending in recent years has been in recurrent expenditure, notably wages (most people employed by the government in Ghana are far from poor). In the 2007 budget Mr Baah-Wiredu revealed that spending on wages reached C8.4trn (US$915m) in the first three quarters of 2006, 11% above the budgetary target for the period. In addition, with elections scheduled for 2008, and following several strikes in the second half of 2006, the government is under increasing pressure to spend even more on public-sector wages instead of capital projects. Ghana�s public-sector wage bill is already equivalent to 9.5% of GDP. Pressure to raise wages in 2006 was particularly intense in the health sector, where many key workers can easily find employment in rich Western economies. The government responded by granting doctors large pay rises (in excess of 100% in some cases), which were estimated to add an additional C1trn to the budget. As a result, the government admitted that as a proportion of discretionary spending, the public-sector wage bill would increase from 30% in 2006 to 66% in 2007.

The disparities created by the increases in health workers� wages have come back to haunt the government, as the rises broke the guidelines laid down by

New public-sector pay structure agreed

MCA funding is under threat

Targeting spending is more problematic

22 Ghana


the Ghana Universal Salary Structure (GUSS) and caused resentment in other areas of the public sector, resulting in widespread strike action. In its 2007 budget, the government therefore announced the abolition of the GUSS, and introduced what has been termed the �single spine� for public-sector salaries. This is expected to be in place in three to five years, following investigation by a Fair Wages Commission, which is being set up to look at wage levels across the public sector. The most likely outcome of this process is an across-the-board increase in public-sector wages. However, the Economist Intelligence Unit doubts that the government has implemented the necessary reform of the public sector to justify the pay increases. The 2007 budget did contain references to �linking the public-sector pay structure with productivity� and �a programme of right sizing�. However, we expect that it is likely to be more difficult for the government to implement public-sector reform after the pay review than to do both at the same time. As a result, we expect recurrent expenditure to add to the overall fiscal deficit from 2007 onwards.

We have few doubts that the government will continue to attract high levels of donor support in coming years, but, in order to ensure that donors do remain committed, Mr Baah-Wiredu used the budget speech to point out that although the government would not renew Ghana�s poverty reduction and growth facility (PRGF) with the IMF, which expired in October 2006, it would sign up to an IMF Policy Support Initiative (PSI). The PSI was introduced by the IMF in October 2005 to provide support to low-income countries that do not want or require the Fund�s financial assistance. Instead, the aim of the PSI is to facilitate the design of effective economic programmes that provide the necessary signals to development partners (donors, multilateral development banks and markets) that the IMF has endorsed the country�s economic policies as sound and reflective of market-led policies. Mr Baah-Wiredu also highlighted the areas on which he believed a PSI would focus, which seem broadly in line with those outlined by the IMF (November 2006, Economic policy). They include:

• enhancing growth-promoting policies, while sustaining macroeconomic stability;

• further strengthening of debt management;

• deepening of the domestic capital markets; and

• creating the environment to access international capital markets in the appropriate circumstances.

In the 2007 budget the government also announced its commitment to meet the convergence criteria for the West African Monetary Zone (WAMZ), in order to join its single currency by 2009. There are four primary convergence criteria, of which Ghana presently meets just two, in relation to central bank financing of the government deficit and the level of reserves. However, the country came close to meeting the inflation criterion, and we forecast that Ghana will meet the single-digit inflation target by the end of 2007. The real question, therefore, will be over the fiscal deficit, and we consider it unlikely that Ghana will meet the required budgetary deficit over the outlook period.

Government announces commitment to WAMZ

Government confirms that it will not sign up to new PRGF

Ghana 23


West African Monetary Zone (WAMZ) convergence criteria

WAMZ criteria Ghana's performance,

2006a

Central bank financing of government deficit 0% 0%

Gross external reserves as import cover 3 months 3.3 monthsInflation <10% 10.5%

Fiscal deficit <4% 4.9%

a Estimates.

Source: Economist Intelligence Unit.

In addition to the primary criteria, in 2005 the WAMZ Convergence Council adopted a new action plan designed to facilitate a single currency for the WAMZ members: Ghana, Nigeria, Sierra Leone, Liberia, The Gambia and Guinea. The updated WAMZ programme includes structural measures such as the liberalisation of financial markets as well as the full liberalisation of capital accounts within the WAMZ. Under these plans, it is expected that the WAMZ will implement full capital-account liberalisation by December 2007 to facilitate the realisation of a customs union by December 2008, although the governor of the Central Bank of Nigeria, Charles Soludo, has already indicated that Nigeria is unlikely to meet these requirements this year. In addition, the Economic Community of West African States (ECOWAS) Common External Tariff, which is scheduled to be agreed by the end of 2007, is a further step towards the WAMZ, and one which the Ghanaian government reiterated its support for in the 2007 budget. However, although the rigours of aiming to meet the convergence criteria may be a useful exercise for Ghana, we doubt whether the single currency will be adopted within the timeframe, given the divergent nature of the countries and the economic dominance of Nigeria.

Cedi to be redenominated

In January the Bank of Ghana (the central bank) announced a redenomination of the country�s currency, the cedi. This has become a common trend in Africa as countries have brought down traditionally high inflation rates, with Mozambique the most recent African state to undergo such an exercise. From July 1st 2007, the cedi will be revalued so that 10,000 cedi will be equal to one new Ghana cedi (nC). The new Ghana cedi will be equivalent to 100 new Ghana pesewas (nP). The Bank of Ghana is to print notes for the denominations nC1, nC5, nC10, nC20 and nC50, and mint coins for the denominations 1nP, 5nP, 10nP, 20nP, 50nP and nC1. In a six-month transition, during which the old notes and coins will be withdrawn, they will remain exchangeable at 1/10,000th of the exchange rate of the new currency, after which time they will no longer be exchangeable. The Bank of Ghana said the July date for the introduction of the new currency was chosen to allow farmers to familiarise themselves with it before the cocoa harvest begins in October. The Bank of Ghana argues that the country will derive several benefits from the redenomination of the cedi. These include: • ending the general inconvenience and high risks involved in carrying large

numbers of bills for transactions; • ending difficulties in bookkeeping and statistical records, and ensuring

compatibility with data-processing software;

WAMZ is unlikely to be implemented

24 Ghana


• ending the strain on the payments system, particularly automated teller machines (ATMs); and

• facilitating the introduction of vending machines and car parking meters. However, economists have been quick to point out potential problems with the redenomination. Foremost among these are the potential inflationary effects of rounding prices, especially those of low-value items. For example, items that were previously sold for C150 will now be worth 1.5nP and will hence probably be sold at 2nP. In addition, some economists have talked of a psychological effect of the redenomination, in making people think that their incomes are lower. For example, a worker who previously earned C1m will now earn nC1,000. However, it is unclear what effect this may have on the economy!and there is an obvious counter-argument that goods will also appear cheaper when redenominated. Overall, the Economist Intelligence Unit believes that the redenomination will have only a minimal effect on the economy.

The domestic economy

Economic trends

As part of the 2007 budget, the government released its estimates of the country�s economic growth in 2006. The finance minister, Kwadwo Baah-Wiredu, estimates that real GDP growth reached 6.2% in 2006, marginally higher than the government�s target of 6%.

Real GDP growth by sector (%)

2006 2003 2004 2005 Target ActualAgriculture 6.1 7.0 4.1 6.2 5.7 Crops 5.3 4.3 3.3 6.2 6.0 Cocoa 16.4 29.9 13.2 12.2 8.7 Forestry & logging 6.1 4.2 5.6 5.6 2.6 Fishing 3.0 6.2 -1.2 3.6 3.6Industry 5.1 4.8 7.7 6.4 7.3 Mining & quarrying 4.7 3.0 6.3 6.3 3.0 Manufacturing 4.6 4.6 5.0 5.0 4.2 Electricity & water 4.2 3.7 12.4 4.0 23.0 Construction 6.1 6.6 10 7.5 8.2Services 4.7 4.9 6.9 5.5 6.5 Transport, storage & communications 5.8 5.2 7.9 6.0 7.2 Wholesale, trade & retail 5.0 6.0 10.0 6.2 7.5 Finance & insurance 5.2 4.8 7.6 5.7 7.6 Government services 4.0 4.4 5.0 5.0 5.7 Community, social & personal services 4.1 4.2 4.3 4.2 4.2 Producers of private non-profit services 3.2 3.5 3.6 3.8 4.5

GDP growth 5.2 5.8 5.8 6.0 6.2

Source: Ministry of Finance, The Budget Statement and Economic Policy of the Government of Ghana for the 2007 Financial Year,

November 2006.

According to the government�s figures, real GDP growth was strongest in the industrial sector, at 7.3%, while the services sector grew by 6.5% and the

Budget reveals growth may be above targets

Ghana 25


agricultural sector by 5.7%. However, the figures were viewed with scepticism by local economists. Within the industrial sector, for example, the government revealed that it estimated growth of 23% within the electricity and water subsector. Given that Ghana suffered power and water shortages for much of 2006, restricting the supply of these utilities to much of the country, this growth figure appears very high. Conversely, in the cocoa subsector, the government estimated growth at only 8.7%, below the government target of 12.2% and the 2005 figure of 13.2%, despite the fact that Ghana had a record cocoa harvest for the crop year (October-September), with production of over 740,000 tonnes, up from 600,000 tonnes in the previous year.

There has also been criticism that, despite strong growth in cocoa, growth in the wider agricultural sector has been much more limited. As well as being the largest component of GDP, the agricultural sector is concentrated outside the richer urban areas and is the country�s largest employer. Strong growth in the sector is, therefore, essential if the government is to make significant inroads in reducing poverty. However, apart from cocoa, agricultural data were disappointing, with most subsectors recording below-target growth, leading to claims that the government was not committed to reducing poverty.

Within the services sector, the finance and insurance services subsector posted the highest growth, at 7.6%. Evidence of this growth, and of confidence in the banking sector, can be seen in the number of banks building new headquarters in 2006, as well as by some takeovers and new entrants into the market. The figure is also backed up by the latest IMF data, published in the Fund�s International Financial Statistics. According to the IMF, domestic credit growth was quite strong in 2006, with the nominal figure having increased by 15% in the first eight months. Additionally, growth in quasi-money of 20.6% in the first eight months of 2006 significantly outstripped growth in the narrow definition of money of 12.4%, suggesting an increased use of banking facilities. There is scope for significant growth in the sector, with the government admitting in the 2007 budget that 90% of the population do not have access to banking facilities.

Interestingly, given the rise in bank lending, there was an improvement in the loan quality of the banking system. The non-performing loans (NPLs) ratio declined from 14.2% to 11% over the 12 months to October 2006, the loan-loss provision/total loan ratio declined from 12.4% to 9.6%, and the NPL net of the provisions/capital ratio declined from 6.7% to 5.9%. This improvement in the quality of loans gives justification to banks� decisions to increase lending and may lead to a lowering of the spread between lending rates and the prime rate.

In January the Bank of Ghana (BoG, the central bank) released its inflation figures for December 2006. Surprisingly, according to the BoG, inflation rose in the final month of the year, to reach 10.5% year on year, giving the country an average inflation rate for 2006 of 10.9%. This came as a surprise, given that inflation had been on a broadly downward trend during 2006 and had fallen on a month-on-month basis since peaking at 11.4% in July. The overall fall has been largely attributed to lower international oil prices. Although detailed breakdown of the end-year spike in the inflation figure has not yet been

Strong growth in the banking sector is encouraging

Inflation rises

Poor agricultural performance causes concern

26 Ghana


released, the Economist Intelligence Unit expects that the increase will be attributed to wage rises in the public sector, as well as to higher costs in the private sector as a result of power shortages. Given the end-year rise in inflation, as well as the fact that the inflation rate remains above the government�s single digit target, we believe that the BoG�s decision in December to lower interest rates by 2 percentage points was premature.

Inflation, 2006 (%)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecYear on year 14.6 12.1 9.9 9.5 10.2 10.5 11.4 11.2 10.8 10.5 10.3 10.5Average 15.3 15.1 14.5 14 13.5 13.1 12.8 12.5 12.1 11.7 11.3 10.9

Month on month 0.7 2.5 2.1 1.6 1.7 1.2 1.1 -0.1 -0.9 -0.4 0.0 0.5

Source: Bank of Ghana.

Infrastructure

The dry season continues to test Ghana�s infrastructure severely. There have been frequent power outages across the country as water levels at the Akosombo dam have continued to fall. Water levels at the dam remain below the 246ft level that is supposed to represent the minimum for electricity production. Unconfirmed reports in the local media suggest that the fact that electricity is still being produced from the dam at such low water levels could mean that it has to be closed for maintenance as early as June. Political pressure to increase electricity production, regardless of water levels, in order to reduce load-shedding when the international spotlight is on Ghana as it celebrates its 50th anniversary of independence in March may worsen this situation.

Despite various initiatives by the government, there is no quick end to the problem. In January the Nigerian president, Olusegun Obasanjo, agreed that Nigeria would meet Ghana�s commitments to provide electricity to Togo in order to free up production for use within Ghana itself. Nigeria will also supply a further 80 mw to Ghana via the West African Power Pool, which will become operational in February. However, the inability of the Power Holding Company of Nigeria to meet its own domestic supply commitments means that a considerable cloud hangs over the proposed arrangement. In addition, the government is moving the Osagyefo barge to Tema from the Western region of Ghana, where it has lain dormant for the last two years. The Osagyefo barge is in many ways indicative of the government�s lack of organisational capacity to solve the problem. The barge, which was built in Italy more than four years ago to produce 110-125 mw of electricity, has never been used as the gas to run it could not be sourced, but it has incurred harbourage and other charges and costs exceeding US$60m. The barge should finally be operational by the end of August, assuming there are no additional delays.

Longer-term solutions to the power shortages are also under way, and these could have a more significant impact. The most notable of these is a large new hydroelectric dam at Bui, which was first suggested as a potential solution to Ghana�s energy problems in the 1960s. China announced in November that it

Dry season affects infrastructure

No short-term solution to power cuts

Long-term solutions to power cuts are under way

Ghana 27


will finance the US$600m cost of the dam, which will produce 400 mw of electricity. Fifteen smaller dams are also being built around the country. In addition, in February the International Financial Corporation (IFC) approved a loan of US$60m towards the development and expansion of the Takoradi Thermal Power Plant, which will increase the country�s power-generating capacity by a further 110 mw. However, these improvements will not be ready until 2008 at the earliest. In the meantime, a survey by the Association of Ghana Industries found that 75% of private-sector chief executives saw load-shedding as the biggest obstacle to profitability in 2007.

The dry season has affected water supply, particularly in the Accra region. The Ghana Water Company Ltd (GWCL) released a statement in January blaming water shortages on seasonal demand, as well as the increasing population in the capital. Power cuts have exacerbated the problem, as waterworks and booster stations have been unable to operate. As with the energy crisis, there is no short-term solution and water rationing will continue in 2007. However, for the medium term, GWCL has announced that five new boreholes have been commissioned at Dodowa. In addition, construction has started on a water treatment plant at Weija, which will increase daily supply by up to 68m litres.

Mining

The minister of land, forestry and mines, Dominic Fobih, announced in January that he expected Ghana to become fully compliant with the Kimberley Process by March 2007. In October 2006 the UN Group of Experts had accused Ghana of being a transit point for the sale of illegal diamonds from troubled neighbouring Côte d�Ivoire. The Kimberley Process is a voluntary code established in 2003 by mining companies and diamond sellers to provide certification that diamonds purchased by consumers in developed economies are not �blood diamonds�, which have not been mined in war zones and the revenue from their sale has not been used to fuel wars in Sub-Saharan Africa. Ghana is a small-scale producer of diamonds, with formal production mainly from the Akwatia mine in the Eastern region, which is operated by the Australian firm Paramount but owned by the state-run Ghana Consolidated Diamond Ltd. The government estimates that the diamond trade in Ghana generates US$30m annually, employing an estimated 10,000 people directly and another 25,000 indirectly.

The report by the Kimberley inspection team is to be published in late February and provisional indications are that it will give Ghana a clean bill of health. The country review is likely to indicate that control over and registration of diamonds produced at the Akwatia mine are more than adequate. The concern of the Kimberley inspectors is more to do with the wider operations of the state-run marketing board, the Precious Minerals Marketing Corporation, which has poor management and few controls and, given its financial problems, considerable scope for corrupt practices. This is particularly the case because, as production at Akwatia has declined, those laid off have increasingly resorted to informal diamond mining. This is clear from the measures the government is now seeking to impose on the sector to be Kimberley-compliant, such as the

There are also water shortages in the south of the country

Ghana�s diamond industry to become Kimberley-compliant

28 Ghana


registration and licensing of diamond buyers and the issuing of identification cards to them. The government is also committed to obtaining a much more accurate picture of production levels in the country, which is crucial if it is to be able to say that all diamonds sold from Ghana are produced in Ghana.

Another source of concern for the government in the coming years could well be the potential for clashes between small-scale artisanal miners and mining companies. These have already occurred in the diamond-mining sector and have been a long running theme in the gold-mining sector, where tensions remain high between local small-scale and unlicensed miners (known as galamseys), who have been driven off land they have traditionally mined, without compensation, in order to make way for larger mining corporations. Unlicensed mining has traditionally been the largest source of employment in many areas and the ongoing disputes raise an interesting political dynamic in the run-up to the 2008 elections. Several local newspapers have run stories revealing that support for the ruling New Patriotic Party (NPP) is falling sharply in the Western region of the country, where much of the mining is based. This follows reports of heavy-handed use of force by the police and mining security forces to protect mines from galamseys. However, mining companies provide a valuable source of revenue to the government, as well as optimising production from the areas in which they mine.

Production of major mining companies and mines in Ghana, 2005 ('000 oz)

Gold Fields Resources Ltd 925 Tarkwa 677 Damang 248Anglogold-Ashanti Ltd 680 Iduapriem 174 Bibiani 115 Obuasi 391Golden Star Resources Ltd 201

Source: Economist Intelligence Unit.

However, gold mines in Ghana are facing even greater difficulties than those posed by galamseys. US company Newmont Mining Corporation announced in December that energy shortages have cost it US$30m so far, and Anglogold Ashanti Ltd has revealed that it is losing up to US$1.8m per month. Although the size of the losses is exacerbated by the high international prices for gold, which prompt mining firms to look to expand production, this is a serious issue for the companies concerned.

In January Newmont Mining revealed that it had purchased a 10-mw generator as a stand-by to make up for the energy shortfall. However, generating power on-site is expensive for mining companies, with production costing around about 26 US cents/kilowatt hour (kwh). The major mining groups operating in Ghana, South African-based producers Anglogold-Ashanti Ltd and Gold Fields Ltd, as well as Newmont Mining and the Canadian Golden Star Resources Ltd, have joined together to pay for an additional 18-mw thermal plant, which will be in operation by the second quarter of 2007. The plant, which will produce power for the national grid at 15 US cents/kwh, will result in the four

Tensions with galamseys persist

Gold-mining companies generating their own power

Ghana 29


companies paying a �blended� price for the energy they need, as well as enabling them to limit load-shedding to 50% of their combined energy demand.

Foreign trade and payments

Following the State of the Union address in January 2007, when the president, John Agyekum Kufour, identified the tourism sector as a potential growth area, the Bank of Ghana (BoG, the central bank) released a policy brief outlining the potential of the sector as a source of foreign exchange. Tourism is already the third-largest earner of foreign exchange, after merchandise exports and private remittances. According to the report, the tourism and diaspora relations ministry believes that foreign-exchange earnings from the sector will reach US$1.5bn in 2007. However, the ministry�s aims appear very ambitious. Although Ghana has recorded strong growth in tourism, with receipts rising from just US$118m in 1991 to US$836m in 2005, this still leaves earnings a long way short of the government�s targets. Additionally, figures for 2005 show that although receipts increased, tourist arrivals decreased that year.

Tourist arrivals and receipts 2000 2001 2002 2003 2004 2005Arrivals (no.) 399,000 438,833 482,643 530,827 583,821 408,167

Receipts (US$ m) 386 478 520 603 649 836

Sources: Ghana Tourist Board; Bank of Ghana.

In addition to expanding the tourism sector, in the 2007 budget the government reiterated its commitment to the creation of an International Financial Services Centre (IFSC) in Ghana. The aim of the IFSC is to create a financial services regional hub in order to attract business and investments into the country. However, this strategy has been tried elsewhere in Africa, with limited success. Mauritius, South Africa, Seychelles and Botswana have all attempted similar strategies. Mauritius had some success, with investment attracted to the looser banking regulations than in more developed economies. The other countries, however, have failed to attract significant investment or create large numbers of jobs. Additionally, Ghana faces stiff regional competition in the banking sector from Nigeria, which has similar ambitions. According to comments by the finance minister, Kwadwo Baah-Wiredu, the model that Ghana appears to favour focuses on loosening the capital account so that international investors can take advantage of the higher interest rates and relatively stable currency that the country offers. However, it is unclear if this would result in a large increase in capital flows. At present, purchases of Ghanaian securities by Western institutions take place via local subsidiaries and the level of additional potential demand remains unclear.

Government targets increased tourism

Financial services also may bring in foreign exchange

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