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How 'free money' is oiling Ghana’s economy
Nana Mensah
Published: 16-OCT-06

The biggest entry of free money in recent times was the signing on 1 August of a $547mn dole-out by the Bush Administration under the Millennium Challenge Account (MCA).

Compared to its export earnings, Ghana earned less than half the MCA cache from exporting non-traditional products aside from cocoa beans and gold, which annually totalled around $110mn. In 2004 earnings from processed cocoa beans reached $86,7mn while gold exports receipts recorded $838,7mn.

Between 2001 and 2004, annual aid to Ghana in the form of grants totalled $700mn, or 30 percent of the national budget.

Traditionally, the bulk of Ghana’s Overseas Development Assistance (ODA) comes from five key sources: the World Bank, United States of America, the United Kingdom, the European Union and the Netherlands.

These donors contribute nearly two-thirds of the ODA.

Finance and Economic Planning Minister in the President Kufuor-led administration, Kwadwo Baah-Wiredu, says, “It is a noble gesture, and an opportunity to halve the gap in development funding over the next five years.”

Among the principal actors in the development cooperation in Ghana, government’s increasing over-dependence on the international donor community has been a topic of long debate in the media. But Baah-Wiredu sees the donor community as a “critical financier to reducing poverty”.

“We earned it” — Finance Minister

“We cannot by ourselves in the short-term meet the Millennium Development Goals (MDGs). However, he succumbed to the assertion that dependency creates vulnerability in any economy,” says Baah-Wiredu.

Economists project that the economy requires an injection of $7bn to execute a new development programme as spelled out in the Growth and Poverty Reduction Strategy (GPRS II) for 2006–2009.

“Government is committed to enlarging its domestic revenue portfolio, it is a difficult task,” says Baah-Wiredu, but the nation is going to lean on non-state actors and the international donor body for support.

Would the Ghanaian government institutionalise free money? “Certainly not, I wish to avoid a situation of donor fatigue,” was the Finance Minister’s response.

“We are bound to witness a gradual decline. It would be a bad policy to avoid over-dependence on ODA.”

Yet Ghana, like most African states is battling corruption and a public sector-ru n economy dominated by the state. “The declaration of a private-sector economy is largely state-run propaganda,” opined an economist at the University of Ghana, Legon campus, adding that the economy is still largely state-controlled.

Others are concerned about corruption. Some fear that the MCA $547mn will vanish into individual accounts or probably slip outside the Ghanaian economy. Has the government overcome weak compliance and enforcement of financial management mechanisms as well as poor planning and performance output; are questions in the public discussion?

The nation’s finance minister has no doubt. The MCA would be spared from this social stinker.

First and second generation economic reforms

Ghana has already undergone first generation reforms in its enlarged parastatal sector initiated in the 1980s. The earlier reforms which were triggered off by sharp economic declines in the late 1970s, was at the instance of the Breton Woods Institutions — the IMF and the World Bank and was aimed at correcting fiscal distortions, increased budget deficits, a large public sector wage bill and low revenue.

More than two decades after, Government officials assessed the outcome of the reforms was shortlived especially as it failed to increase a GDP growth rate of around 3 percent. A recent World Bank report suggests that “Ghana did not sustain its promise of successful economic and administrative changes demonstrated in the early 1980s”, even though in 1999 reforms in the public sector again gained steam. The goal was to press for more open transparent and accountable governance, especially in the handling of public funds.

Ghana enjoying a stable economy

The outcomes of the Structural Adjustment Programme (SAP) were less desirable. “We could not reap the expected influx of high volume foreign investment and we also failed to diversify our exports,” says Kwadwo Baah-Wiredu.

In the sixth year of his reign, President John Agyekum Kufuor is largely accredited with a new sense of reform. The 67-year-old lawyer, who rose to power in 2001, has accepted IMF and World Bank recipes for reviving the West African state’s economy, described as a stable economy. Ghana is implementing the second generation reforms with a renewed mandate of making the public sector efficient, effective and robust to partner the private sector for accelerated economic growth.

The second generation reforms have proved more rewarding.

Economic dividend for good governance?

With its focus on creating an enabling environment — politically and economically — the country in 2003 benefited from $4bn in debt cancellation, spread over the next 20 years under the Heavily Indebted and Poor Country Initiative (HIPC) owed to the Multilaterals (African Development Bank, World Bank and the IMF) as well as the Paris Club of Lenders.

In August 2006, the government was given $547mn, by the US government. “I deem these gestures as deserving dividends for the economy,” says finance minister, Baah-Wiredu.

Creating an financial hub for investors

With a market of just 20 million people, Ghana is at a disadvantage to big foreign investors who are eyeing bigger markets. The Finance Minister says, “We are not entirely out of the race for FDIs.” The country is spearheading fast-track measures to economic integration in the sub-region under the West African Monetary Zone (WAMZ). The idea is to create a single economic bloc of nearly 250 million people. Rough estimates put the spending power up to $40bn for the sixteen countries forming the Economic Community of West Africa States (ECOWAS). The EU is counting on Ghana to open up a region the size of the US market to European investors. “Creating a regional market will help West Africa’s economy if we are to meet the MDGs,” Baah-Wiredu remarked. Though others think otherwise, the lead economist is optimistic that the “WAMZ will work.” A timeline of December 2009 has been set for the creation of the single monetary Union involving Nigeria, Gambia, Ghana, Sierra Leone and Guinea. The government of Ghana recently announced a $7bn plan under the Growth and Poverty Reduction Strategy (GPRS) to accelerate infrastructural development and free resources for employment generation in the economy. “With this kind of approach, we will succeed,” says Baah-Wiredu.

A real GDP growth rate of 5,8 percent was recorded in 2005 and inflation within single-digits is targeted this year.

Nigerian banks pump $300mn into Ghana

A priority on the economic agenda would be to consolidate macroeconomic gains and increase intra-regional trade in West Africa. Nigeria, the regional economic giant, has a strong influence in determining the trade patterns in the area. Recently, Ghana has been witnessing an influx of Nigerian Banks, the likes of Zentih Bank, Guaranty Trust Bank, Inter-Continental Bank and Standard Trust Bank.

It is apparent that Nigeria is adding to Ghana’s position as one of the region’s most promising financial hubs. A new directive from the Central Bank of Ghana two months ago abolished the hitherto statutory secondary reserve in all commercial banks in Ghana allowing banks to increase credits and double loans to businesses. “We are sending a strong signal that our economy is rife for business,” says Baah-Wiredu.

Ghana is also reviewing its business laws to make the country competitive and dissuade money laundering. Ghana marks its fiftieth anniversary in 2007 and it seems certain that Ghanaian businesses will mark the occasion with an economic liftoff for the country as an emerging marketplace for business.

This article was published in Business in Africa Magazine (West Africa Edition), October 2006. To subscribe click here


  • The amount coming to Ghana is pegged at $547mn
  • Agriculture Component: $241mn
  • Transportation Component: $143mn
  • Rural development component: $101mn
  • Economic rate of return: estimated at 20 percent
  • Estimated direct beneficiaries: 1,5 million Ghanaians

    Ghana’s economy runs low on energy
    When in late August, the Volta River Authority, responsible for electricity generation in Ghana, announced that it was going to ration power for the next one month, the private sector was immediately up in arms. This is understandable. Electricity is usually very stable in places connected to Ghana’s national grid and so few companies have their own power generating capabilities. Now, with the water level at the Akosombo Lake, essential to the operations of the hydro-electric power station there, at its lowest in about eight years, power rationing is inevitable.

    As the Kufuor administration bears the brunt of private sector criticism, it is also counting its own potential macro-economic performance losses as well. Even before the current energy crises emerged, government economic management chieftains had begun to admit privately that the 8,8 percent inflation target for the end of 2006 is unlikely to be met.

    Now the current energy crisis has given the Kufuor administration a new dilemma. With many industries facing production cuts and the crucial mining sector actually looking at the dire possibility of temporary mine closures, GDP growth, projected at 6 percent for the year, may not reach that target either. This in turn may throw other macro-economic targets awry.

    The main fiscal target this year is to reduce the domestic debt to GDP ratio from 10,8 percent at the end of 2005 to 8,7 percent at the end of 2006. Actually, the original projected ratio for 2005 was 11,4 percent but the over-performance of the domestic debt repayments in 2005 by ¢577,7bn is now being computed into 2006’s calculations.

    Actually, higher than originally budgeted net financing for 2006 did occur during the first four months of the year and perhaps at a faster pace than many would have envisaged.

    Most of the foreign grant and loan inflows for this year under the Multi Donor Budgetary Support System are only now beginning to be received. As usual most of such funds are given to Ghana during the third quarter of the year.

    Perhaps most importantly though, the government now knows just how much in additional resources is available this year through the Multilateral Debt Relief Initiative, under which the group of eight biggest industrialised economies (G8) are sponsoring a major write-off of debts owed by some of the world’s poorest nations.

    The effects of the current energy crisis on government’s revenue expectations are still unclear since they have not been quantified. But a reduction in the GDP growth rate from originally projected cannot but adversely affect the GDP to domestic debt ratio.

    The Kufuor administration can take solace from the fact that the next general elections are still more than two years away. However, for a government that, when in opposition, accused the then incumbent Rawlings administration of mismanaging the energy sector when the last crisis occurred in 1998, the current one is self-damning. Apparently, the current government’s energy policies are not as good as its financial management ones.

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