At independence in 1957, Ghana was one of the brightest stars in Africa. It enjoyed the highest per capita income on the continent and had a well-earned reputation for a comparatively sizeable and well-educated middle-class. Economie growth was respectable, averaging 4 percent during the sixties. This growth was heavily driven by Ghana's most important export- cocoa, which accounted for about 70 percent of foreign exchange earnings. The country was the world's largest producer of cocoa, averaging about a third of world supply in the late fifties. The economy could be compared with sorne East-Asian countries like Singapore and Malaysia.
Foreign reserves were equivalent to three years of imports. The country is well endowed with natural resources (gold, diarnond, bauxite, manganese, forestry, etc) and has a potential for tourism. Government intervention in the economy after independence, however, adversely affected the economy.
The role of the public sector was greatly enlarged on both the productive and distributive sides.
Increasingly Prime Minister Nkrumah carried out more dirigiste policies and in 1961, he introduced officially socialist state-led planning. Deteriorating terms of trade compounded the impact of these policies. Between 1959 and 1965, the world market priee of cocoa fell substantially; the 1965 priee was only 40 percent of the 195 8 lev el. Because of all these factors, large fiscal deficits emerged, the balance of payments deteriorated significantly, and the economy took a nosedive.
Ghana's economy declined between 1971 and 1983 as a result of the first two oil shocks (1971 and 1979) to which most developing economies had not anticipated. Industrial production that was championed by State-owned Enterprises (SOEs) declined more than 47 percent, especially in the mining and construction sub-sectors. By 1981-83, Ghana's economy had deteriorated as GDP growth recorded negative figures (-3.5, -6.9 and -4.6 percent in 1981, 1982 and 1983 respectively). In 1983, a severe drought, a fall in the cocoa priee on the world market, the retum of over one million Ghanaians from Nigeria compounded the economie woes (Tsikata et al., 2000).
The currency was devalued by 43 percent in July 1967, public expenditure was reduced, and the activities of public enterprises were streamlined or eliminated. To address balance of payments difficulties, import controls were tightened and foreign debt payments were rescheduled.
Improving terms of trade enabled the govemment to reduce significantly the number of goods on the negative list for imports. With a fall in the world priee of cocoa in 1971, however, rapid import liberalization was no longer affordable. Both the fiscal and capital accounts deteriorated.
In late 1971, the cedi was devalued by 44 percent in an attempt to improve the balance of payments position. Consumer priee inflation skyrocketed, rising from 9.6 percent in 1972 to 77.2 percent by 1977. As the exchange rate continued to be fixed, the cedi was increasingly overvalued, discouraging exports. Govemment expenditures rose as the state became more heavily involved in production and regulation. These expenditures were financed by a complex and high rate of taxation on imports, goods, services and exports. Ghana experienced continued stagflation in the second half of the seventies (Tsikata et al., 2000).
On the economie front, the Armed Forces Revolutionary Council led by Fit. Lt. Jerry John Rawlings in 1982 re-imposed priee controls on consumables, raised the cocoa priee paid to farmers, evacuated sorne of the rotting coco a from rural areas with the assistance of students, and collected large amounts of outstanding tax payments during this period. While sorne of these measures were successful in the short-run, many would prove to be ultimately unsustainable (for example, the priee controls).
The general economie situation was desperate and financial liquidity precarious. Lax fiscal and monetary control over almost a decade had resulted in hyperinflation. Inflation worsened over the next two years reaching 77 percent by 1981. Production had contracted in ali sectors of the
economy. Cocoa exports, which were Ghana's leading foreign exchange earner, had declined in part due to the absence of basic transport infrastructure to move the harvest to the ports. The shortage of foreign exchange meant that critical spare parts and inputs were in short supply, adversely affecting the industrial sector performance. Not surprisingly, both social and physical infrastructure had severely deteriorated.
Ghana liberalised her economy in 1983 with the implementation of the Economie Recovery Program (ERP) to stabilize the economy. The ERP and its follow up, the Structural Adjustment Programme (SAP), received substantial assistance from the international financial institutions and donors. Rehabilitation of the country's deteriorated ports, roads and railway was prioritized earl y in the pro gram. Input and produce marketing of most crops was liberalized over the reform period. In general, priee controls on goods, and interest rates were removed. In the decade following the introduction of the ERP, real GDP growth was impressive, averaging 5 percent annually. Real income grew by 2 percent per capita during the decade. Inflation remained high and variable, however, discouraging private investment.
As shown in Figure 2.1, the trend of Ghana' s GDP per capita growth rate has been fluctuating.
The pre-ERP period was characterised by negative growth rates in per capita GDP. However, years of positive growth rates were very modest with the exception of 1970 and 1978 which recorded the highest growth rates of7.32 percent and 6.64 perecent, respectively.
The periods 1971, 1973, 1974 and 1977 recorded positive but low growth rates of2.6, 0.04, 4.08 and 0.53 percent respectively while negative growth rates of 5.14, 14.45, 4.44, 10.02 and 7.92 perecent were recorded in 1972, 1975, 1979, 1982 and 1983 respectively. It is worth noting that the years that recorded negative per capita GDP growth rates were periods characterised by coup d' etat (1972 and 1979) or a natural disaster such the famine in 1982.
However, the post-ERP period (1983-2006) witnessed relatively stable growth rates with the highest being 4.87 percent in 1984 and the lowest being 0.98 pe~cent in 1992. The period recorded an average per capita growth rate of 2.16 percent.
Figure 2.1: Trend of GDP per Capita growth rate (1970-2006)
10.00 5.00
-
~ 0 0.00-
cu C)-5.~Ç)
....,
cu c cu(.)
...
-10.00a.
cu-15.00
--20.00
Years
1 ---+---
PCGDP(%)1
Source: World Bank (2007)
In the decade after 1983, Ghana's economie performance successfully turned around with GDP growth averaging around 5 percent. The Bretton Woods institutions touted Ghana as one of the success stories of the ERP. As a result of severa! polie y initiatives and economie measures taken in the 1990s, Ghana has been able to develop its private sec tor and liberalize its economy. The mostly successful adjustment was partially derailed in 1992 due in part to an election-related wage increase of about 80 percent. With loss of fiscal control came macroeconomie instability, reflected for example, in higher inflation. Much of the nineties have been spent trying to regain sustained fiscal balance. Not surprisingly, the decade has been marked by increased difficulties between the government and the Bretton Woods institutions as policy slippages occurred. On the positive side, accelerated Government efforts to increase investment paid off in the form of higher investment rates and greater foreign investment. The period aft.er the 1990s has seen sorne prudent management of the macroeconomie environment and Ghana now leads Sub-Saharan Africa as a mode! of economie, political and social development. Ghana's GDP was US$7.6
billion in 2003, and is estimated to increase toUS$ 10.3 billion in 2005. The growth rate of real GDP was 5.8 percent in 2005.
The Government had undertaken strong fiscal and monetary measures for restoring and sustaining macro-economie stability and bringing down the rate of inflation and the overall budget deficit. The stabilization measures of tight monetary policy and fiscal discipline had improved the macro economie situation considerably since the beginning of 2002. Inflation had fallen from about 42 percent in March 2002 to an average of26.7 percent for 2003, and further to 12.6 percent for 2004. Inflation for December 2005 was 13.5 percent which is slightly higher than that of 2004, mainly because of the 50 percent increase in priees of petroleum products in February 2005. Inflation at the end of November 2006 stood at 10.3 percent. Gross official foreign reserves at the end of 2005 were US $1.75 billion, which is equivalent to 3.5 months of imports. The Bank of Ghana prime lending rates decreased from 18.5 percent at the end of 2004 to 12.5 percent now. Accordingly Bank interest rates assumed a downward trend and it had fallen from 26 percent at the end of the year 2004 to 19-21 percent now. This has, to sorne extent, helped manufacturing and the import sectors by providing sorne relief to the very tight credit situation. Economie growth will be helped by government's efforts to boast infrastructure spending, emphasis on FDI and on private sector-led growth and the Presidenfs Special Initiatives in sorne key economie sectors.
Private remittances through banks are now the largest source of foreign exchange earnings.
These were expected to be approximately $4 billion in 2005. Tourism is now the third biggest source of foreign exchange eamings. Export receipts for gold, cocoa and timber were US$945 million, US$753 million and US$227 million, respectively for 2005. Non-traditional exports (bananas, fish, rubber, agricultural products, salt and textiles) have grown over the past decade and were around US$700 million in 2005.
The governmeilt has announced sorne new initiatives for the production of Cassava, textiles, Palm oil and salt. These are aimed at promoting non-traditional exports to broaden the export base and reduce the dependence on Ghana's traditional exports, which are frequently adversely affected by large variations in international priees.
Ghana is a member of the Economie Community of West African States (ECOWAS). Ghana, along with Nigeria, Guinea, Sierra Leone and Gambia, has established West African Monetary Zone (W AMZ). Under W AMZ, the monetary union is expected to commence by 1 December 2009. Ultimately, it hopes to be part of the ECOWAS free-trade zone that encompasses the 250 million people strong market covering the entire West African sub-region.
In November 2005, Ghana negotiated with its development partners including World Bank and IMF the Growth and Poverty Reduction Strategy II (GPRS II). GPRS II will be implemented for the period 2006-09, and will focus on accelerated growth through integrated approach to socio-economic development (with focus on agriculture, infrastructure and industrial development) at all levels; local, regional and national. Under this scheme, Ghana is expected to receive the budgetary support of $1.2 billion per year in form of grants and soft loans for 2006-09.
Key economie policies include: (a) a more effective control and monitoring of public expenditure; (b) reduction in the government's domestic debt as a share of GDP and using unprogrammed receipts from divesture and a portion of HIPC relief to retire domestic debt; ( c) the containment of the indebtedness of the main parastatals until full cost recovery can be achieved, ( d) the deregulation of the petroleum sector, ( e) continued monitoring and protection of the health of the banking system; and (f) the development of an effective inter-bank forex market and a vibrant secondary market for government financial instruments.
International credit rating agency Standard and Poors has retained Ghana's B rating, while another international credit rating agency Fitch Ratings has upgraded Ghana's B Positive outlook to B+. These ratings are at par with countries like Turkey, Brazil and Indonesia, in terms of sovereign credit risk, and therefore, support Ghana's sustained track record in prudent economie management and good governance.
In the Global Competitiveness Report 2005-2006 rankings, Ghana moved to 59th position ( among 117 co un tries polled) in 2005 from 68th in 2004, was d~scribed, along with South Africa, Botswana and Mauritius as the region's success stories. It is worthy to note that Ghana performed better than sorne of its peer group members in sovereign credit ratings such as Brazil
and Turkey. The World Bank/IFC' s "Doing Business 2007 Report" rated Ghana as the top reformer in Africa and among the top 10 global reformers.
Total exports in 2005 were US$2.7 billion (same as in 2004) and total imports were US$5.3 billion in 2005 (US$4.3 billion in 2004), resulting in a resource balance or deficit of US$2.6 billion. Ghana's major trading partners are the Netherlands, UK, USA, Belgium, Nigeria, France and China.
As a result of continued political stability, the strong macroeconomie performance and a number of measures taken by the government to attract foreign direct investment (FDI), foreign investment in Ghana has increased considerably in recent years. Ghana Investment Promotion Centre (GIPC) registered FDI worth approximately US$160 million in 2005. India is the largest foreign investor in terms ofnumber ofprojects, followed by China.