Ghana is a major cocoa and gold exporter, so why is the West African nation battling its worst economic crisis in decades?

By Kent Mensah

Doris Oduro sits at her small, almost-empty store in Odorkor, a suburb of Ghana’s capital, Accra. The single mother of two feels frustrated. After 15 years in business, she is now considering closing because she cannot restock her shop due to the high cost of living. “I am running at a big loss,” Oduro, 38, told Al Jazeera. She sells imported items, including juices, biscuits, soft drinks, toiletries and sweets, but Ghana’s economic crisis is taking a huge toll on her business. “Prices of goods keep soaring, and it is affecting my principal capital,” she said. “I want to close my store and find something else to do. Things are tough for me because I can’t sustain the business and I have a family to keep.”

Ghana, a country once described as Africa’s shining star by the World Bank, had the world’s fastest-growing economy in 2019 after it doubled its economic growth. But today, it is no longer the economic poster boy of West Africa. Despite being a major cocoa and gold exporter, it is currently battling its worst financial crisis in decades with inflation hovering at a record 50.3 percent, the highest in 21 years.

Ghana’s economic successes were in the limelight when the new government of President Nana Akufo-Addo took power in January 2017 and brought down inflation significantly. Under the previous government in 2016, it was 15.4 percent, and it fell to 7.9 percent by the end of 2019 and remained in single digits until the pandemic hit in March 2020.

Ghana’s budget deficit, which was about 6.5 percent of the nation’s gross domestic product before Akufo-Addo’s government came to power, was brought down to under 5 percent of GDP by the end of 2019. “The growth that we experienced around 2017 to 2019 was actually coming from the oil sector,” Daniel Anim Amarteye, an economist with the Accra-based Policy Initiative for Economic Development, told Al Jazeera. “We were so excited that the economy was growing, but we couldn’t devise strategies to ensure that the growth reflects in the other sectors of the economy,” he said. “For instance, we neglected the agriculture sector, and we couldn’t do any meaningful value-added investment in that sector. The government became complacent.”

According to the United Nations’ Food and Agriculture Organization, agriculture represents 21 percent of Ghana’s GDP and accounts for more than 40 percent of its export earnings. At the same time, it provides more than 90 percent of the food the country needs. “Over the years, the government failed to invest in increasing output in the agricultural sector that will eventually lead to economic growth and transformation and food security. We are a major cocoa growing country, but we didn’t pay attention to increasing yields to translate into more foreign exchange earnings to drive economic growth and employment,” Amarteye said.

Ghanaian traders, who contribute significantly to the economy, mostly buy and sell products they import from Western countries and China, including home appliances, consumables, cars and second-hand clothes. Due to the nature of their businesses, there is a persistent strong demand for the US dollar to pay for imports. This led to the continuous depreciation of the local currency, the cedi, which was recently described as the worst-performing on world markets.

As inflation surges, rising prices keep the cost of living accelerating for Ghanaians. “Things are not the same anymore,” said Francis Anim, a vehicle spare parts importer. “I used to spend $5 a day with my wife and child on food alone early this year. Now we spend close to $10 [for the same amount of food]. Why?” “We are feeling the heat,” he said. “The import duties are very high at the ports, so we have to pass on that burden to retailers, and eventually the consumer suffers. This has resulted in a high cost of living in Ghana, and the economy is not helping us either.”

A nation in crisis

The president conceded in a recent address to the nation that the West African country is in crisis. He blamed the situation on external shocks – the pandemic and Russia-Ukraine war. However, analysts say the government took certain political and economic decisions that would have eventually exposed the weaknesses in the system even without those external factors. For instance, to fulfil one of Akufo-Addo’s most expensive campaign pledges, his government launched a free education programme in public high schools nine months after he took office. It also provided free meals to students at primary and secondary levels.

Also in 2017, the governing New Patriotic Party scrapped what it called 15 “nuisance taxes”. These included the 17.5 percent value added tax on financial services, real estate and selected imported medicines. They also reduced import duties on spare car parts, abolished the 1 percent special import levy and the 17.5 percent VAT on domestic airline tickets.

“This brought a massive reduction in government revenue,” Williams Kwasi Peprah, a Ghanaian associate professor of finance at Andrews University in Michigan, told Al Jazeera. “To make up for the revenue shortfall, the government adopted borrowing. This increased Ghana’s bond market activities domestically and externally and, as a result, a high debt-to-GDP exposure, leading to the current debt unsustainability levels.”

“The financial sector clean-up also cost the country more than anticipated in attaining a robust financial sector before 2022,” Peprah said. He said the discovery of two more oilfields in 2019 led to the anticipation of more revenues. The government responded by issuing more domestic and external bonds, increasing its debt and raising spending on interest payments, social programmes and employment.

The government is Ghana’s largest employer, primarily in the fields of education, healthcare and security. It spends almost half of its budget on wages; this year, it raked in $8.2bn in estimated revenue and used about $4.2bn to pay salaries of public sector workers. From August 2017 to December 2018, Akufo-Addo’s government spent more than $2.1bn on what it called the “banking sector clean-up”.

The central bank said some banks were insolvent and were operating on life support, putting the interests of depositors at risk. The clean-up saw a reduction in the number of banks from 33 to 23 while more than 340 other financial institutions, such as savings and loans companies, had their licences revoked. The government aimed to restore confidence and reposition the banking sector to support economic growth. “The financial sector clean-up also cost the country more than anticipated in attaining a robust financial sector before 2022,” Peprah said.

He said the discovery of two more oilfields in 2019 led to the anticipation of more revenues. The government responded by issuing more domestic and external bonds, increasing its debt and raising spending on interest payments, social programmes and employment. The government is Ghana’s largest employer, primarily in the fields of education, healthcare and security. It spends almost half of its budget on wages; this year, it raked in $8.2bn in estimated revenue and used about $4.2bn to pay salaries of public sector workers.

In 2017, the government also restored allowances for trainee nurses and teachers. President John Mahama lost to Akufo-Addo in the 2016 election partly for suspending those allowances two years earlier. They put a huge strain on the public purse. For the nurses’ allowances alone, the government paid more than $2.5 million annually.

“That was a poor political and economic decision the Akufo-Addo government made at that time because the country was faced with revenue challenges,” said Kwasi Yirenkyi, a financial analyst with Accra-based Data Crunchers. “The government was spending more than it was receiving, and at the same time, it failed to widen the tax net. We were slowly heading for disaster.”

The pandemic and debt load

There was a significant drop in revenue in 2020 coupled with a rise in government expenditures. They were mainly COVID-related as the government adopted a populist approach, provided free water and electricity to citizens and fed 470,000 households during a three-week lockdown that cost the nation $9.4m.

In August 2021 Akufo-Addo began what he later admitted was “an overly ambitious” construction project of 111 hospitals with an estimated price tag of more than $1bn. Pressure kept mounting on his government to fulfil a plethora of other electoral promises, such as the construction of roads, schools and markets, forcing the government to keep borrowing and leaving an economy dogged by high public debt. The most recent data released by the central bank put the country’s debt load at $48.9bn as of September. That represents 76 percent of GDP.

“Largely, the debt that we accrued were not actually prudently used to drive economic growth,” Amarteye said. “If that was done, we could have generated sufficient inflow to be able to meet repayment obligations. Borrowing is not a bad thing, but how you use it is critical. On our part, the managers of the economy failed to invest it in the critical sectors of the economy.”

The oil-exporting country produced 39.15 million barrels of crude oil from January to September, according to the 2023 budget statement read by Finance Minister Ken Ofori-Atta in Parliament in November. They brought in $873.25m in revenues for the eighth-largest oil producer in Africa. Although oil production declined between January and June, according to a report by the Public Interest and Accountability Committee, a surge in prices resulted in the government taking in more revenue than it had expected. “Where did all the oil revenue go to?” opposition member of parliament Isaac Adongo asked. “The economy has been on life-support system because this government kept borrowing. We have now hit the ceiling, and there is no way out.”

In spite of the challenges, the government had been optimistic that the economy would bounce back after the pandemic. However, Russia’s war in Ukraine has derailed Ghana’s economic recovery. The cedi, its currency, lost more than 50 percent of its value between January and October 2022, causing Ghana’s debt burden to rise by $6bn. “The war affected global economies and exposed fundamental weaknesses,” Peprah said. “Within a short period, prices in Ghana had increased, leading to hyperinflation and currency devaluation affecting both macro and micro levels of the economy. The Bank of Ghana did not have the needed dollars to pay for the country’s commitments. The balance of payment had deteriorated, leading Ghana to insolvency.” Workers and traders protested from July to September over price hikes, which have increased the cost of electricity by 27 percent and water by 22 percent.

Activists and anti-corruption campaigners have also accused the government of mismanaging public finances. “We have gold, oil and cocoa, yet we’re still foundering as a nation,” said Bernard Mornah, a leading member of the Arise Ghana pressure group. “The level of corruption under this government is unprecedented. There are so many revenue loopholes that must be blocked. Government officials are looting state funds and assets, so how do we develop?” A 2021 Transparency International study on perceptions of corruption in Africa ranked Ghana ninth out of 49 Sub-Saharan African countries.

Investor confidence dims

Investors began to lose confidence in the economy as the government grappled with liquidity challenges. They started moving their money out of Ghana. In May, Minister Ofori-Atta introduced an unpopular e-levy, which placed a 1.5 percent tax on all electronic and merchant payments, bank transfers and remittances as part of measures to increase revenue. It brought in a paltry 10 percent of its targeted amount in its first month.

In the middle of this economic storm, credit ratings firms such as Moody’s downgraded Ghana to junk status, pushing even more investors away. At this point, Ghana was forced in July to turn to the International Monetary Fund (IMF) for relief.  It was a difficult decision for Akufo-Addo to make after he had condemned his predecessor for mismanaging the economy and taking an IMF bailout.

In December, the government reached an agreement with the IMF for a $3bn loan. However, the West African country needs to carry out a comprehensive debt restructuring in order to receive the funds. This means that Ghana will have to renegotiate the terms of its debt with its creditors, including extending repayment period, lowering the interest rate, or reducing the overall balance owed.

Formerly regarded as an investor favourite, Ghana has also suspended payments on part of its foreign debt to preserve the fast-depleting international reserve of the central bank. There is also a freeze in hiring into the public sector among many other measures taken to cut expenditure.  “The story would have been different but for the pandemic and the Russia war in Ukraine,” Deputy Finance Minister Abena Osei-Asare said. “We have instituted clear policies to return to economic growth. We are very hopeful the economy will bounce back.”

The economy has made some gains since Ghana reached the agreement with the IMF. The cedi is recovering against the US dollar, appreciating by 63.7 percent in mid-December, according to the Bank of Ghana, after suffering a year-to-date depreciation of 54.2 percent at the end of November. But economists and scholars such as Peprah believe the long-term solution is for the government to live within its means.

“The solution to the current problem is for the government to reduce expenditure and increase revenue,” Peprah said. “It needs to ensure efficient and effective allocation of resources backed by accountability.”  For his part, Amarteye said the government must be downsized, and he called for stringent measures to check corruption.

“We have to ensure that every cedi that is extended to government agencies are accounted for,” Amarteye said. “The Office of the Special Prosecutor should be empowered to be able to deal with corruption in the system. There should be fiscal discipline, and also we have to add value to our produce by supporting the private sector to lead that particular space.” “If that is done, jobs will be created and also the economy will bounce back,” he said.  In Odorkor, shop-owner Oduro, like many Ghanaians, wants to see a thriving economy again, one in which she can do business and feed her family. “I have played my part as a voter,” she said. “The government must play its part too – fix the economy. This is not the Ghana we came to meet.”