Analysis of Ghana’s fiscal and macroeconomic performance 2014-2015 and risk to medium term growth outlook.

1. Addressing Downside
Risks to Growth
A CALL TO BATTLE
Analysis of Ghana’s fiscal and macroeconomic performance 2014-2015 and
risk to medium term growth outlook.
metisdecisions.com All Rights Reserved. 2015

2. Addressing Downside
Risks to Growth
A Call to Battle
From Whence We Came
Following the mid-year review of government
budget and economic policies for 2015, views from
various policy commentators and analysts have
sent mixed signals to the markets about
government’s fiscal performance and consequent
impact on inflationary expectations, business risks
and operational costs. For clarity however, it is
important to situate the current fiscal and real
sector performance in the broader global context
and evaluate the trajectory of growth in order to
determine whether or not real progress has being
made.
In order to present a balanced perspective, a
cursory review of IMF’s Fiscal Consolidation and
Structural Adjustment program (3-year Extended
Credit Facility) and its linkage with Ghana’s
“home-grown” policy efforts to achieve economic
transformation, is necessary. IMF’s Balance of
Payment support facility of USD 918million (in
eight installments) is designed to help the
Government of Ghana recover fiscal space after
three consecutive periods of budget deficit [2012:
12%; 2013: 10.1%; 2014: 10.3%]. This economic
recovery program is rooted in the Ghana Shared
Growth and Development Agenda (II), Ghana’s
basic economic blueprint for achieving
macroeconomic stability, social inclusion and
economic diversification within the period 2014-
2016.
In terms of fiscal and macroeconomic
performance, Ghana’s economy experienced
major imbalances starting from 2012 and reaching
a crescendo in 2014. With fiscal and external
current account deficit at 10.3% and 9.5%
respectively at 2014 year-end, there was
substantial pressure on the currency market to
correct the cedi over-valuation which ended at
31.3% in December 2014. A yawning Public
Sector Borrowing Requirement (PSBR) resulting
from the deficit, precipitated growth in the Net
Domestic Asset of the Banking system (See Fig.1
for M2+ growth), leading to a higher year-on-year
growth of credit to government compared to

3. AddressingDownsideRiskstoGrowth
2
private sector credit growth. Deposit money
Banks’ (DMBs) investment in securities as a share
of total investment declined to 22.9 percent in
March 2015 from 35 percent in March 2014.
Meanwhile, investment in treasury bills as a share
of total investment however increased to 73.3
percent in March 2015 from 61.8 percent in March
2014. These pressures and other systemic risks
compelled Bank of Ghana’s Monetary Policy
Committee to hike the Policy Rate by 100 basis
points to 22% in May 2015, in an attempt to
subdue inflationary pressures from all angles;
fiscal, monetary and external sector.
Considering this background, IMF’s balance of
payment support was timely in avoiding liquidity
distress. This performance background for 2014
provides the canvas upon which to conduct any
progress review for 2015 and to appreciate the
significance of having reversed the trend of
negative real GDP growth that were experienced
in 2013/2014 FY.
“
Considering This Background, IMF’s
Balance of Payment Support Was
Timely in Avoiding Liquidity Distress.”$918 million
…Extended Credit Facility (ECF) approved by IMF.
April 2015…

4. AddressingDownsideRiskstoGrowth
3
Fig1 – Monetary Impact of High Fiscal Deficits (2012-2014)
Year-to-Date 2015
Provisional data from Ghana Statistical Service
(GSS) on real sector performance showed a real
GDP growth of 4.7% in Q1 2015, compared to
3.8% output contraction within same period in
2014. Agriculture topped the growth story,
expanding by 7.4% compared to a contraction of
8% Q1 2014. Services also rallied with 4.7%
growth from a negative growth in Q1 2014 of 5.5%
while industry rebounded from a -1.8% to grow at
0.9%. It is interesting to see that Information and
0
5
10
15
20
25
30
0
5000
10000
15000
20000
25000
30000
35000
Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec
2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014
%
GHS'000
Fiscal Domination of Monetary Operations
M2+ INF-YOY TBR-91 day
Inflation y-o-y
91-Day Bill
M2+
Source: Monetary Time Series Data, Bank of Ghana

5. AddressingDownsideRiskstoGrowth
4
Communication subsector led the recovery of
Services (year-on-year) with 41.3%. Livestock
(Agriculture subsector) contributed 20.7%, while
Water and Sanitation, Public Administration and
Health/Social services contributed 16%, 9.8% and
9.7% respectively to their sector.
In terms of the front-loaded fiscal consolidation
exercise, Revenue and Grants target were met
while expenditure growth was contained leading to
shrinking of narrow fiscal deficit on broad
coverage basis from 2.1% of GDP in Q1 2014 to
0.6% of GDP in first quarter 2015 (Monetary Policy
Report, Vol. 4, No. 2, para. 3).
This has been supported by implementation of
bold revenue generation initiatives and controlling
of certain key recurrent expenditures. Admittedly
some of these fiscal adjustments have been
controversial. An example is the progressive
elimination of subsidies on petroleum and utility
through strict compliance with a fortnightly and
quarterly price adjustment mechanism
respectively, as mandated by IMF under the 3-
year Extended Credit Facility. This
notwithstanding, inflation expectation in the
downstream petroleum sector remain elevated. If
the current petroleum price liberalization is not
handled properly with appropriate regulatory
controls, the economy risks delaying a pass-
through effect of cedi stability as a result of Bank
of Ghana’s market interventions. See next
paragraph for analysis on inflation outlook.
Risks to Growth Outlook
According to the fiscal framework under IMF’s
program, real GDP growth (oil inclusive) is
expected to rebound by 2016 from 3.5% in 2015 to
reach 9.2% in 2017. Inflation is targeted at 12% by
year-end 2015 and subsequently to 8% (+/- 200
basis) by Q4 2016. Given the commodity price
shocks and production shortfalls in H1 2015, the
Government of Ghana has revised downwards its
revenue and grants projections by GHS1.9 billion
and spending (total expenditure and arrears) by
GHS900million leading to a revised deficit target
from 6.5% of GDP to 7.3%. It remains to be seen
however, whether the cedi appreciation in July and
lower than expected fiscal deficit would translated
into lower headline inflation performance for Q3
2015. It is important to point out also, that as a
result of new debt proposals tabled before
Parliament (See Order Paper, 37th Sitting, Item 11
&17), projected foreign debt repayment for 2015
have been revised from GHS2.8 billion to GHS4.6

6. AddressingDownsideRiskstoGrowth
5
billion. This has adverse implication for current
account imbalance and consequently cedi
depreciation in Q3 and Q4, 2015. Unless Bank of
Ghana continues with its current liquidity
interventions in the currency market, a reversal,
between 11%-15% year-to-date loss (from -9.8%
year-to-date in July 2015 for USD) is likely in Q3
2015.
The following risks to medium-term growth outlook
remain elevated:
1. Inflation
2. Weak Monetary Policy Transmission
3. Energy Sufficiency
4. Global Commodity Market Performance
5. Debt Management and PFM Reforms
The ensuing paragraphs will focus on inflation and
monetary policy transmission while the next
volume of this report will address the remaining
items separately.
Inflation
The economic rationale behind the
current front-loaded fiscal
adjustment program is to recover
fiscal space and realign savings
with long-term infrastructural and
capital needs away from recurrent
spending. The expected impact, as
the government pursue a policy of
demand contraction, would be to
dampen growth (2.3% non-oil real
GDP in 2015 – IMF projection) and
inflation in the short-term, with
adverse consequence for employment. In the medium term (2016-2017), after a successful fiscal recovery in
2015 (with declining inflation, hopefully), government can then target spending in high growth areas to
stimulate growth (5.5% non-oil in 2017) and job creation. This is typical Keynesian economics.
“
Unless Bank of Ghana continues with its
current liquidity interventions in the
currency market, a reversal, between 11%-
15% year-to-date loss (from -9.8% year-to-
date in July 2015 for USD) is likely to occur
in Q3 2015.”

7. AddressingDownsideRiskstoGrowth
6
Here is the challenge: in the first half of 2015 fiscal
year, the growth story has complied with the
Keynesian logic, except for inflation. Consumer
Price Index (CPI) report from Ghana Statistical
Service showed inflation has trended upwards
from 16.4% in February 2015 to 16.9% in May and
subsequently 17.1% in June 2015. With the cedi
regaining grounds against the U.S dollar in July (-
9.8% year-to-date as at July 2015), cost savings
on petroleum ex-pump prices are expected to
translate into lower transport costs and
consequently declining prices of goods and
services. However, the structural hindrance,
manifested as contention between Bulk Oil
Distributors (BDCs), Oil Marketing Companies
(OMCs) and private sector transport regulators
(GPRTU, etc.), threatens a smooth transmission of
this cost savings to other economic sectors. For
this reason, inflation expectation remain elevated
for Q3 and Q4, 2015. It is our view at Metis
Decisions LLC that CPI data for Q3 2015 would
serve as a watershed for Ghana’s effort in
breaking the vicious cycle of high inflation, high
interest rate and low growth.
Monetary Policy Transmission
The ineffective transmission of Bank of Ghana’s
policy instruments in controlling aggregate
monetary variables is a major risk to growth
outlook. The failure of BOG’s proposed
standardized financial asset pricing model
introduced in July 2013, reinforces market
perceptions about weakness in monetary sector
regulation, thereby causing interest rate to remain
high (29% average lending rate as at July 2015).
Bank of Ghana’s new proposal to converge short
tenor reverse repos may help in further liquidity
management but doubts remain as whether it may
have any impact on interbank cost of funds. The
most prominent threat to policy transmission
effectiveness remain the Net Domestic Financing
of fiscal deficits (GH5.2 billion in Dec 2014).

8. AddressingDownsideRiskstoGrowth
6
Fig. 2 – Monetary Policy Transmission
In the Next Issue…
In the next paper, analysis of risks to medium-term growth outlook will be presented as context for certain
key policy recommendations. The discourse will also touch on the policy wisdom of establishing an Exim
Bank as a lever for an export-led growth strategy.
24.1 24.1 24.3 24.3 24.1 23.9 23.4 22.9 23 23.2 23.6
15.3 15.9 16.5 16.9 17.1 17 16.4 16.5 16.7 16.8 16.9
18 18
19 19
21
21 21 21 21 21 22
27.8 27.8 27.4 26.4 26.4
29 29 29 29 29 29
0
5
10
15
20
25
30
35
Jun-14 Jul-14 Sep-14 Nov-14 Dec-14 Feb-15 Apr-15 May-15
%tageScale
July 2014-May 2015
Monetary Policy Transmission Gaps
CommBkBR INF-YOY MPR Ave. Lending Rate
Source: Monetary Time Series Data, Bank of Ghana

9. AddressingDownsideRiskstoGrowth
7
The author is a management consultant and policy analyst. He is the
founder of Metis Decisions LLC, a management consulting firm in
Ghana.
Contact:
+233 202 952 658
+233 242 564 143
nkunimdini.antwi@metisdecisions.com
“Risks to the
program include
delayed or partial
implementation of
policies, including
next year in the
run-up to elections,
a slower growth
recovery if the
electricity crisis is
not addressed
quickly, and
additional negative
commodity price
shocks.”
- IMF Country
Report 15/103
Except otherwise stated, statistical data herein contained was sourced from Ministry of Finance, Ghana Statistical
Service, Bank of Ghana and IMF Country Reports.