Macro-Economic rebound continues into Ghana’s political transition

As the eight year tenure of the President Nana Akufo-Addo administration draws to a close, the transition to a second President John Dramani Mahama administration is well underway, albeit unsurprisingly with some contentions between representatives of both the outgoing New Patriotic Party and the incoming National Democratic Congress. But one major controversy does not relate to activities under the transition process nor the 12 parliamentary constituency election results that are still being contest before the Electoral Commission and in the law courts.

Rather it has arisen out of differing assessments as to the state of the economy being handed over.  Ther NPP asserts that it is bequeathing the incoming NDC administration with what outgoing Finance Minister Mohammed Amin has controversially characterized as a “strong economy”; the NDC retorts that this assertion is delusional.

Already, the electorate has voted overwhelmingly in favour of the latter, at the December 7, 2024 general elections by giving President Elect Mahama some 1.5 million more votes than the outgoing Vice President, Dr Mahmudu Bawumia who was his closer contender. But beyond voter sentiments, what do the economic facts say?

Data released by the Bank of Ghana which guided its Monetary Policy Committee meeting during the last week of November, confirm that the country’s macro-economy is showing clear signs of a rebound. But the data does not overtly point to a “strong” economy; rather it subtly shows the fragility of the ongoing economic rebound and the need to maintain both the fiscal and monetary discipline insisted on by the International Monetary Fund programme which is benefitting the country. The data indeed shows a stronger economy than the one Ghanaians were enduring a year ago, but importantly, voters protest that improvements in key macroeconomic performance indicators have not yet translated into commensurate improvements in the living standards of most households.

To be sure, the economic data released by the Ghana Statistical Service has shown a surprising surge in Gross Domestic Product growth. During the first half of 2024 Ghana’s GDP grew by 6.1%, year on year, well ahead of projections, a performance which sent economic analysts, the IMF, the World Bank and sovereign credit ratings agencies scrambling back to the drawing board to revise their forward looking projections upward. This was not a fluke; year on year GDP growth for the third quarter of 2024 was an more robust 7.3.%.

But the growth has not been broad based. Indeed, the GSS reports than it has been driven largely by the extractives sector – primarily oil and gas and solid mineral mining and quarrying, none of which stand out for the number of jobs they create nor for the wealth they generate and widely distribute domestically. To be sure though, this has translated into increased economic activity.

Confirms BoG  Governor Dr Ernest Addison “On the domestic economy, high frequency indicators point to continued improvement in economic activity. In the third quarter of 2024, the Bank’s high frequency real sector indicators pointed to a sustained pick-up in economic activity. The updated real Composite Index of Economic Activity (CIEA) recorded an annual growth of 2.2 percent in September 2024, compared to a contraction of 0.4 percent in the corresponding period of 2023.  Major drivers of the improvement in economic activity include increased port activity, households and firms consumption of goods and services, construction activities, credit to the private sector, and higher tourist arrivals.”

But this has not translated into a significant increase in employment which remains in double digits, even by the obviously understated official figures.

It is instructive that the most recent surveys have revealed increasing business confidence but consumer confidence has hardly grown. The BoG’s  latest business confidence survey conducted in October 2024 reflected improved business confidence as firms met their short-term targets and expressed optimism about company and industry prospects. The survey findings were broadly consistent with trends observed in Ghana’s Purchasing Managers’ Index (PMI), which also signalled an improvement in business conditions. The PMI increased to 50.6 in October 2024, up from 49.1 in September.

However consumer confidence was broadly unchanged, according the central bank’s October 2024 consumer confidence survey.

The curtailment of inflation which has been one of the biggest achievements of government and its central bank over the past year has run into headwinds too.

“Recent price developments show some sluggishness in the pace of disinflation” admits Dr Addison. “Since the September MPC meeting,  headline inflation readings for September and October point to upticks driven by food price increases. Overall, headline inflation which stood at 20.4 percent in August, rose to 21.5 percent in September and then further to 22.1 percent in October 2024.”

This rise in inflation has largely been driven by food price pressures and some exchange rate pass-through effects from previous depreciation of the currency so the lower and middle classes are feeling particularly aggrieved. But on a year-on-year basis, however, the inflation rate of 22.1 percent for October 2024 reflects an ease in inflationary conditions from the rate of 35.1 percent recorded in October 2023 a clear pointer that the economy is improving. Actually, core inflation has done even better, having eased considerably over the previous 12 months. This measure of inflation, which isolates the price changes of energy and utility items from the consumer basket shows a decline in the rate of inflation by 14.0 percentage points, from 36.2 percent in October 2023 to 21.4 percent in October 2024.

Enthuses Dr Addison: “Inflation expectations, gauged from the one-year ahead expectations of the financial sector continue to ease over the next year based on the strength of current policies.

But this optimism is accompanied with a warning. “. Inflation projections show a slightly elevated profile driven by high and unstable food prices, pass-through of previous exchange rate pressures, fuel prices and utility tariff adjustments. The price increases in food items have been steep in the course of the year and together with a fast-paced depreciating currency earlier on in the year have altered the inflation trajectory and stalled the disinflation process. At the time of the (September) MPC meeting, average inflation forecast a year ahead which stood at 19.0 percent has increased slightly to 20.1 percent at this forecast round. The horizon for inflation to get back within the target band of 6-10 percent has slightly shifted forward to fourth quarter 2025 from the original forecast period of third quarter 2025.”

Better gains have been achieved recently with regards to stabilizing the cedi’s exchange rate though, after spiralling depreciation between late 2021 and the end of 2022 when Ghana’s expulsion from international capital markets reversed portfolio investment flows by foreign investors, effectively pulling the rug from under an economy that had lived on ever mounting forex debt levels since late 2007.  Confidence in the foreign exchange market has risen due to improved external sector performance and the fiscal space created by Ghana’s controversial yet effective public debt restructuring exercise. The Ghana cedi has recorded appreciable gains since end-October 2024. By the end of November the Ghana cedi had recorded respective year to date appreciations of 6.0 percent, 7.6 percent and 9.1 percent against the US dollar, the British pound and the euro, bringing the year-to-date depreciation of the Ghana cedi against the US dollar, the British pound and the euro to 22.7 percent, 22.4 percent, and 19.1 percent, respectively.

The conventional wisdom though is that the BoG intervened significantly in the foreign exchange market by using up part of the country’s much improved gross international reserves to meet surging demand for forex at a time that the election of United States President Elect Donald Trump caused the dollar’s value to surge against other currencies. While, with US$237 million used out of nearly US$8 billion in reserves, this is partly true – and uncharitably and incorrectly ascribed to the BoG trying to white wash the Akufo Addo administration’s economic performance record in the run up to the December general elections – a significant improvement in the country’s external sector has played a major part in the cedi’s recovery.

“The external sector position has improved remarkably in the year, supported by a higher current account surplus and reduction in net financial outflows, leading to a strong external reserves build-up” explains Dr Addison. “The current account surplus increased to US$2.2 billion in the first nine months of the year, compared with a surplus of US$912 million over the corresponding period in 2023. The strong current account surplus was supported by increased gold and crude oil exports as well as robust remittance inflows. This development, together with a lower net outflow of US$414 million in the capital and financial account (relative to a net outflow of US$1.4 billion in 2023) contributed to an improved balance of payments position in the first three quarters of the year. As a result, from the beginning of the year to end-September 2024, a reserve build-up of over US$1.91 billion was accumulated, pushing Reserves up to US$7.83 billion (equivalent to 3.5 months of import cover). Gross reserves have increased further to US$7.92 billion as at November 22, 2024.”

Looking forward Dr Addison is optimistic about the fortunes of the cedi over the near term at least, saying “The cedi’s rebound observed recently should continue with the dissipation of election-related uncertainties and the improved foreign exchange buffers accumulated by the central bank. A combination of economic uncertainty brought about by the (now concluded) elections and the high demand for foreign exchange has led to an exchange rate path that is slightly deviated from the fundamentals. With strong macroeconomic policy implementation and improved foreign exchange availability, the economy should observe a realignment of the trajectory of the exchange rate with the fundamentals.”

The outlook is good for Ghana’s commercial banking industry too, with the biggest uncertainty being politically driven rather than financial. This is the position of President – elect, John Dramani Mahama, to revisit the revocation of bank licenses – specifically those of indigenously owned banks –  that the Bank of Ghana did between 2017 and 2019. Restoring those banks is a most unlikely proposition and indeed most financial analysts suggest it would be ill -advised. They argue that if the central bank’s financial industry reforms had not been done at the end of the last decade, the economic morass generated by COVID 19 and the following Domestic Debt Exchange Programme, would have done it in an uncontrolled, indeed chaotic manner.

Whatever results from the incoming administration’s review of the commercial banking reforms however, it will inherit a mostly healthy banking sector   “Commercial banks have accumulated enough capital buffers to withstand the effects of the external debt restructuring” confirms Dr Addison. “The latest macro-prudential risk assessment shows that the impact from the Eurobond restructuring would be minimal, given the pre-emptive provisioning made by banks to account for potential impairments. Banks are therefore expected to continue to remain stable and support economic growth going forward.”

Notwithstanding an elevated non-performing loans (NPL) profile – the NPL ratio rose to 22.7 percent from 18.3 percent over the 12 months to end of October 2024 –  the banking sector remains sound, well capitalized and liquid. The banking sector continued to record improvements in performance with total assets growing by 42.4 percent to GH¢367.2 billion at end-October 2024, compared to just 3.2 percent at end-October 2023, when it was still absorbing the hit imposed by the DDEP. Solvency indicators also improved, with the capital adequacy ratio (with reliefs) increasing to 11.1 percent (14.2 %) from 7.3 percent (13.4%) in October 2023 . Perhaps even more encouragingly for funding-hungry private sector enterprises, growth in private sector credit increased to 28.8 percent in October 2024 from negative 7.5 percent recorded in the corresponding period of 2023. In real terms, credit to the private sector increased by 5.5 percent relative to a 31.6 percent contraction, recorded over the same comparative period.

Going forward, Dr Addison asserts that banking sector performance will be contingent on a rebound in profits, continuous adherence to recapitalisation plans and enforcement of strict credit underwriting standards

For the bank’s borrowing customers though the biggest issue is high interest rates, due in part to high inflation and in part strong demand by government for short end treasury bill financing. At its latest meeting during the last week of November, the BoG’s Monetary Policy Committee, on the balance of risks posed by inflation and the need to support the surge in economic growth, elected to maintain the Monetary Policy Rate at 27% .

But by the start of November the 91-day and 182-day Treasury bill rates were still at 25.80 percent and 27.01 percent respectively, although this was lower than they were a year earlier.  Similarly, the rate on the 364-day instrument declined to 28.70 percent in October 2024 from 33.16 percent in October 2023. The Interbank Weighted Average Rate decreased to 27.69 percent in October 2024 from 28.49 percent in October 2023, reflecting the transmission of the reduction in monetary policy rate to the interbank market. Similarly, the average lending rates of banks declined marginally to 30.45 percent in October 2024 from 32.69 percent, recorded in the corresponding period of 2023.

Dr Addison provides the recommendations of the central bank’s MPC going forward: “Monitoring global conditions will be needed in the coming months. In the view of the Committee, while global economic conditions remain favourable, the strength of the US economy coupled with a strong United States dollar and the possibility of a resurgence in global energy and food prices arising from trade protectionism, geopolitical conflicts, and extreme weather conditions will have to be monitored closely for policy responses to ensure stability in the economy.

“Domestic macroeconomic conditions remain stable and the IMF-ECF Programme implementation remains on track. Data observed through October 2024 indicated broad stability in the macroeconomic indicators. Growth outturn so far has been strong, and leading indicators of economic activity is projecting stronger growth in the second half of the year, business and consumer confidence is slowly turning around, core inflation remains broadly stable, the financial sector inflation expectations remain broadly anchored, reserve build-up has been sufficient to provide confidence, and the currency is recording some appreciation.”

The verdict: The macro-economy is turning around. What is left, say Ghanaian voters, is for their own household economies to follow suit.

By TOMA IMIRHE || The Corporate Guardian Magazine