Former president John Mahama has promised that if he is re-elected in the December 2024 election, he will re-set Ghana’s “hacked” economy, now in its seventh year of decline and crisis, and put it back on the path to rapid, sustained and equitable growth in pursuit of his transformative agenda for a 24-hour economy. But how?
There are many options, starting with a “feel-good factor,” effectively announcing to Ghanaians that there’s a new sheriff in town and that he would do things differently – and better. This may include the sweeping tax reforms that he has promised Ghanaians, providing almost immediate relief but balanced with an aggressive programme to rein in government spending while going after the stolen loot that has left the fiscus virtually empty.
We can’t borrow billions of cedis supposedly to build infrastructure only to have little or nothing to show for it after nearly a decade. For example, gross fixed capital formation, the broadest measure of investment in the economy and its capacity to grow, has fallen from 27% of GDP in 2015 to 10% in 2023, the lowest since 1987. And between 2017 and 2023, the government’s domestic infrastructure spending fell short of budget by 10.3% per year. Re-setting these critical drivers of growth as an integral part of an Infrastructure Revitalisation Scheme is essential for bringing the economy from the brink and creating ample employment opportunities for the restless youth.
And then there is the matter of our broken macroeconomic framework, comprising fiscal policy (by the Ministry of Finance) and monetary policy (by the Bank of Ghana), which needs fixing. Both have proven to be remarkable failures over the years, as evidenced by Ghana’s recurring macroeconomic crises that have sent it to the International Monetary Fund (IMF) for financial bailouts 17 times since 1966, with the latest three-year bailout ending in 2026 and the Bank of Ghana’s disappointing record on fighting inflation and depreciation.
Each bailout programme promises stabilisation, followed by growth, which never comes, because some of the policies under the programmes, such as maintaining high interest rates and haphazardly imposing tax hikes, are anti-growth.
A civil sit-down with the IMF to smooth over these unseemly – and counterproductive – elements of the programme would go a long way in building investor confidence, bringing relief to Ghanaian businesses and consumers, and rescuing the programme from failure, if the past is any guide. The Fund’s most recent review found evidence of implementation slippages and the continued vulnerability of the economy to debt distress, despite the partial suspension of some debt repayments and the government’s predatory domestic debt exchange programme.
Broadly, fiscal policy will require more structural and institutional reforms, with a mix of immediate and medium-to-long-term benefits to be expected. With over 80.0% of the labour force in informal employment and the informal sector accounting for only 27.0% of GDP, shortfalls in government revenue, persistent and inflationary expenditure overruns by the government, and chronic budget deficits have long hobbled Ghana’s fiscal policy. Between 2008 and 2022, for example, the government exceeded its wage bill every single year¸ at an average of about 10.0% per year. Over the same period, budgetary shortfalls in domestic infrastructure spending averaged nearly 4.0% per year. Not surprisingly, government revenues also fell short of target, due to weak economic growth, by an annual average of about 4%. An agenda for modernisation, formalisation, industrialisation, and transformation would be just what the doctor ordered for such sclerosis.
Of equal importance is the limited institutional capacity at the national and sub-national levels for effective budget formulation, execution and monitoring, despite millions of dollars in donor support over decades to address the problem. A 2009 review of the government’s financial management by the World Bank and other donors, for example, blamed “weaknesses in… payroll planning” for the runaway wage overruns and under-investment in other parts of the economy. The review recommended a number of corrective measures, but not much happened afterwards. Instead, the payroll bloated from 419,000 in 2010 to 804,000 in 2023, with public sector wages growing and remaining considerably higher than those in the private sector without matching the productivity of the private sector. This disparity between higher wages and stagnant productivity in the public sector puts a choke on fiscal policy and economic growth that can only be removed through better-calibrated budgetary reforms and strategic public sector modernisation.
Monetary policy has fared no better. In 2007, the Bank of Ghana adopted “inflation targeting” ostensibly as a better approach to “ensure price stability over the medium-term.” Unlike the previous framework, which manipulated the money supply to fight inflation (without much success), the new framework uses high interest rates as a blunt instrument to achieve the same objective, still without much success but with a great deal of harm done, especially to Ghanaian businesses that must contend with the high interest rates AND stubbornly high inflation rates. (For government, the twin evil of high interest rates and high inflation rates mean an increased debt service burden and diminished purchasing power of the little revenue it collects from struggling businesses). Between 2007 and 2023, for example, consumer inflation averaged 15% per year, outside the already unambitious range of 6%-10% set by the Bank and substantially worse than the rates for comparator countries like Kenya (8.4% inflation) and South Africa (5.7% inflation), both of which have narrower inflation ranges of 2.5%-7.5% and 3.0%-6.0%, respectively. As of October 2024, the Bank of Ghana had an interest rate of 27% with an inflation rate of 21.5%, both among the highest in Africa, compared to a 12.0% policy rate for Kenya (with an inflation rate of 3.6%) and 8.0% for South Africa (which has an inflation rate of 3.8%). High interest rates have been nothing but a disaster for Ghana’s economy.
It is not surprising, therefore, that credit to the private sector as a share of GDP has averaged only 12.0% per year since 1990, compared to 26.0% for Kenya, 59.0% for South Africa, and 33.0% for lower-middle-income countries, which Ghana is one. And since June 2023, business credit from Ghana’s commercial banks, adjusted for inflation, has declined by an average of 12.0% per month, worsening the economic crisis that took the country to the IMF. In the rare cases where credit is available to businesses, most of it (15.3%) goes to commercial activities, with manufacturing receiving 10.8%; construction, 9.2%; import trade, 6.7%; agriculture, 3.9%; and export trade, 0.7%. The paradox of imports receiving more bank credit than exports may explain a substantial part of the cedi’s 94.0% depreciation against the US dollar since the redenomination in 2007. The fundamentals are truly weak–and exposing.
For the record, higher interest rates work best in taming inflation when an economy is operating at or near full capacity and unemployment is unusually low, with the risk that a tighter labour market might lead to rising wages, which firms might pass on to consumers in the form of higher prices (inflation). In such situations, high interest rates slow economic growth by raising the cost of credit for both businesses and consumers. Slowed growth reduces pressure on prices but at the expense of increased unemployment. Ghana’s economy has never operated anywhere close to full capacity, and high unemployment and low wages have been our biggest challenges, not the other way around. High interest rates, therefore, have only succeeded in wrecking the economy and destroying jobs, without bringing down inflation to any appreciable degree. It’s time for a new type of monetary policy that speaks to the peculiarities and rigidities of Ghana’s post-colonial economy.
Re-setting the real, or productive, economy is another matter and must begin with local economies, which are the building blocks of the national economy. The now-dormant secretariat set up at the Local Government Ministry to promote local economic development (LED) must be revitalised to make LED the bedrock of district medium-term development plans. A new three-pillar LED framework based on (1) enterprise development, (2) infrastructure and spatial development, and (3) social development should become the economic core of all district development plans, duly aligned with national development objectives. The Ghana Enterprise Agency must have a greater impact in the districts without necessarily undermining the responsibility of the assemblies for local development. The SADA Master Plan and the Greater Kumasi Master Plan covering the Garden City and seven districts, both abandoned legacies of Mr. Mahama, should be revived to complement these efforts. Those alone will cover about half of the country’s economic revival and growth.
Associated institutional reforms should include the swift passage of the Competition Bill, critical to promoting efficiency and productivity among Ghanaian businesses; the Consumer Protection Bill, essential for the health and safety of all Ghanaians (after nearly 20 years of legislative neglect of both bills); and the Local Government Finances Bill, which has been under development since 2019, to replace the Local Governance Act of 2016. The Procurement Act, the Petroleum Revenue Management Act, and the Public Financial Management Act, among others, will have to undergo a make-over to better protect the public purse and drive economic growth and job creation.
The wider framework for all this re-setting must be an ambitious national productivity development agenda led by the Management Development and Productivity Institute across government and the private sector, under the direction of the president’s office. For the government, it would mean efficient service delivery, critical to the proper functioning of the economy; for the private sector, attention must focus on small and medium-scale enterprises, the main sources of job creation, which are constrained by low productivity, resulting in lower profits and hence lower ability to pay decent wages, all of which lead to lower government revenue and a lowered capacity to finance development. The vicious cycle must be broken.
Re-setting these catalytic parameters of the Ghanaian economy, at the national and sub-national levels, with the required sense of purpose and urgency, will be the surest way to get the economy out of its current paralysis and back to the proposed path of rapid, sustained and equitable growth.
By: Nii Moi Thompson