Ghana has made significant achievements in terms of governance, growth and poverty reduction in recent years. In 2007, the Country Performance and Institutional Assessment ranked Ghana:
- 5th among all 75 low-income countries
- Above several middle-income countries
- Between 2001 and 2007, this index went from 3.4 to 4.0
See State of the Economy. The new Government inherited a difficult macro-economic situation, the result of a series of shocks in 2008 which exacerbated a structural trend of widening fiscal imbalances. Rapid fiscal expansion in 2008 coincided with a sudden closure of access to international capital markets in September, and as a result, the Ghanaian economy was hit hard by the combination of a widening current account deficit and contracting capital account surplus.
While fiscal expansion was prolonging trends observed since 2005, it was also the result of a combination of important exogenous shocks, including floods and droughts in late 2007, and a rise in world food prices, prompting Government to introduce food tax exemptions, and in oil prices which led the Government to purchase oil on behalf of utilities in the absence of effective tariff adjustment mechanisms.
The electoral cycle, which culminated in the successful Presidential and Legislative elections of December 2008, also contributed to the fiscal expansion, as observed during previous elections. The newly elected President, in his address to the Nation, committed to take bold austerity measures in 2009 and 2010 to bring Ghana’s fiscal stance onto a sound and sustainable track and protect the development objectives set forth in Ghana’s Second Growth and Poverty Reduction Strategy.
The budget law, which was passed in March 2009, foresees a reduction of the fiscal deficit from 14.5 percent of GDP in 2008 to 9.4 percent in 2009, as the first step in a small-term fiscal consolidation strategy aimed at stabilizing the debt to GDP ratio in 2010 to put it on a downward path from 2011 onwards. To do this, the Government is targeting a deficit of 6.0 percent in 2010 and 4.5 percent in 2011.
The Government strategy comprises immediate actions in 2009 to restore control over expenditures and pave the way for structural reforms in the public sector and energy in 2010. But this will not be sufficient. Without important external support, financing of the deficit internally will crowd out private investors, generate further currency depreciation and inflation and lead to an unsustainable accumulation of high interest debt. Slower growth, rapid inflation and reduced ability to Public Disclosure Authorized finance social programs now threaten to reverse the very significant developmental gains recorded in the last decade, and to weaken Ghana’s ability to generate broad-based benefits from significant oil revenues in the near term.
There is a strong macro-economic rationale for providing swift counter-cyclical external financing against demonstrated progress on key actions and reforms and a credible adjustment plan. Ghana’s small-term development prospects remain bright, building on past records, strong institutions and the promises of oil and democratic dividends. But a pre-requisite is macroeconomic stability, which is being hurt by the combination of the current global crisis with inherited pre-existing imbalances.
Against demonstrated progress on critical actions and a credible adjustment and reform plan, the proposed front-loaded assistance would help maintain the development momentum by making the needed adjustment less abrupt and more credible, before the expected arrival of oil and the recovery of the global environment in 2010-11.
Date PID Prepared June 5, 2009
See Report No.: 49021-GH
The successful democratic transition in government in December 2008 is another important expression of the maturity of Ghanaian institutions at their highest level. Growth accelerated to average 6 percent in the last five years. The proportion of people living with less than PPP US$1.25 a day declined from 39 percent in 1999 to 30 percent in 2005, and to probably less afterwards.