Ghana is facing considerable immediate challenges, including clearing of arrears, shrinking the wage bill, halting the monetisation of debt and a power crisis which crippled the country’s economy.
Renaissance Capital, a leading emerging and frontier markets investment bank which sounded the alarm, maintains that looking at what it describes as the “considerable immediate challenges” facing Ghana.
The Russian-based investment bank believes that, most pressingly, Ghana needs to prove it can control its commitments, especially in an election year.
Halting the monetisation of debt
Officials of the bank, who visited Accra recently, following Renaissance Capital’s 6th Annual Pan-African Investor Conference noted that; “one of the most important aspects of Ghana’s new IMF programme is the phasing out of the Bank of Ghana’s (BoG) financing of the budget deficit; to 5% of the previous year’s revenue in 2015, and 0% from 2016”.
The bank’s June Economic Research Outlook on Ghana acknowledged that BoG financing weakened the capacity of monetary policy, contributing partly to the sharp cedi depreciation of the country.
The Head of Renaissance Capital Research Team, David Nangle and his colleagues who prepared the research outlook attributed the 26% year-on-year Dollar and Cedi depreciation to a $494mn financing gap in the balance of payments in the first quarter of 2015, which had to be met with foreign exchange reserves.
“This gap was due to an 80% year-on-year fall in the capital and financial account surplus to $55million, which failed to fully finance the $549million current account deficit”.
On the back of this, they had revised the 2015 exchange rate forecast to GHC4.7 per $1 as against GHC3.9 per $1 previously.
“We expect the phasing out of BoG financing to slow cedi weakness, implying rate cuts from 2016 are likely (we see 18% at 2016 ending). We believe commercial financing of the deficit from 2016 implies the risk of a fiscal blowout falls, as the market will only participate if comfortable with the macro”, the researchers stated.
Arrears are a deal breaker
In addition to clearing up existing arrears, the running up of arrears is not permitted under the new IMF programme. The repayment of arrears is positive for the banks. The procure-to-pay system that is now in place should help improve expenditure control at commitment level and in so doing reduce the build-up of arrears, according to the research out.
Some of the arrears that need to be cleared are those to the power sector and fuel importers (Bulk Distribution Companies ( BDCs). According to one development finance institution (DFI), the BDCs claim the government owes them $500mn. If validated, this will have to be added to arrears. “We think this week’s government announcement that it will stop regulating fuel prices will help stem the future accumulation of arrears”.
Tackling the mighty wage bill
The wage bill’s swell to 70% of tax revenue earlier this decade (versus 40% in 2000) is attributed to the unification of the salary structure for all civil servants.
The government plans to further shrink the wage bill by reducing allowances, which account for 20%, and culling ghost workers, who make up another 20%. To this end the government capped fiscal year 2015 wages with the unions; however, the researchers at Renaissance Capital believe a multi-year deal would have been better.
Crippling power shortage
Peak demand for power in Ghana is 2,300MW. This is more than threefold the current supply of 700MW. This power crisis spurred the IMF to downwardly revise its growth forecast to 2.3% in 2015 as against 3.5% previously.
Initially, the Fund projected a 20-25% cut in gold output on the back of the initial power rationing plan for miners, which has since been revised in favour of miners. Power barges from Turkey, due before 2015 ending, will supply 200MW, according to a DFI.
The clearing of arrears to the Volta River Authority (generation facility) and planned concession of the Electricity Company of Ghana should help draw investment into the power sector.
Resolving the power problem
One DFI believes a cheaper alternative to the power barges from Turkey would be fixing the turbine at the Volta River Authority, at a cost of $50million. The planned conversion of the VRA generation plant to a hybrid one that can use gas, in addition to hydro, to generate power, will also help alleviate the power shortage, according to the DFI.
The Millennium Challenge Account (MCA) is working with the government on the concession of the Electricity Company of Ghana (ECG); an announcement is likely in the short term. RenCap believes this would help bring foreign investment into the capital-starved sector.
Control of commitments
The researchers believe a loss of trust in Ghana’s control of its commitments partly explains why the cedi is undervalued. Control of commitments is key to preventing slippages.
Ghana Integrated Financial Management Information System (GIFMIS) is to address this from 2016; when expenditure committed by any government agency will reflect via GIFMIS at the Ministry of Finance. According to the IMF, this system works well in Nigeria. The DFIs expect GIFMIS to improve the transparency of fiscal finances.
Financing the gap
External financing, in their view, is constrained because Ghana is almost entirely debt constrained. The Eurobond issuance that the government had initially planned for this month has been pushed out until the summer, post-IMF review. The government is after $1bn, but market conditions will dictate the amount. The World Bank may guarantee part of the bond, the research outlook posited.
Ghana’s commodity portfolio
Although Ghana is a commodity exporter, it does not have the concentration risk that is common to many of its peers, that is, Nigeria’s crude oil accounts for over 95% of its exports. Ghana actually has a diversified commodity portfolio that includes one energy product, a precious metal and an agriculture product.
Gold and cocoa are Ghana’s traditional exports. The price of gold (which presently accounts for 22% of export earnings) fell by almost 30% in 2013 and has been broadly flat, with a downward bias over the past 18 months. The drop in the gold price resulted in slimmer margins on gold production and led to workers being laid off. Power rationing has further hurt the gold industry.
This year, cocoa production (which presently accounts for 20% of export earnings) is below IMF forecasts because of poor rains. The IMF thinks the smuggling of cocoa by farmers to Cote d’Ivoire, where they can fetch better prices owing to a stronger local currency, may partly explain the below-forecast output. Cocobod has not honoured about 200k of cocoa as against the IMF’s production estimate of 700k) pledged because of low yields.
The ruling, from the Hamburg-based International Tribunal for the Law of the Sea, made in April, this year on the border dispute between Ghana and Cote d’Ivoire, was in favour of Ghana. Cote d’Ivoire wanted all oil exploration and exploitation to stop in the disputed zone that includes the Tweneboa, Enyenra and Ntomme (TEN) project.
However, the court ruled that development work on the TEN project can proceed. Almost 60% of the project is complete and all the wells that are expected to be online at first oil (expected in mid-2016 by Tullow) are already drilled.
Tullow PLC, the unit operator of Ghana’s Jubilee fields stock price rallied on the back of this ruling. Tullow forecasts that it will produce 80k b/d from the TEN project by 2016 (vs 120k b/d from the Jubilee field).
Analysts believe production will be closer to 20k b/d. The Researchers think the actual number probably falls somewhere in the middle, (50k b/d). This implies Ghana’s oil exports – which presently account for almost 20% of export earnings – may increase by 40% in the medium term.
All of the aforementioned developments in the export sector suggest that exports performance will be undermined by poor cocoa export earnings in 2015. However, over the medium term, researchers and experts at RenCap expect an increase in oil exports – as the wells from the TEN project come online – should boost export earnings.
African Eye News.com
