Published on 28 Apr, 2020.

Following recent events, many government institutions have come under pressure and no more so than Ministry of Finance and Ken Ofori-Atta. Whilst still enjoying international credibility, many questions abound as to why monies are not forthcoming to fight C-19.

This crisis has highlighted several deficiencies across the markets and with Oil set to go below $20, African oil-dependent countries are going to be the hardest hit. Recent €3billion bond fortuitous in timing will not save the cedi as purported yesterday nor will inflation be spared as the economy flounders, unemployment soars, supply chains disrupted and a fiscal stimulus package just announced with no clear implementation guidelines insight.

Statutory funds such as sovereign, stabilisation, oil, GET Fund all seem to be lacking amidst the crisis and instead, Ghana went cap in hand to IMF/WB, further delaying response time and placing lives at risk. We foresee a forex risk with the surge for USD in the coming weeks, tightening government’s ability to service foreign debt and even buy crude. With most sectors in various form of crisis before C-19, it is difficult to see how growth above 5.6% (IMF) can be achieved. Bank of Ghana now forecasts it could decline to 5% but could go as low as 2.5%.

Impact on the economy

  • The Finance Minister estimates projected revenue loss from oil at $750million
  • Hotel occupancy rates are down from 70% to under 30% and staff are being sent home. Before the impact of the current lockdown, restaurants were experiencing a 60% average drop in patronage. Four international conferences scheduled for March in Ghana were cancelled leading to revenue loss in combined 1000 hotel beds.
  • Trading volumes and values have reduced. There has been a reduction in container arrivals at the ports by a third. As net importers, import duties have also been affected. Preliminary analysis shows that import duties will fall short of the target by GHȼ808 million for the 2020 fiscal year. The reduction in import of intermediate goods could affect manufacturing industries. On a positive note, it could ease the pressure on the cedi, positively impact Ghana’s net international reserves, and provide the opportunity for import substitution, thereby enhancing the local production of goods and services. Companies like GIHOC Distilleries, Kasapreko, and KNUST have veered towards the production of hand sanitisers. But it is worth noting that the net gain from exchange rate volatility as the export of goods has also declined is unclear.
  • The agriculture sector may have challenges accessing inputs like seeds, fertilisers and insecticides. It is anticipated that the uncertainty and fear could disrupt farming decisions and shortage of food is not far-fetched. The break in the supply chain may result in shortage and increase in prices of food (inflation).
  • Cocoa prices have declined from US$2,440mt in December 2019 to US$2,253mt as at 30th March 2020. The increased demand for gold as a haven as a result of C-19 will likely impact positively on the balance of payments and receipts from mineral royalties. Gold prices have increased from US$1,479/toz in December 2019 to US$1,621.6/toz, an increase of 9.6% as of 30th March 2020.
  • Crude oil price has declined from $63.21 (November 2019) to $22.9 (30th March 2020) per barrel. As net importers of crude, consumers will benefit from this and on the macro-economic level, Ghana’s petroleum revenue for the 2020 fiscal year will reduce. Corresponding projected shortfall in Annual Budget Funding Amount (ABFA) is GHȼ3,526 million; while shortfalls in the Ghana Stabilisation Fund and the Ghana Heritage Fund are GHȼ1,058 million and GHȼ453 million respectively. Projected shortfalls in transfers to GNPC is GHȼ642million.
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  • Impact on Tax Revenue: Based on the performance of import duties to date, as well as assumptions on the projected decline in import volumes and values, Similarly, the projected slowdown in non-oil GDP as a result of the coronavirus pandemic is expected to result in shortfalls in tax revenues (excluding oil tax revenues and import duties) amounting to GHȼ1,446 million, bringing the total estimated shortfall in non-oil tax revenues to GHȼ2.254 billion.
  • Impact on GDP: A preliminary analysis of the impact of the C-19 on the real sector shows that the 2020 projected real GDP growth rate could decline from 6.8% to 2.6% with an outbreak and 1.5% with a partial lock-down. Projected growth will further worsen in the event of full lock-down.
  • Cost of Preparedness and Response Plan: The initial cost of programmes and activities under the COVID-19 Preparedness and Response Plan is about GHȼ572 million (US$100 million). Another GHȼ 1bn ($219 million) from Stabilization Fund (awaiting parliamentary approval) stimulus incentive for individuals and businesses.

Overall Cost of COVID-19 on Ghana (Pecuniary Terms): The total estimated fiscal impact from the shortfall in petroleum receipts, shortfall import duties, a shortfall in other tax revenues, the cost of the preparedness plan, and the cost of Coronavirus Alleviation Programme is GHȼ9.505 million (2.5% of revised GDP).

The overall fiscal deficit will increase from the programmed GHȼ18.9 billion (4.7% of GDP) to GHȼ30.2 billion (7.8% of revised GDP). The primary balance will correspondingly worsen from a surplus of GHȼ2.811 billion (0.7% of GDP) to a deficit of GHȼ5.6 billion (1.4% of GDP).

Proposed Measures to Close the Fiscal Gap of GHȼ30.2 billion

A Corona Alleviation Programme-CAP presented to Parliament on 31st March spells how the stimulus incentive will be carried out.

  1. Lowering the Ghana Stabilisation Fund (GSF) from the current US$300 million to US$100 million per Section 23 (3) of the Petroleum Revenue Management Act (PRMA). The excess amount an estimated GHȼ1.250 billion will be transferred to the Contingency Fund to finance the CAP.
  2. Arrange with BOG to defer interest payments on non-marketable instruments estimated at GHȼ1.222.8 billion to 2022 and beyond.
  3. Adjust expenditures on Goods & Services and Capex downwards by GHȼ1.248 billion.
  4. Secure the World Bank DPO of GHȼ1.716 billion.
  5. Reduce the proportion of Net Carried and Participating Interest due to GNPC from 30% to 15%.
  6. Amend the PRMA to allow a withdrawal from the Ghana Heritage Fund to undertake emergency expenditures in periods of national emergency. There is an estimated US$591.1 million in the Ghana Heritage Fund. Other measures introduced by the Bank of Ghana include;
  7. Lowering reserve requirements for lenders to 8% from 10% to provide liquidity support to critical sectors.
  8. Reducing conservation buffer for banks from 3%to 1.5%, which effectively cuts the capital-adequacy ratio to 11.5% from 13%.
  9. Lowering the cost of fund transfers through mobile money.
  10. The central bank will convene further “emergency meetings” when warranted.
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Once these fiscal measures are approved and implemented, the fiscal deficit of 6.6% of revised GDP will be recorded and corresponding primary balance (deficit) of 1.1% of rebased GDP.

Ghana’s overall debt burden and debt due within 12 months score it very low on the continent. The huge informal sector, subsistence farming and access to finance will slow the effectiveness of any fiscal response, yet its greatest impediment will be political and its inability to revise budgets, control costs and have real-time figures to help decision-making.

Already looking to the West, Ghana and other African import-dependent economies show their fragility and if the C-19 curve is to turn mid-July, Ghana still faces annual cholera and possible measles outbreak, particularly in the poor Northern regions. Grappling with poor hygiene conditions, access to sanitation, freshwater, poor transport and a broken health care system, considerable pain is envisaged. Being an election year, the traditional war chest is now seriously undermined as Ghana is highly likely to enter debt distress, with repatriated funds diminishing and exacerbating a projected dollar drought. Hidden Chinese debt may maintain this debt trajectory.

It is now accepted that the initial V-shaped recovery will not be a factor for African Economies, but Ghana has been the first African country to reduce interest rates from 16% - 14.5%. The situation continues to change rapidly and maybe Ghana can stem the infection rates. Being three weeks into the COVID- 19 cycle a lot of uncertainties remain, but what is known is that the economic repercussion will be severe and with the upside being a recession for many. Ghana can still come out better than others if contagion is curtailed but it is inescapable for it not to be several affected by a world economy in flux.

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“The global economic picture is looking bleak, with recessions in almost every developed economy across the world. We assume that there will be a recovery in the second half of the year, but downside risks to this baseline scenario are extremely high, as the emergence of second, or third waves of the epidemic would sink growth further. At this stage, it is also hard to see an exit strategy from the lockdowns, which means that uncertainty will remain high. Finally, the combination of lower fiscal revenues, and higher public spending, will put many countries on the brink of a debt crisis.”

Agathe Demarrias, The EIU’s Global Forecasting Director

As Africa grapples with C-19, traditional external support and development assistance will diminish as European countries and others come to terms with their situations which may impose a new reality. Considering that US C-19 response is more than the combined annual GDP for the continent, it is maybe a time for a different perspective and economic model if Africa is to be a serious player in a post-C-19 world economy.

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