Ghana: Elevated inflation, fiscal and monetary tightening to dampen economic recovery

Ghana’s economic recovery from the Covid-19 pandemic according to Fitch Solutions will be dampened by the country’s elevated inflation coupled with the tightening of fiscal and monetary policies by government and the Central Bank respectively.

According to the agency, elevated inflation will dampen consumer confidence and spending.

Recorded inflation for end of February 2022 was 15.7%, 1.8 percentage points higher than the 13..9% inflation rate recorded for the previous month – January 2022.

Economic analysts in the country have projected a negative outlook for inflation in the coming months given the anticipated spikes in crude oil price on the back of the Russia-Ukraine War, asserting the anticipated increased inflation will adversely impact the economy.

Regarding fiscal and monetary tightening policies, the government through the Finance Ministry has announced a 20% quarterly cut in its expenditure for this year.

The Central Bank last year also increased its monetary policy rate by 100 basis points from 13.5% to 14.5%. Given the upward trajectory of inflation rate, the BoG might increase its policy rate at the impending 105th MPC meeting to counter rising inflation.

Assessing Ghana’s economy, Fitch Solutions asserts Gross Domestic Product (GDP) growth rate for this year will modestly slow down to 4.8% from the earlier projection of 5% GDP growth rate for 2022.

Adding that, GDP growth will remain below the country’s five-year and ten-year pre-Covid-19 averages of 5.3% and 6.8% respectively.

“At Fitch Solutions, we expect Ghanaian real GDP growth to slow modestly in 2022, forecasting growth of 4.8% in 2022 down from an estimated 5.0% in 2021. While the impact of the Covid-19 pandemic will continue to slowly fade, elevated inflation alongside fiscal and monetary tightening will dampen the pace of the economic recovery. Indeed, after growth of just 0.4% in 2020 – a multidecade long low, our forecast implies growth will remain below its historical five and 10-year pre-Covid averages of 5.3% and 6.8% respectively,” said the agency.

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Ghana’s Growth To Moderate In 2022

Key View

  • At Fitch Solutions, we continue to expect Ghanaian real GDP growth to come in below its historic trend in 2022 at 4.8%, following estimated growth of 5.0% in 2021.
  • Elevated inflation will dampen consumer confidence and spending, whereas falling oil and cocoa production will weigh on exports.
  • While fixed investment will accelerate as projects delayed by the pan­­demic resume and higher commodity prices boost foreign interest in the country’s abundant natural resources, this will not be sufficient to offset weakness in other components.

At Fitch Solutions, we expect Ghanaian real GDP growth to slow modestly in 2022, forecasting growth of 4.8% in 2022 down from an estimated 5.0% in 2021. While the impact of the Covid-19 pandemic will continue to slowly fade, elevated inflation alongside fiscal and monetary tightening will dampen the pace of the economic recovery. Indeed, after growth of just 0.4% in 2020 – a multidecade long low, our forecast implies growth will remain below its historical five and 10-year pre-Covid averages of 5.3% and 6.8% respectively.

Ghanaian Growth To Slow In 2022

Ghana – Contribution To Real GDP Growth, pp

Fitch Solutions estimate/forecast. Source: Ghana Statistical Service, Fitch Solutions

We expect private consumption to slow even as the country benefits from a speeding up of its vaccine rollout. As of March 3 , 15.4% of the Ghanaian population were fully vaccinated and 24.9% had received one dose, up from 8.5% and 5.0% respectively on December 15 2021 (see chart below). We expect vaccination rates to rise further, following regulations put in place in January 2022 mandating vaccinations for public employees and for entry into stadiums, restaurants and bars.

This will allow a further loosening of social distancing restrictions which we expect will boost demand as Ghanaians return to more normal patterns of economic activity. We also expect robust remittance inflows, on the back of strong growth in 2021 in key source market such as the US and the UK, which will offer further tailwinds in consumer spending.

Ghana Vaccination Rates Will Continue To Rise

Ghana – Covid Vaccination Rates, Per 100 People

Source: Our World In Data, Fitch Solutions

That said, there are a number of headwinds that will weigh on household demand. In a bid to address rising public sector debt – which we forecast to hit 83.0% in 2022 – Ghanaian authorities have announced a number of measures to narrow the country’s fiscal deficits, which we believe could offer headwinds to household consumption. One of the main proposals set out in the 2022 budget is a levy of 1.75% on all electronic transactions over GHS100.0 (USD16.0), including mobile payments, bank transfers and inward remittances.

This has not been passed in the legislature yet, but given sharply rising borrowing costs we believe there will be increased pressure on policymakers to push through some version of the tax. Inflation will also weigh on household consumption. We forecast inflation of 12.8% in 2022, driven higher by elevated global commodity prices. It is likely inflation is already starting to affect consumer spending, with consumer confidence easing to 88.1 in December 2021, which is the lowest level since April 2020. As such, we forecast private consumption growth of 4.3% in 2022, from estimated 4.7% growth in 2021.

Consumer Confidence To Keep Falling

Ghana – Consumer Confidence Index

Source: Bank of Ghana, Fitch Solutions

Meanwhile, we expect robust import growth will weigh on net exports, forecasting that net exports will add 0.4pp to headline growth, from 0.5pp in 2021. Imports will be buoyed by the growing construction sector as a large pipeline of delayed projects restarts and high commodity prices bolster investment into natural resource extraction, boosting capital imports. Meanwhile, export growth will be comparatively sluggish on the back of a short-term decline in two of the country’s largest commodity exports – gold (which accounts for 49.8% of exports) and oil (21.5%).

Indeed, even despite higher global energy prices, our Oil & Gas team forecast a 1.9% decline in oil production in 2022, largely on the back of underinvestment in the sector during the pandemic and natural declines at existing fields, namely the Tweneboa Enyenra Ntomme (TEN) oil field. Moreover, our Agribusiness team forecast a 3.5% decline in cocoa production as the cocoa swollen shoot virus is likely to weigh on yields.

These headwinds to exports will be somewhat tempered by stronger gold production alongside a gradual increase in services exports, as visitor arrivals begin to accelerate as the impact of the pandemic gradually eases. That said, given the country’s still relatively low vaccination rate, tourist arrival numbers are unlikely to return to pre-crisis highs.Sluggish Oil and Cocoa Production Will Weigh On ExportsGhana – Oil Production (LHS) & Cocoa Production (RHS)

e/f = Fitch Solutions estimate/forecast. Source: EIA, Ministry of Food and Agriculture, Fitch Solutions

By contrast, fixed investment growth will accelerate in 2022. We forecast fixed investment will grow from an estimated 4.5% in 2021 to 5.0% in 2022, adding 1.1pp to real GDP growth. This is above the pre-pandemic level of 2.7% in 2015-2019. Higher global gold prices will spur investment into Ghana’s large precious metals sector. In January 2022, gold mining firm Gold Fields, announced plans to invest USD500mn in their Ghana mines over the coming years.

Meanwhile, Asante Gold reported USD100mn financing for its Ghana gold mine in February 2022. We see scope for further investment in the sector the coming quarters bolstered by a favourable regulatory environment and rising international precious metals prices, with our Mining team forecasting gold prices at USD1,700/oz in 2022, well above the 20-year historical price level.

Outside of precious metals, we believe investment in other sectors will begin to accelerate as the effects of the pandemic ease and projects that were put on hold are resumed. Business confidence increased in December 2021 to 98.4, its highest level since December 2020, signaling a perceived improvement in business conditions (see below). While rising interest rates could offer some headwinds, the country’s comparatively stronger operating environment – it ranks first out of 16 West African countries in our Operational Risk Index and 7th out of 48 countries in SSA – will likely encourage foreign investment.

Increasing Business Confidence Will Boost Investment

Ghana – Business Confidence Index

Source: Bank of Ghana, Fitch Solutions

The risks to our forecast are largely skewed to the downside. First, Ghana remains relatively vulnerable to further Covid-19 outbreaks, considering the still low national vaccination rates. This could undermine tourist arrivals and dampen consumer confidence if there is another large outbreak, weighing on growth. Second, rising market concerns over the country’s high debt burden could see authorities forced to raise taxes or cut spending more substantially than indicated in the 2022 budget, particularly if authorities seek support from the IMF to reassure investors. Third, there is scope for higher than expected inflation, particularly if fighting in Ukraine continues through the fall and undermines global access to Russian and Ukrainian wheat exports.