Ghana’s Economic Outlook: Business, Trade and Economic Transformation

April 28, 2021

In this Q&A originally published in the French magazine Emerging Nations, Prof. John Asafu-Adjaye, Senior Fellow at the Economic Management and Governance Program and Charles Odoom, Head of Private Sector Development discuss the current and future business environment in Ghana.

Is Ghana a gateway for businesses in West Africa? If so, what are its strengths?

Ghana has long been touted as the gateway to West Africa—and Africa as a whole. It has one of the fastest-growing economies in the ECOWAS sub-region over the last five years and remains a  top destination for investment—largely because of its political stability, low crime rate, respect for rule of law and comparatively large market. Ghana’s international airport is one of the busiest in the region with connecting flights to the rest of the continent and beyond. Accra, the capital city, is rapidly urbanizing with strong transport links to other major cities. The country’s physical and digital infrastructure is among the most developed within the region, with mobile and internet penetration (about 50% in January 2021) also among the highest on the continent. It is endowed with abundant natural resources, including vast agriculture and mining, a well-educated populace and a strong middle class.

But the real strength of Ghana is embodied in its democratic credentials. Ghana is considered a beacon of democracy in Africa, having successfully organized seven presidential and parliamentary elections and seamlessly transitioned to different governments since 1992. The most recent election was just held in December 2020. It was hard-fought and messy, but stable.

What is your opinion on the economic trajectory of Ghana in recent years?

Between 1960 and 1993, Ghana experienced three periods of civilian rule interspersed with military governments. The economy suffered greatly as a result of this political and economic instability and economic growth was low and sometimes negative. Economic growth started to improve after 1992 when the country returned to constitutional rule under the Fourth Republic. Between 2000 and 2008, the economy grew at an average rate of 5.3% per year compared to the Sub-Saharan African average of 5% per annum. Ghana’s economic growth peaked at 14% in 2011 after the first year of oil production and was the fastest growing economy in the world at the time.

However, this growth rate could not be sustained and declined continuously to 3.4% in 2016. Ghana, like most African countries, depends heavily on the exports of primary commodities. The poor performance from 2012 to 2016 was due to a decline in commodity prices combined with other factors. These included persistent power supply shortages that forced several businesses to close or relocate to other countries. Ghana also experienced macroeconomic challenges such as poor fiscal management, low public investment, double-digit inflation and a volatile exchange rate. As a result, there was a decline in key sectors such as agriculture and manufacturing.

The economy began to turn around after 2016 when macroeconomic stability was restored, and commodity prices started to improve. Between 2016 and 2019, Ghana’s economy grew three times faster than the rest of Sub-Saharan Africa at an average rate of 6.1% per year compared to 2.1% per annum. Like all countries in the world, Ghana’s economy took a big hit in 2020 as a result of COVID-19, with economic growth expected to decline to 1.1%. But the economy is expected to recover strongly, with a projected growth rate of 5% in 2021. That would place Ghana among the fastest growing economies in Africa.

How would you assess Ghana’s efforts to improve the business environment?

Ghana’s efforts at creating opportunities for both local and international businesses are commendable. Despite being a leading African destination for foreign direct investment (FDI) in the mid-1990s, Ghana slipped into an economic crisis in 1998, recovered and liberalized its economy in the mid-2000s, and has not looked back since. In the early 2000s, the government announced its “golden age” for business to boost private sector development, regional integration, and good governance. This came with a raft of policies that led to the opening up of the economy for investors in the mining, financial, and telecommunications sectors of the economy. The discovery of oil in commercial quantities in 2007 further opened up the economy for business. In 2013, the country amended the Ghana Investment Promotion Centre Act to boost the management of the country’s investor relations.

The country remains in the top ten investment destinations on the continent thanks to its political stability and investment policies. The current administration has prioritized FDI to support economic diversification and industrialization in key sectors. But there are still sizable challenges in the business environment range: high energy costs, unstable supply of utilities, weak currency, land tenure issues that complicate acquisition and registration, local content requirements in certain sectors, and corruption.

We often hear that Ghana is “an exception” in West Africa. Does that mean we have to have a “differentiated approach” to this country in terms of economic transformation?

Ghana is often regarded as an “exception” in Africa primarily because of the political stability it has enjoyed since 1992. Civil disturbances of a political nature are rare in Ghana, and that alone helps make it a preferred destination for investors coming into the subregion.

However, a “differentiated approach” to Ghana may not be justified, as the structure of the economy and the challenges it faces are the same as in other West African countries. ACET has developed the African Transformation Index (ATI) to measure the progress African countries are making in transforming their economies. The latest edition of the ATI will arrive later this year. It will show that Ghana, like most African countries, is not making much progress in transforming its economy. Exports are mainly based on raw primary commodities such as cocoa and crude oil and the level of industrialization is low. All the countries in the region face similar challenges of how to diversify production and exports, increase productivity across all sectors, increase the use of technology and improve workers’ skills and training.

In 2021, a new free trade agreement entered into force: the African Continental Free Trade Area (AfCFTA). What are the key takeaways of this agreement that could be useful for companies? 

The agreement will be useful to companies in several ways. The first is the market opportunity the agreement presents to African businesses. Businesses in Africa now have access to a 1.2-billion person market with real GDP projected to grow at 3.7% in 2021, with strong recovery expectations post-COVID-19. Intra-African trade is expected to increase significantly, especially considering the current low levels.

The agreement also affords the creation of an enabling business environment, improved access to credit, improved human capital, harmonized payments and settlement systems on the continent. The private sector will carry out the bulk of investment, so a good business climate will be critical. In particular, a deliberate attempt should be made to enhance and facilitate growth among small and medium enterprises (SMEs).

In addition, AfCFTA can contribute to the development of sound, effective and efficient payments systems and payments services across the continent. A fully developed, regional financial infrastructure can help facilitate trade. In this regard, the African Union, in partnership with the Afreximbank, developed the Pan African Payment and Settlement System (PAPSS), which is the first centralized payment market infrastructure for processing, clearing, and settling of intra-African trade and commerce payments. The platform will make it possible for African companies to clear and settle intra-African trade transactions in their local currencies. This will significantly reduce the dependence on hard currencies in regional trade payments.

AfCFTA has short- and long-term impacts. Most of the associated costs of adjustment and integration—such as local SMEs vanishing in front of stronger competition and the need for higher investments in infrastructure—are expected to be incurred in the short term. But the majority of benefits expected from the agreement—such as welfare benefits from lower import prices, production efficiency, an increase in outputs, higher value-added jobs, technological specialization and more—will materialize in the long term. Patience and long-term planning will be required.

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