This year not only marks the 50th anniversary of Ghana’s independence but also a watershed in the country’s rutted journey to economic prosperity. The redenomination of the Ghanaian cedi in July was in many ways the capstone of a new era of sound economic management, which has led to an upsurge in investment and newfound macroeconomic stability.
Ghana reached another historic crossroads in September when it became the first post-HIPC nation to access international capital markets with its successful issue of a $750 million Eurobond, which received $3 billion in demand despite the global credit crunch.
Kwadwo Baah-Wiredu, Ghana’s finance minister, has been a central figure in this transformation. He pushed hard for measured capital account liberalization, which has allowed foreign investors into three- and six-year domestic government bond auctions. But he has also taken a stand against external spending pressure through sound management of the country’s public finances.
Debt relief and buoyant commodity prices have provided the west African nation with a supportive economic environment. But its success story was tainted this year by the acute energy crisis, which began in August 2006 and eventually led to an emergency budget in July, which shifted resources to tackle the country’s woeful energy and infrastructure shortfalls. The extra spending brought this year’s budget deficit to 12%.
But Baah-Wiredu is emphatic that the fiscal blow-out is a one-off and argues that the political consensus and domestic institutions have matured, favouring the country’s long-term growth potential rather than the boom and bust cycles of the 1990s.
“Despite the problems we have had this year, I am confident that conservative spending will be maintained in the next couple of years,” he tells Emerging Markets. “I have called for fiscal discipline, and the president and all members of parliament will be accountable to this goal. And ministries are more transparent in their day-to-day dealings than before, so we are now aware of their full costs.”
Razia Khan, regional head of research for Africa at Standard Chartered, is impressed and is confident fiscal prudence will be maintained. “There will be a gradual removal of energy subsidies starting in October, followed by a second adjustment next year; there are plans to obtain gas via the west African pipeline as well as moves to a market pricing mechanism for utilities. These measures will result in a 30% reduction in energy costs relative to now. And they will be doing whatever is needed to restore confidence in fiscal sustainability,” she says.
Macroeconomic stability has led to a rapid decline in the country’s interest rates, and Baah-Wiredu pledges new reforms to develop the country’s financial markets, to boost the sources of financing for domestic businesses. “Most of the banks in Ghana have limited branches, so we want to encourage them to open up more. For example, we are providing consumers with credit through our social security system, allowing them to repay their loans to banks,” he says. “But more fundamentally, I am pushing a pension reform bill through parliament. This will stimulate the development of local capital markets as well as competition in the banking sector.”