Over 80% of Ghana's revenue comes from exports of three major commodities: gold, crude oil and cocoa. Unfortunately, shipments of crude oil and cocoa have been drastically reduced during the past year, as a result of the COVID-19 pandemic.
With government debt increasing to over 70% of gross domestic product (GDP) and interest payments consuming half of the country's revenue, Ghana's credit rating was reduced to B- in September 2020. Revenue spent on debt servicing increased from 39 percent in 2019 to a staggering 55 percent in 2020. The International Monetary Fund (IMF) disbursed $1 billion to Ghana in April 2020 due to the severe impact of the COVID-19 pandemic.
Tao Zhang, Deputy Managing Director and Chair of the IMF, commented that "The COVID-19 pandemic is impacting Ghana severely. Growth is projected to slow down, financial conditions have tightened, and the exchange rate is under pressure. The budget deficit is projected to widen this year given expected lower government revenues and higher spending needs related to the pandemic."
Demand for Crude Oil Drops
With fewer people traveling, shipments of freight reduced and manufacturing halted in many areas, the demand for crude oil as well as prices plummeted during the past year. Just as there was a worldwide increase in production, the International Energy Agency (IEA) estimated that global demand for oil was down by almost 30 million barrels per day (mb/d) during 2020. However, demand for oil is projected to grow by 5.4 million barrels per day in 2021, recovering around 60% of the volume lost to the pandemic in 2020. There should be stronger demand in the second half of 2021 as the world economy recovers.
Cocoa Viewed as a Luxury Product
Cocoa is the key ingredient in chocolate, for which there was a decline in demand during the pandemic. Ghana is the second largest exporter of cocoa beans in the world, with Ivory Coast being the largest. As the country's main cash crop, over 1 million farmers in Ghana depend on cocoa for their livelihood. The government has provided incentives in recent years to encourage people to expand their farms such as building improved access roads, establishing minimum producer prices, encouraging the use of fertilizers and insecticides, and providing new seedlings for trees lost during periods of drought. The supply of cocoa did not decrease during the pandemic, but demand declined by 5-10 percent. Restaurants that bought cocoa for their menus were closed, and since no one was traveling, the amount of chocolate purchased in airports also decreased.
Gold Prices Increase as Production Ramps Up
The price of gold increased during the past year, which was good news for Ghana. They are now the largest producer of gold in Africa, thanks to their lower-cost mines where it is easier to extract deposits. The government also created a friendly business environment by cutting corporate taxes and establishing a sliding scale of mineral royalties based on the gold price. Ghana also has a standard 10% free-carry stake in all mining companies that provides investors with a high level of assurance.
Plans for the Future to Minimize Disruptions to Ghana's Economy
Ghana needs to diversify its economy so they are not totally dependent on just the three commodities mentioned above. But with the high amount of debt servicing required each month, this may not be possible in the short term. For such commodities as cocoa, local clusters of production and processing could be established so that if one area of the country is affected by a drought, for example, other areas can still harvest cocoa beans for export. Ghana also needs to strengthen the enforcement of child labor laws in the harvesting of cocoa, or risk backlash from major U.S. importers such as Nestlé, Hershey's and Blommer.
The country will remain dependent on the availability of loans to avoid long-term consequences of the pandemic. But since their credit rating declined, market-based sources of credit will not be available. Ghana will then have to rely on financial institutions such as the IMF for funding. However, the IMF can impose certain conditions on their loans such as public sector wage freezes. This discourages young adults to enter such professions as medicine and education, which further deepens a crisis such as COVID-19 or an Ebola outbreak. Like many African countries, Ghana spends more on debt servicing than health and education combined. Their tax system needs to be strengthened so that the wealthier residents and companies are paying their fair share.
The IMF could also assist Ghana when agreeing to provide emergency loans. The agency should call all creditors to immediately start talks towards a full debt restructuring as part of the official agreement.
There is certainly hope for the future. The IMF recently forecast that due to the rollout of COVID-19 vaccines and vast sums of government aid, global economic growth will accelerate to a record high this year in a powerful rebound from the pandemic recession. The agency expects the world economy to expand 6 percent in 2021, up from the 5.5% it had forecast in January 2021. It would be the fastest expansion for the global economy in IMF records dating back to 1980.