When a country cuts power to its aluminium smelters so its people can watch the World Cup on TV, you have to conclude that its economic policy isn’t all about investing for the future.
Ghana this week called in the International Monetary Fund after a depreciation in its currency threatened to turn into a rout. The episode is an excellent illustration of the injunction to be careful what you wish for, in this case Ghana’s discovery of oil. Its fellow minerals exporter, copper-rich Zambia, has also called in the IMF.
The two nations have become object lessons in how easy outside financing and high but volatile export prices give countries enough rope to strangle themselves. Their experience is unlikely to be a bad as similar countries in previous decades, but it still represents another chapter in the sad history of resource-dependent economies going wrong.
Ghana and Zambia are going through a (so far mercifully miniaturised) version of a common African experience of the 1970s and 1980s. Back then, having borrowed freely from abroad on the back of buoyant raw material export revenues, countries were hammered by rising interest rates and collapsing overseas earnings when Paul Volcker’s Federal Reserve set about driving inflation out of the system. The result was a decade or more of debt default, currency collapse, stagnation and the almost permanent encampment of the IMF and World Bank in sub-Saharan Africa, enforcing increasingly unpopular policies of “structural adjustment”.
Ghana’s current travails are simultaneously highly unfortunate, largely avoidable and all too predictable. The west African country’s steady economic growth over two decades apparently received a boost in 2007 when, to much national rejoicing, it discovered a large oilfield. Production started in 2010, and Ghana talked a good game about using the money to diversify its economy, which was already overly dependent on commodity exports, chiefly gold and cocoa.
Yet instead of capacity-enhancing investment, it bought popular support by tripling the civil service wage bill from 2009-2012 and introducing crowd-pleasing fuel subsidies earlier this year. This fiscal laxity – not helped by oil production undershooting expectations – has led directly to an unsustainable current account deficit, which last year approached 11 per cent of GDP. Symbolically, the government was forced to reverse the fuel subsidies after only three months. It is hardly surprising that the cedi has fallen by nearly 40 per cent this year, the largest depreciation of any freely-traded currency.
Ghana has been too eager to return to the capital markets on a large scale, and the capital markets have been too eager to lend. In 2007 Ghana was the first of the Heavily-Indebted Poor Countries (HIPC), which received massive debt relief from the IMF, World Bank and rich donor governments, to issue eurobonds. In 2013, with investors searching for yield and comforted by the idea that borrowing was secured on Ghana’s future oil revenues, Accra borrowed another $1bn. (This year it has been followed by Kenya, which has issued its first ever eurobond, Ivory Coast, Senegal and Zambia.)
That borrowing has not resulted in enough investment and reform to drive economic diversification. For example, while it has performed well on many of the World Bank’s Doing Business indicators for commercial climate, Ghana – like Nigeria – contrives to be an oil producer with big problems in generating and distributing enough electric power for its undersized manufacturing sector to grow. Apart from the World Cup episode, Ghana suffered a crippling week-long fuel shortage in June after mismanagement of subsidy payments forced the government to release oil from its strategic reserve.
The economy remains too dependent on commodity prices. Even before the 2013 eurobond was issued, falling prices of gold and cocoa, Ghana’s two other major hard currency earners, were reducing export revenues, forcing it to pay over the odds to borrow. The government is planning to use the slight boost to confidence achieved by calling in the IMF to issue another $1bn or more in paper before the end of September.
True, Ghana has fewer other sources of finance than previously. It is in the process of “graduating” from being a low-income to a middle-income country on the World Bank definition. Among other things, that means soft-loan borrowing from the Bank and other official sources of finance will be restricted. However, as the OECD recently noted, Ghana seems to have rushed to the other corner and actively prefers to borrow expensively on capital markets rather than accepting whatever concessional finance is available. The OECD found Ghana’s approach to debt management uncoordinated and unsystematic, with multiple parts of government with different incentives.
Still, Ghana is better off than it was in the 1980s, and a floating exchange rate is part of the reason. Back then, the country continued to maintain an official fixed exchange rate (though, typically, the black market rate was massively lower), simultaneously postponing and worsening its problems. This time round, by inflating the domestic cost to Ghana of borrowing in dollars, the fall in the cedi has forced the government to a reckoning much earlier. The IMF warns that Ghana will need to tighten fiscal policy more than it is currently doing, but says that the risk of a debt distress remains “moderate” as long as it implements the right policies.
Ghana (along with Zambia) has got its longer rope tangled round its neck, but it has mercifully failed so far to throttle itself. With a tough fiscal tightening inevitable, the next few years are unlikely to have the heady sensations of the last two, even if oil production does ramp up and global crude prices stay high. But nor are they likely to be the disasters produced by earlier episodes of borrowing abroad on the back of high commodity prices. Ghana is a salutary warning: it is not a disaster.
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