Ghana’s Advance to Middle-income Status Requires Firm Policies

Strong growth momentum amid significant short-term vulnerabilities

Debt sustainability weakened by unexpectedly high fiscal deficit

Higher borrowing costs, unreliable energy supply risk curbing growth

However, continued success will depend on strong political will to decisively confront Ghana’s short-term vulnerabilities, the IMF said in its regular review of the West African nation’s economy.

Mining and agriculture dominate Ghana’s exports, but construction and services now account for more than half of the country’s output, while a large majority of jobs remain in the informal sector. Ghana has made great strides in reducing poverty to less than 30 percent of the population and has recently reached lower middle–income status. Offshore oil production started in late 2010, with new discoveries to come on stream over the medium term.

The newly elected government has adopted an ambitious transformation agenda centered on economic diversification, social inclusion and job creation, and macroeconomic stability. It recognizes that better infrastructure, further investment in health and education, and sustained macroeconomic stability will be central for Ghana’s ambition of achieving full middle-income status and raising the living standards of all its citizens.

Risks to growth, stability

A large current account deficit, growing public debt, and a low official reserve buffer all expose the economy to significant stability risks. A rising public sector wage bill and costly energy subsides led to a near tripling of the cash deficit to 12 percent of GDP in 2012.

Monetary policy was tightened with some delay last year to halt a rapid currency depreciation, but success came at the cost of double digit real interest rates, raising the cost of credit to the private sector (see Chart 1).

Survey-based inflation expectations remain elevated at above 10 percent, and the current account deficit is projected to stay high at 12 percent of GDP, reflecting a weaker outlook for cocoa and gold exports.

Structural problems in the energy sector also pose risks to growth and economic transformation, while the concentration of exports in three commodities—gold, cocoa, and oil—makes the economy vulnerable to terms of trade shocks (see Chart 2).

In this context, IMF staff identified two principal policy priorities.

First, rebalancing the macroeconomic policy mix: The IMF staff pointed out that safeguarding stability, by rebuilding fiscal and external buffers...