High Twin Deficits Pose Risks to Ghana’s Growth Outlook

Economic growth slowing from high levels

Large current account, fiscal deficits expose economy to risks

Sound financial sector still requires close monitoring of exposures

The main priority now, the IMF says in its regular review of the West African nation’s economy, is to restore macroeconomic stability by addressing short-term vulnerabilities that put Ghana’s transformation agenda at risk.

Ghana has experienced strong and broadly inclusive growth over the past two decades. The country has outperformed regional peers in reducing poverty and improving social indicators. Robust democratic credentials and a highly rated business climate (see Chart 1) have helped attract significant foreign investment, supporting strong growth and a graduation to lower middle–income status.

Yet the economy faces a number of important challenges. About a quarter of the population still lives below the poverty line, firms lack access to affordable credit and reliable electricity supply (see Chart 2), and 6–7 million jobs—more than half of the current labor force—will need to be created in the next two decades.

To address these priorities, the government’s transformation agenda focuses on economic diversification, social inclusion, and macroeconomic stability.

While Ghana’s growth still reached 7 percent in 2013 it has slowed from previous years, and IMF staff projects a further slowdown to less than 5 percent this year, as high interest rates and a weaker currency are depressing domestic demand. At the same time, the economy’s continued large twin deficits (see Chart 3) and high financing needs, leave it vulnerable to weaker external conditions.

Government strategy

The authorities recognize the economic challenges, and have acted across a broad front.

• In response to shortfalls in tax collection and grants, and ongoing overruns in the wage bill, the government in 2013 imposed levies on certain imports and on profits of specific sectors. It also eliminated fuel subsidies; sharply raised electricity and water tariffs; and compressed other spending. Despite these significant policy efforts, the 2013 fiscal cash deficit reached 10.1 percent of GDP.

• In the near term, the government’s 2014 budget focuses on mobilizing additional revenue, while containing current primary spending. The value-added tax rate was raised and the coverage was broadened to previously exempted activities. At the same time, there is an increased effort to control the wage bill...