ACCRA, July 19, 2023 — A combination of domestic imbalances and external shocks in 2022 has led to macroeconomic challenges in Ghana. The year was marked by currency depreciation, rising inflation and falling investor confidence. Pre-existing fiscal vulnerabilities such as the growing debt burden, a rigid budget weakened by high energy sector costs and chronically low government revenues, have been compounded by difficult global economic conditions, notes the latest economic update of the World Bank. The report entitled “Rising prices: untangling the consequences of inflation on poverty and food security» indicates that Ghana faces an extremely difficult outlook and that the economic situation is likely to remain difficult before rebounding. Economic growth is expected to slow to 1.5% in 2023 and remain depressed in 2024 at 2.8%, but the economy is expected to return to potential growth by 2025.
“Through efforts to address macroeconomic instability, corrective fiscal and monetary policies are expected to influence total demand and slow non-extractive GDP growth,” said Pierre Laporte, World Bank Country Director for Ghana, Liberia and Sierra Leone “High inflation, rising interest rates and macroeconomic uncertainties will keep private consumption and investment growth below pre-pandemic levels, leading to moderate non-extractive growth in the near term; but growth will begin to return to potential by 2025, as the drag on fiscal consolidation eases and macroeconomic stabilization and structural reforms begin to bear fruit.
The report recommends that in addition to managing the immediate macroeconomic crisis, authorities would do well to embark on structural reforms to address its root causes, boost economic growth and strengthen economic resilience:
- The report calls on Ghana to sustainably raise more domestic revenue, including by streamlining tax incentive schemes and improving revenue administration.
- It suggests that Ghana could implement stricter spending controls to improve the accuracy of budget execution and prevent the accumulation of further arrears.
- The report says the government must fully address the energy sector deficits, which continue to threaten fiscal sustainability, and it calls on the government to extend, broaden and thoroughly implement the energy sector recovery program.
- Rebuilding the capital reserves of the financial sector will promote financial stability and development. As recently released audited financial statements show, DDEP has eroded banks’ capital reserves and some of them are undercapitalized or insolvent.
- It calls on the government to boost FDI inflows by improving the investment climate through improvements in transparency, accessibility and quality of business regulation and regulatory governance.
- On climate change adaptability, the report recommends that the government draws on recommendations from the World Bank’s recent National Climate and Development Report (CCDR) to prioritize investments that maximize climate resilience benefits. an affordable cost.
“Macroeconomic shocks, particularly inflation, tend to affect the poor the most. The next two years will be very challenging for Ghana’s poverty reduction efforts. Without getting the economy back on track, no significant reduction in poverty can take place. At the same time, safety nets designed to protect the most vulnerable must be strengthened to ensure sustainable poverty reduction and shared prosperity. said Kwabena Gyan Kwakye, World Bank economist and co-author of the report. “Expanding and increasing transfers under the Livelihood Empowerment Against Poverty (LEAP) program could ensure that the poorest are able to cope and build resilience to future shocks. »
The report also indicates that high inflation in 2022 has had significant effects on food security and poverty in Ghana and has eroded the purchasing power of Ghanaian households, leading to a deterioration in living standards and, ultimately, a worsening poverty and food insecurity. Simulations suggest that by 2022, almost 850,000 Ghanaians have been pushed into poverty due to rising prices and loss of purchasing power.
“Longer term, to mitigate the impact of inflation on food security, policymakers must enable farmers to adapt to global demand and take advantage of market opportunities. » said Ashwini Sebastian, senior agricultural economist and co-author “This is particularly relevant given that a large number of poor people live in agricultural households. Policies must therefore be evidence-based and aim to alleviate the various constraints farmers face.»
Medium- and long-term policy measures may include channeling investments in agricultural research and technology transfer to help increase productivity and reduce production costs, as well as improve food quality and safety. . Additionally, when it comes to climate change, it is essential that the government invests in climate-smart agricultural initiatives, which can help farmers adapt to climate change. Promoting sustainable and climate-resilient agriculture can help farmers resist future shocks.
In addition to supporting higher domestic food production, policies should aim to open the country to more effective integration into global food supply chains. Programs may seek to foster regional and global trade to improve the availability and affordability of food products by reducing trade barriers, promoting regional integration and increasing market transparency. Additionally, policies to reduce market distortions such as subsidies, taxes and price controls can improve market efficiency and reduce food waste.