OVERVIEW OF THE CURRENT ECONOMY
In the early 1990s, Ghana’s economic recovery still appeared uneven and was geared primarily to the export rather than domestic market. GDP had risen by an average of 5 percent per year since 1984, inflation had been reduced to about 20 percent, and export earnings had reached US$1 billion. Most production came from the export sector, and by the 1992-93 crop year, cocoa production surpassed 300,000 tons, placing Ghana third in the world. In 1990 exports of minerals—primarily gold but also diamonds, manganese, and bauxite—brought in US$234 million, an increase of 23.2 percent from the year before. Nevertheless, salaries were low, and because the cost of public services continued to rise, Ghana’s poor bore the brunt of the negative effects of the austerity program.
Despite devaluations by the Rawlings regime and rising exports, the government has been unable to fulfill a key stabilization goal of reducing the trade and current account deficits. To stimulate production in various sectors, the government has incurred loans to finance imports of necessary inputs such as machinery, fertilizer, and petroleum. As a result, the country’s foreign debt exceeded US$4 billion in 1991. According to World Bank estimates, the country’s debt continued to rise in 1992, and was equivalent to almost 63 percent of Gross National Product (GNP). In 1992 the debt service ratio (debt service as a proportion of exports) was 27 percent, an improvement on late 1980s levels, which averaged as high as 62.5 percent. To cover the deficits that result from loans and increased imports, the government came to rely on rising levels of foreign aid, with net aid disbursements increasing to an estimated US$550 million by 1990. Unfortunately, foreign investment, compared with aid, was weak except in the mining sector, and domestic savings were insufficient to finance the country’s ambitious development projects.
Government policies have produced mixed results in terms of productivity and debt, and they have also incurred significant social costs through job elimination and reduced public expenditure policies. The government has addressed this problem by launching a special initiative to create 40,000 jobs providing services to the poorest groups. Spending on health and education also has increased as a proportion of GDP, but the central government believes that major poverty alleviation can come only with even faster and higher economic growth.
STRUCTURE OF THE ECONOMY
Most government efforts to restore the productivity of the Ghanaian economy have been directed toward boosting the country’s exports. These policies, however, have had numerous consequences. Following the initiation of the ERP in 1983 and the devastating drought of 1983, Ghana’s GDP has registered steady growth, most of it attributable to the export sector, including cocoa and minerals and, to some extent, timber processing. The cost of this growth is apparent, however, in Ghana’s growing external debts, which have financed rehabilitation of the export sector, and in the country’s steady rate of inflation that has curbed consumer imports. The government has tried with limited success to avoid some of the country’s historical pitfalls by broadening the range of both exports and trading partners. Nevertheless, prices for the goods that most Ghanaians purchase have been rising faster than the wages they receive for their work.
Gross Domestic Product
In current prices, Ghana’s GDP rose from ¢511 billion in 1986 to ¢3 trillion in 1992. In constant 1987 prices, these GDP figures amounted to ¢713 billion (US$4.62 billion) in 1986 and ¢934 billion (US$6.06 billion) in 1992.
During the 1980s, Ghana’s economy registered strong growth of approximately 6 percent per year because of a reversal in the steadily declining production of the previous decade. Ghana’s worst years were 1982 and 1983, when the country was hit with the worst drought in fifty years, bush fires that destroyed crops, and the lowest cocoa prices of the postwar period. Growth throughout the remainder of the decade reflected the pace of the economic recovery, but output remained weak in comparison with 1970 production levels. The same was true of consumption, minimum wages, and social services.
Growth fell off considerably in 1990 when another drought caused real GDP growth to decline by nearly two percentage points. Government estimates claimed that real GDP growth in 1993 was 6.1 percent, which reflected a recovery in cocoa output and an increase in gold production. At the same time, gross domestic fixed investment rose from 3.5 percent of the total in 1982 to 12.9 percent in 1992. The share of public consumption in GDP fell from a peak of 11.1 percent in 1986 to 9.9 percent in 1988, but appeared to have risen again to 13.3 percent in 1992.
Significant changes have taken place in the structure of GDP since the ERP began. Agriculture continues to be the bedrock of Ghana’s economy, accounting for more than 48 percent of GDP in 1991. Agriculture’s long-term importance has declined, however, in favor of that of industry, the contribution of which to GDP more than doubled from 1988 to 1991 when it constituted almost 16 percent of GDP, and in favor of services, the contribution of which was 35.3 percent in 1991. Notable changes have also occurred within the broader sectors: cocoa’s share rose from 5.6 percent in 1983 to 9.5 percent in 1991; manufacturing’s contribution increased from 3.9 percent to 8.7 percent; and construction output from 1.5 percent to 3.5 percent. \
Debt and Inflation
ERP policies during the 1980s resulted in increased external debts as well as in relatively high inflation rates. Most ERP projects were funded by foreign loans, notably from the IMF. At the same time, the government repeatedly devalued the country’s currency to raise producer prices for exports and to encourage production, but devaluation also led to price rises on all other goods as well. ERP attempts to promote production have, at least in the short term, resulted in higher debts and inflation.
World Bank figures show that Ghana’s total external debt exceeded US$4 billion by 1991; this figure rose to nearly US$4.3 billion in 1992. The external deficit and requirements for repayments on principal were met through additional loans. The debt figures revealed a strong reliance on official creditors, who accounted for about 92 percent of public disbursed debt, and on concessional funding, which approached 60 percent of total external debt in 1992. In addition, Ghana began to borrow on international capital markets in 1991. Nevertheless, the country’s debt service ratio fell at an annual average of 25 percent in 1991 and 1992, reflecting repayment of large IMF obligations and the ending of the government’s use of IMF funding at the end of 1991. An additional factor was debt cancellation by a number of leading bilateral creditors totaling US$1.5 billion since 1989.
In the early 1990s, the government was unable to reduce high inflation significantly. Although down from the staggering levels of the early 1980s when inflation hit 123 percent because of drought, inflation in the following six years averaged almost 30 percent. Recovery in agricultural output in 1984 and 1985 helped shrink inflation rates, but a marginal decline in food production in 1986 was accompanied by an upward trend in inflation. For the next four years, ever higher food prices, driven by devaluation, contributed greatly to high inflation. By late 1994, the country’s inflation rate stood at about 28 percent.
The promotion of Ghana’s foreign trade has been central to all government plans to revive the economy since 1983. Under the ERP, export-producing industries received the most direct support; they also received the most indirect support through the improvement of their proximate infrastructure. By promoting exports, the government sought to obtain foreign exchange essential to repay debts and to ease the country’s restrictions on imports. Imports, of course, are also necessary to upgrade many of the export industries hamstrung for lack of equipment.
Prior to 1983, economic conditions conspired to erode the terms of trade to such an extent that Ghanaians had reverted to smuggling goods across the borders as well as to trading on the black market on a significant scale. Ghanaians who had anything to sell could multiply their earnings by selling their goods in French-speaking countries, especially neighboring Côte d’Ivoire, and then changing the resultant francs into cedis at black market rates. Smuggling cut down the amount of foreign exchange available for official transactions, leading to a reduction in imports, which hit manufacturing enterprises dependent upon imported equipment and raw materials especially hard. As a result, many consumer goods were no longer available in Ghana, which further boosted smuggling across borders of those countries where such goods could be obtained. By 1982 the World Bank estimated that transactions on the parallel, or black, market constituted 32.4 percent of all domestic trade.
Since the start of the ERP in 1983, the government has introduced several policies to adjust the pattern of Ghana’s trade structure. These include devaluing the currency as well as raising producer prices for crucial exports such as cocoa to offset the advantages of smuggling such goods across borders. In addition, the government introduced an interbank foreign exchange market to facilitate currency exchange. To ease the importation of essential capital goods, but not necessarily consumer goods, the government revised and reduced numerous import duties and trade taxes.
By the early 1990s, government efforts had resulted in the restoration of many of Ghana’s historical trade relationships. Exports were again dominated by cocoa, which earned US$280 million in 1993. Other significant export commodities in 1993 were gold (US$416 million) and timber (US$140 million), followed by electricity, diamonds, and bauxite. Ghana’s nontraditional exports, such as furniture, cola nuts, and pineapples, have also increased significantly. On the import side, fuel and energy, mainly oil, accounted for 16 percent of 1990 imports; followed by capital goods, 43 percent; intermediate goods, 28 percent; and consumer goods, 10 percent, according to the World Bank.
In addition to supporting traditional export industries such as cocoa and gold, the government also attempted to diversify the content of Ghana’s exports. To encourage nontraditional exports in the fishing and agriculture sectors, the government offered to refund 95 percent of import duties on goods destined for reexport and even to cancel sales taxes on manufactured goods sold abroad. In addition, the government devised a scale of tax rebates ranging from 20 percent to 50 percent determined by the volume of total production that was exported. These incentives generated considerable response. By 1988 more than 700 exporters were dealing in 123 export products, the major items being pineapples, marine and fish products (especially tuna), wood products, aluminum products, and salt. By 1990, the last year for which figures were available, the value of nontraditional exports had risen to US$62 million.
In 1992 the government’s Ghana Export Promotion Council announced a plan to raise nontraditional exports to US$335 million by 1997 through increased market research, trade missions, trade fairs and exhibitions, and training. Among its most ambitious specific targets were increases in tuna and shrimp sales to US$45 million and US$32 million, respectively, by 1995, and increases in pineapple sales to US$12.5 million. In the manufacturing sector, wood products, aluminum goods, and processed rubber were targeted to yield US$44 million, US$42 million, and US$23 million, respectively. Earnings from salt were projected to rise to US$20 million.
In the early 1990s, Ghana continued to trade primarily with the European Community, particularly Britain and Germany. Britain continued to be the principal market for Ghanaian cocoa beans, absorbing approximately 50 percent of all cocoa beans exported. In 1992, Germany was the single most important destination of Ghana’s exports, accounting for some 19 percent of all exports. Britain was next, accounting for about 12 percent; followed by the United States, 9 percent; and Japan, 5 percent. The same year, Britain supplied approximately 20 percent of Ghana’s imports, followed by Nigeria, which provided 11 percent. The United States and Germany were third and fourth, respectively.
Ghana also belongs to the sixteen-member Economic Community of West African States (ECOWAS), founded in 1975 with headquarters in Abuja, Nigeria. ECOWAS is designed to promote the cultural, economic, and social development of its component states. To achieve these ends, ECOWAS seeks to foster regional cooperation in several areas, including removal of barriers to the movement of peoples and trade, harmonization of agricultural policies, improvements in infrastructure, and, as of 1991, renewed commitment to democratic political processes and non-aggression against member states.
Ghana also has a number of barter trade agreements with several East European countries, China, and Cuba. Under the agreements, imports of goods and services are paid for mainly by cocoa from Ghana. A major change occurred in 1991 when the German Democratic Republic (GDR, or East Germany) abrogated its barter trade agreement with Ghana following the union of the two Germanies. In spite of this, agreement was reached between the two countries to honor existing commitments. In late 1991, the Ghanaian government showed renewed interest in trade with the countries of Eastern Europe following the adoption of free-market systems in the wake of political upheavals in those countries. Ghanaian trade officials expect that the barter trade system will give way to open market operations.