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01.08.2022 Feature Article

FDI as a catalyst for economic recovery in Ghana – PART 1

FDI as a catalyst for economic recovery in Ghana – PART 1
01.08.2022 LISTEN

Let’s not pretend that we aren’t worried about the current global economic happenings that have thrown all predictions into disarray.

By this, I am referring to the decline in global economic growth; the rise of public debt above sustainable levels across major economies, especially in emerging markets; the degree of decay when it comes to public health due to the COVID-19 pandemic; and now the Russia-Ukraine war and its attendant consequences.

In all these uncertainties and global risks, no single country is an exception, as that’s the case for Ghana.

In this article, first originally written for and published by Ghana Invest, a Paris-based private diaspora-led organization dedicated to the promotion of Ghanaian trade, industry and investment abroad, I will be sharing some insights, which border on Ghana’s quest for economic recovery, which could be shorter or longer, depending on the approach that the government of the day chooses.

Foreign direct investment (FDI) is an integral part of an open and effective international economic system and a major catalyst for development.

The question is, how will Ghana catalyse FDI for its economic recovery?

Economic Outlook

According to a recent IMF report, Ghana’s economy is projected to remain relatively strong over the medium term, supported by higher prices for key exports and strong domestic demand. Growth is projected to reach 5.5% in 2022 and average 5.3% over 2022. Growth is expected to be broad-based, led by agriculture and services, and a relatively stronger industry sector.

‘Light at the end of the tunnel’

Let me make it simple for you to grasp. Ghana’s current economic situation fits the phrase, "There’s light at the end of the tunnel."

In the wake of the recent COVID-19 outbreak, global commodity price fluctuations, and the instabilities and uncertainties in and around Europe, the Ghanaian economy has suffered a great deal of economic difficulties at the macro and micro levels.

The war in Ukraine is expected to exacerbate already-existing fiscal and macroeconomic challenges, slowing growth to pre-pandemic levels.

The developments are expected to raise global prices for a number of key commodities, including food, fuels, fertilizers, and metals used in manufacturing, adding to Ghana's already-existing inflationary pressures.

However, one could argue that the road to recovery could be shorter than anticipated if governments had the political will to stay through on the fiscal discipline that’s required in times like these.

Rising debt levels

Ghana’s public debt has risen past the sustainable levels for an emerging economy. The country’s current debt is over 80% of its GDP.

The overall fiscal deficit doubled to 15.2% in 2020 and public debt increased to 81.1% in 2020, placing Ghana at a significant risk of debt distress.

These rising public expenditures in the context of persistently weak revenue performance have undermined Ghana’s fiscal and debt sustainability in recent years. As the country’s fiscal risks remained high, credible fiscal consolidation was required to reverse the unfavourable debt dynamics and reduce domestic refinancing risks.

Home-grown policies

In the wake of these fiscal management challenges, the government has developed and introduced policy measures and programs aimed at restoring fiscal discipline, reversing the fiscal deterioration, and putting the public debt on a downward and sustainable path.

The government’s 2022 budget sets forth an ambitious consolidation plan as it aims to raise revenue from 16% in 2021 to 20% in 2022. Fiscal measures would reduce the deficit from 12% in 2021 to 4.5% by 2024.

E-Levy

In a move to stimulate domestic revenue growth, which is ideal in this situation looking at the impossible state for the country to borrow from the international capital market, the government has introduced an electronic transfer levy, which has faced steep opposition from the Ghanaian populace.

The E-levy is estimated to generate 1.4% of 2022 GDP.

To be continued…

About Author

Paul Frimpong, CGIA, FCCE

Paul Frimpong is Development Economist and award-winning entrepreneur. He’s currently the Global Head of Strategy & Membership at the Institute of Certified Chartered Economists (ICCE).

This article is originally curated for and published by Ghana Invest.

www.charteredeconomist.org

[email protected]

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