How Did Ghana Fell Off the African Success Wagon?

Ghana's Success Story Goes Dark
President Obama was fan of Ghana’s economic success record, but cheers haven’t been enough to keep the country on the rails. But what went wrong?

By Adam Minter,

JUST a few years ago, Ghana seemed to be one of Africa’s few good news stories. The country was on a path to paying back the international creditors it had relied on for decades, and was widely lauded for managing five peaceful and democratic transitions of power since 1992.

When U.S. President Barack Obama visited the country in 2012, he called it “a wonderful success story economically,” and praised its government for “working for the people of Ghana, and not just the few.” 

But that same year, blackouts became a regular occurrence in the capital city of Accra; just three years later, they’ve become an ongoing catastrophe. Residential power outages take place in 12-hour blocs, every 36 hours; commercial ones can be even longer. When the lights go out, factories go idle in the middle of production and people conducting business are forced to make their way to the lobbies of hotels that have their own generators. Desperate and angry citizens turn to dedicated apps to track the outages or just vent about them.

Slowest growth in 20 years

The blackouts, predictably, are playing havoc with Ghana’s economy—and at the very worst of times. Thanks to the bear market in commodities and the drop in oil prices, Ghana’s economy is facing its slowest growth in two decades. Desperate and out of options, Ghana recently approached the International Monetary Fund for help; last week, the IMF obliged, signing off on a $918 million package of loans designed to get the country back on track.

But the rampant blackouts give plenty of reason to consider whether Ghana was on the right track in the first place.

Ghana’s rise was far more fragile than most observers acknowledged.

During its best years, during the early 2010s, Ghana’s growth rate was largely fuelled by offshore oil drilling, as well as boom markets in gold, cocoa and other commodities that attracted foreign investors. But when the commodity boom burst and oil prices plummeted in 2014, foreign investment dried up and Ghana’s economy slowed precipitously. After achieving a growth rate of 15% in 2011, Ghana saw only 4.1% growth last year. Meanwhile, the cedi, Ghana’s currency, lost 31% of its value in 2014.

The slide wouldn’t have been so steep if Ghana’s government had been diligent about managing its oil and tax revenues during better times. But the country largely failed to save or invest its commodities windfalls. In 2012, the country already had a budget deficit amounting to 12% of GDP; in 2014 it was hardly any better, at 9.2% of GDP.

Threw away good money

And there’s little sign the government spent wisely, either. Roads throughout Ghana are poorly maintained and overcapacity. There are also obvious deficiencies in the country’s energy infrastructure. And none of this is news to the government. Ghana has had intermittent electricity outages since at least the 1990s.

The problems then were much the same as now: over-reliance on hydropower that drops off during low water periods (such as now) and inadequate transmission infrastructure. Yet the government never bothered using its commodities windfalls to fix these long-standing problems.

IMF lays down the law

Many Ghanaians assume that the country’s money disappeared into the vortex of corruption that define so much of Ghanaian life.

In February, Ghana’s auditor general provided some tinder to an already explosive situation when he revealed that money earmarked for providing electricity had instead been spent on 38 luxury cars for government officials. Not long after, large street protests broke out over the power outages, and the government mismanagement allegedly responsible for them.

Fortunately, the IMF is not oblivious to these problems. Its aid package requires that the government improve the transparency of its budgeting process and expenditures.

It also requires a civil service hiring freeze, a 17.5% tax on petroleum, and the cessation of energy subsidies. The last measure is particularly important, both as a means of controlling government spending, and as a way to free utilities from the burden of charging below-market rates mandated by the government.

Presumably, the greater revenue (and profits) will encourage them to invest in power generation and transmission capacity.

These are all excellent ideas, but with President John Dramani Mahama’s government already unpopular, and facing an election in 2016, there’s considerable doubt—among ratings agencies, for starters—that he has any intention of meeting Ghana’s end of the bargain.

It would be a tragedy for Ghana if he didn’t. The IMF plan is designed to restore investor confidence in the country, a necessary prerequisite to diversifying Ghana’s economy away from the commodities that sent it spiraling into its current crisis.

But even more important is the long-term planning that it will require of a government that doesn’t seem to have much interest in planning beyond the current crisis. If it hopes to keep the lights on in Ghana, it’s going to have to change that approach.