﻿Why Ghana is Africa's most expensive country to live in in 2022
Ghana’s economy is very much known as the Guggisberg economy. Sir Gordon Guggisberg was
a British empire colonial administrator in what was then Gold Coast (1919-1927). He designed an
economy to focus on the export of raw materials and importation of finished goods. Hence the
moniker. Any economy with strong fundamentals is resilient, has a well-developed base,
is industrialised, and creates jobs. That kind of economy can mobilise resources domestically,
without much reliance on external support, and can even borrow at a lower cost. The citizens
of this kind of economy have good roads, good transportation, good health, and good educational
systems. They are well-resourced and free from civil unrest. For decades, African countries
have chalked up successes but these have not been significant enough to transform their economies.
Most countries on the continent are still far from achieving these indicators of an
economy with strong fundamentals. They often export primary commodities and import finished
products. The Ghanaian economy is no exception. Cocoa and gold are still Ghana’s major exports.
Ghana is Africa’s top gold exporter at 138.7 tonnes. It has since added oil and gas,
and some non-traditional commodities. Ghana’s reliance on exporting raw materials and importing
finished products contributed to the country’s persistent demand for, and less supply of,
foreign currencies. This is why, for a long time, Ghana’s cedi has been depreciating
against the other major trading currencies. Ghana is one of Africa's most prosperous nations,
and this is reflected in the cost of living, which is higher than in many other African nations.
Inflation is one of the biggest enemies to wealth creation. It silently but consistently erodes
the value of money unaware. In Africa, it is a constant problem. And even though many of those
it affects are of the damage it can cause, they do feel its effect in the form of high prices,
expensive food items, etc. Whereas inflation is a general problem across the continent, some
countries have it worse. Ghana is one of these countries. According to Ghana Statistical Service,
Ghana's inflation rate accelerated to 19.4% in March of 2022, up from 15.7% in February.
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Ghana is ranked among the 20 most expensive countries in Africa to live in. A BBC Ghana
documentary claims that Ghana is one of the most expensive places to live. Since the pandemic
began, prices for goods and services have shot up, and some people claim the situation is getting
intolerable proportions. Rising food and fuel costs have an impact on every aspect of society.
Ghana's economy is reliant on imports. Due to a decreased supply of foreign exchange from exports,
the nation must continue to purchase foreign currency to cover its import needs. When exports
exceed import costs, the nation occasionally records a net gain, but these are merely
theoretical gains. The foreign businesses that do business there repatriate the actual funds.
They are not prevented from remitting all of their profits by the retention law.
The cedi has always lost value in accordance with the seasons. The worst months are February and
March. Multinational corporations with operations in Ghana repatriate profits during this time.
Additionally, regional companies that had purchased imported goods on credit prior to the
Christmas season pay off their debts. These are the main reasons for the depreciation of the cedi.
And the fundamentals haven't changed all that much over time. Because imports slowed as a result of
border closures by the majority of countries, the exchange rate was relatively stable,
particularly during the peak of the COVID-19 period (2020–2021). But as of February 28, 2022,
the Ghanaian cedi, which had lost 7.6 percent of its value in the first two months of that year,
was the worst-performing currency among the top 15 African currencies.
Since most businesses in Ghana are now recovering from the COVID-19 shock, there is an
increased demand for foreign currencies, which is the primary cause of the recent depreciation.
This extends beyond Ghana. Globally, the majority of businesses are regaining
their footing and ramping up production. The nation's inability to obtain loans from
the global capital market is the second factor. Successive governments have attempted to control
the depreciation of the cedi by borrowing from the international capital market,
issuing domestic bonds denominated in dollars, and exhausting the nation's foreign exchange
reserves because Ghana is unable to produce enough foreign currency through exports.
The cedi depreciates whenever Ghana's sovereign bond is no longer profitable and
there are insufficient reserves to support it. The happenings in March 2019 paint the ideal picture.
The US Federal Reserve raised its interest rate in that month,
making it more lucrative to draw investors. In response,
investors disposed of sovereign bonds issued by developing nations like Ghana.
Following the pandemic, the global economy is recovering, which is driving up inflation
worldwide. From 2020 to 2022, inflation increased from 3.1 percent to 3.8 percent.
From 1.35 percent in December 2021 to 7.46 percent in February 2022, the US
inflation rate has increased. In response, the US Federal Reserve raised the interest rate,
making US government bonds very alluring. In order to buy bonds from developed economies like the US,
many investors are currently selling their bonds in developing nations like Ghana.
Any currency's import costs increase and export costs decrease when its value is depreciated.
Some nations purposefully undervalue their currencies to reduce the cost of exports.
However, because Ghana's export sector is not very developed, the nation is unable to benefit
from the depreciation of the Cedi by increasing exports and generating more foreign exchange.
The price of imported goods has increased as a result of currency depreciation.
The majority of imported goods are intermediate goods used in domestic production.
Rising inflation is the result of this. For instance, since a larger portion of
refined fuel is imported, the ex-pump prices of fuel heavily depend on the exchange rate.
The demand for crude oil has increased globally as most sectors are now recovering from COVID's
effects. The supply of crude oil has also decreased since Russia's invasion of Ukraine.
It's anticipated that the price of crude oil will keep rising for some time.
The ex-pump price of fuel in Ghana is anticipated to continue increasing, at least through the end
of 2022, as a result of the combination of the cedi's depreciation and rising global
crude oil prices. The Bank of Ghana will raise its policy rate in response to high inflation
in an effort to rein in the expansion of credit. The cost of borrowing will go up as a result.
Eventually, higher borrowing costs will result in higher production costs,
which will further drive up inflation. For the country to have enough foreign currency,
industrialization, adding value to exports, increasing domestic production, and reducing
imports are the long-term solutions. To hasten the industrialization process,
the government should improve its one-district-one-factory and modernization
of agriculture policies. The government's ability to increase domestic revenue will enable it to
pay off its debts and fund development without heavily relying on borrowing in the medium term.
The government should borrow money from abroad and import foreign currency as a temporary fix. This
is only possible once the government has proven to the investment community that it is capable
of raising domestic revenue to pay off debt. In order to access Eurobonds, the government
urgently needs to update the electronic levy's (e-levy) design and pass it
as soon as possible. International investors will be alerted by the passage of the e-levy
and the reversal of the 50 percent benchmark values at the ports that the government of Ghana
is on the path of fiscal consolidation and that it can increase domestic revenue to service its debt,
according to international credit rating agencies. By focusing on other revenue sources like property
tax, tax breaks, and natural resources in the short term, the government can also demonstrate
its capacity to mobilise domestic revenue In June 2022, Ghana's inflation rate was
about 30%, leading to the highest cost of living in 20 years. The cost of food
and other goods is increasing daily, making life more difficult for regular consumers. The reason
for this crisis is that, despite admitting that Ghana's economy is in serious trouble,
the government will not take responsibility for the country's financial mismanagement.
In contrast, the COVID pandemic and Russia's invasion of Ukraine are to blame. Even before
the pandemic struck and Russia invaded Ukraine, there were worries about the nation's public debt,
which as of 2021 central bank figures stands at $45.5 billion with a corresponding debt-to-GDP
ratio of more than 77 percent. The government has come under fire for what critics claim is poor
economic management, which started even before the coronavirus pandemic and the conflict in Ukraine.
According to some analysts, the debt-to-GDP ratio has already surpassed the 81 percent threshold,
and the government's need for a bailout from the International Monetary Fund
(IMF) appeared imminent. The Ghanaian government recently
declared that it had contacted the IMF to request additional funding to stabilise the
economy. The government abruptly reversed course after key policy advisers and cabinet members
vowed that Ghana wouldn't request another programme from the IMF. This is a good deal,
and if Ghana is granted an IMF bailout, it will be the country's second in eight years. Additionally,
it would be the 18th time the fund has saved Ghana. Its previous three-year agreement, which
received $918 million in support, was extended by another year to end in 2019. Ghana reportedly
hopes to close a $2 billion deal this time. Ghanaian President Nana Akufo-Addo who has in
the past hailed the mantra of "Ghana-Beyond-Aid" told party supporters over the weekend that his
government is "going to negotiate a good deal with the IMF. He hopes that this is the deal that would
enable Ghana to revive their economy and carry out the task of constructing a more robust economy
than the currently in place. The decision to approach the IMF,
according to Ghanaian economist Tsonam Cleanse Akpeloo, was "to be expected because the
country relied very heavily on imports." The majority of goods used in the nation
are imported, so any disruption of the international financial system will have
an impact on Ghana, according to Akpeloo. He continued by saying that because Ghana's
economy was already in rough shape, the pandemic and the conflict in Ukraine would
only make matters worse. The Ghanaian government has also come under fire for amassing debt at a
time when revenue mobilisation was in trouble. According to some analysts, that was one of the
main reasons for the current economic problems. "At the end of the day, there was no choice for
the government but to resort to going to the IMF to restore fiscal discipline
because of the high expenditure and, for that matter, high spending vis-à-vis decreasing
levels of revenue," Akpeloo said. It's ironic that despite low ratings,
the Ghanaian economy continues to struggle with borrowing. Ghana has
spent $19.6 billion on average just to pay interest on prior borrowing.
Ghana's economy has already been downgraded by rating agencies, making it challenging
for the government to take on more debt. The government pushed through a policy
that resulted in strong opposition from Ghanaians and decreased use of electronic payment systems:
an electronic levy on mobile money transactions. The expected revenue from the new tax did not
meet expectations, and the president decided to negotiate a bailout with the IMF because
there was no other way to stabilise the nation's finances. Ghana, according to Akpeloo, has the
resources to maintain a thriving economy; what it lacked was "discipline. the ability to budget."
On the promise of ambitious initiatives like free senior high school and the
construction of factories in each district of Ghana, among others, the
Akufo-Addo administration won the 2016 election. It has been determined that such social programmes
contribute to the government's high spending portfolio. Akpeloo asserts that "most decisions
[concerning government initiatives] are more political than economic, which is unfortunate."
Since most of their projects "are so ambitious without a corresponding source of revenue
financing so there is always deficit financing and putting enormous pressure on the public purse,"
in his opinion, governments need to exercise more restraint in their spending.
However, there are worries that a programme backed by the IMF will mean the end of some
ambitious social intervention programmes, which could ultimately harm regular people.
In Akufo-assurance, Addo's "We will be able to negotiate and put into action
a favourable arrangement. We already have, and we will do it once more "In many cases,
the goal of such austerity measures is to reduce government spending in the short term
in order to regain long-term fiscal stability and investor confidence in the economy.
In anticipation of a hiring freeze in the public sector, labour unions like the Ghana
Trades Union Congress (TUC) have already criticised the decision
to approach the IMF. Going to the IMF,
according to the TUC, is bad for Ghanaian workers,
and institutions like the IMF are not the answer to the nation's economic problems.