For the occasional Ghana watcher, the story probably began in February 2022 with Moody’s decision to slash Ghana’s credit rating from B3 to Caa1, indicative of “very high credit risk”.
The country’s authorities went berserk and accused Moody’s of incompetence, and effective sabotage. Yields on Ghana’s international bonds shot up by 300 basis points almost overnight and difficulties accessing the international capital markets congealed to a shutout. Interest in Ghana peaked around the world. Domestic actors who had been shouting themselves hoarse for more than a year about alarming rates of debt accumulation and fiscal looseness watched bewilderedly as the international charade of surprise gathered steam.
Two years on, much has happened. After “homegrown” revenue-boosting measures, like a highly unpopular tax on mobile money and digital payments (panned by analysts but doggedly pursued by the government), and feeble attempts at cutting government expenses (so-called “fiscal consolidation” efforts) failed, the country dashed off to the IMF. Given the severity of the fiscal burden, it was required to freeze servicing on international, and most domestic, debts before unlocking a $3 billion bailout package.
The debt restructuring exercise was highly dramatic. The aloof finance ministry was forced to acknowledge the power of social forces as it locked horns with unions, pensioners, and former Chief Justices. Eventually, though, Ghana did enough to get the IMF to release upfront a first tranche of $600 million. The money came along with several ringing endorsements that have continued as the program enters its ninth month.
The first review was recently completed after a major prerequisite was met: progress with restructuring the country’s bilateral debt. Ghana came out with flying colours. Another $600 million was airdropped into government’s vaults. The government and the IMF have been hard at work trying to get a new tune of recovery, of a magical “turnaround” in economic fortunes, to resonate loud and clear at home and abroad. Truth be told, they are struggling.
As already recounted elsewhere, the talk of “turning the corner” has so far not been able to register. The ruling party recently forced the President to remove his beloved Finance Minister in hopes that a new man with stronger sensitivity to local politics could contribute better to saving the party from a looming defeat at the polls in December 2024.
To the chagrin of the IMF and the government, a drop in inflation from a crisis peak of 54% to 23.2% last month, and in the domestic currency’s depreciation rate from a cumulative 55% between January and October 2022 (over 30% by year-end) to about 15.5% in 2023, has not had the political and public opinion effects that the IMF and the authorities had hoped for.
What more sophisticated observers are interested in, however, is whether the current improvements are sustainable and if so, whether the mood in the country can eventually be salvaged ahead of the elections scheduled for December 2024. The IMF seems rather confident. They see more data than most analysts and they have some pretty solid technical whizzes. Some leading analysts have aligned with such forecasts. The African Development Bank expects 2024 to end with inflation at 20.4% (higher than the Bank of Ghana’s own projection of 13.5%). Fitch says it will average 18.6% for 2024 and end the year at 13.1%. The Economist Intelligence Unit concurs: 18%, they say.
Such broad-based technical consensus cannot be treated lightly, yet one cannot shake off the feeling that all these macroeconomic and econometric modelling types are not looking much beyond their rose-tinged crystal balls to factor in mass behavioural patterns in the Ghanaian economy. A particular pattern comes to mind, something best described as, “uncertainty apathy”. This phenomenon is likely present in other African countries besides Ghana. In Ghana’s present circumstances, its principal effect is likely to be a prolongation of the secondary effects of the 2022 crisis throughout 2024.
The easiest way to explain “uncertainty apathy” is to narrow its manifestation to a specific economic context: business confidence. If one were to examine any business confidence survey graphs from markets such as the United States, the United Kingdom, or South Korea, over any significant period, one would immediately notice considerable bumpiness.
Economic actors process information about future events in decisive ways in an attempt to minimise the impacts of uncertainty. This sometimes leads to massive overreactions, self-fulfilling doom sentiments, and sharp corrections. But all that volatility, stressful as it is, often means that, in general, a solid recovery is often very clear due to the decisiveness of prior proactive business measures.
My stylised observation is that, in Ghana, and very likely some other major African economies too, such decisive proactiveness tends to be rarer. Economic actors and decision-makers appear to be somewhat apathetic about the future significance of uncertainty and are more willing to wait and see and to adapt to the times. Any business confidence survey graph in Ghana or Nigeria, therefore, typically shows a remarkable smoothness of the curve, with the occasional deep bend when a truly epic black swan event like COVID-19 turns up.
Economic actors’ uncertainty apathy accounts for an interesting array of poorly studied phenomena in the Ghanaian and, very probably, African context.
For example, despite Africa having been in the commodities exchange game for quite some time, at least since the mid-90s when a couple were launched in Zambia and Zimbabwe, and despite the praise some of these exchanges, like the venerable one launched in Ethiopia in 2008, have received, there have so far been no serious efforts to introduce uncertainty-driven derivatives like futures and other complex synthetics.
Contrast the pattern with, say, Bangladesh, where the first major commodities exchange was launched in 2022 and yet plans are already underway to incorporate futures by leveraging Indian technology. In Latin America, derivatives powerhouses like Grupo Matba Rofex are exploring regional dissemination of such products in markets with only recent exposure to commodity bourses.
Even classical stock markets in Ghana frequently startle analysts because of their sheer stolidness. In situations where significantly impactful information is circulating, share price movements generally remain frigid and viscous. Many analysts just blame low liquidity without realising that the low liquidity is simply a product of low reactivity. As one researcher, after reviewing dynamics in several African stock exchanges, put it, “However, expected growth does not generate a positive premium, meaning that the Q model is equivalent to the Q5 model for explaining African stock returns.” Not surprising then that insider trading in sub-Saharan Africa (outside South Africa) has never even caused a ripple.
Across broader trading markets, beyond the stock exchange, hedging practices are extremely rare and policy-making rarely incorporates scenario modelling as a tool of uncertainty-suppression.
Since noticing this pattern, this author has been reinterpreting some long-standing policy debates in Ghana. Inflation management has for decades pitched a group of eminent market practitioners against the central bank. The market gurus lament the central bank’s habit of setting interest rates with a rearview mirror instead of doing so on a forward-looking basis. The central bank actually does have a more nuanced system based on a model (called QPM) it developed in partnership with the IMF. The simple truth, however, is that, from the perspective of market observers, the process comes across as if they are constantly in near-term reactivity mode.
The relative rarity of actual bank runs is another mystery given how often central banks have had to step in and shut down banks, whose weak ratios have long been in the public view (cf: Silicon Valley Bank). There is also the sheer durability of real estate bubbles in Africa’s biggest cities and the stickiness of insurance models, among many other patterns.
The relevance of the uncertainty apathy trope to the Ghanaian situation, as hinted, is to be found in the “stretching out” of reactions to likely future developments due to a kind of indecisiveness more akin to apathy. For example, all the indicators in the second half of 2023 showed an escalating trend in demand contraction. Yet, Purchasing Managers Indices, have still not reflected the full magnitude of what real sector feedback has been unpacking to date.
Retail demand in Ghana fell from $350 million in the third quarter of 2021 to barely $250 million in the third quarter of 2023. Cement sales dropped from more than 803,000 tonnes in the third quarter of 2022 to roughly 583,000 tonnes in the third quarter of 2023. Vehicle registrations (a proxy for new purchases) dropped nearly 20% in the third quarter of 2023 compared with the third quarter of 2022. Secured bank loans to the formal sector dropped a whopping 54.9% at the end of 2023 compared with year-end 2022. A clear shift to sub-prime borrowing was underway as business actors resorted to the grimier parts of the credit markets, where rates easily top 60% per annum. Indeed, the average lending rates among the mid-tier “finance houses” in Ghana topped 60% in the last quarter of 2023. Unsurprisingly, the share of secured loans provided by banks dropped by a mind-boggling 32 percentage points and still hovers around 2%.
Amid all this craziness, the Bank of Ghana was still reporting an uptick in the composite index of the real sector by 10% in the last quarter of 2023, in continuation of an upward trend. Only for 2024 to open to a reversal of business confidence (even if at a lower rate than warranted) as measured by the, clearly lagging, S&P Global Purchasing Managers Index, and the first-ever drop in business confidence in January since records began.
Port data shows continued plummeting of import levels, with a strong bearing on intermediate goods inventory levels in the country, a precursor of supply-side constriction. Hotel occupancy rates and activity in the hospitality sector generally have also seen severe cuts. Data from the fixed-income bourse also show virtual desertion of the restructured bond market by foreign and domestic investors.
All this is reminiscent of the early days of the crisis in January 2022. The S&P Global Ghana PMI was at 49.6. The indicator stayed at an average of 48 until August 2022 until the full effects of the crisis had played out before the indicator tumbled to 45.9, and eventually bottomed out at 44 in October 2022.
The IMF and the government’s bold expectations of jacking up government revenue outturn to more than 17% of GDP because of the “signs of stabilisation” witnessed in the leadup to the program review in January now looks fanciful given the fragility of both demand and supply conditions. At any rate, the total expected take from specified new tax measures amounted to about 1% of GDP. With the government now in retreat from unpopular taxes in order not to further rile the electorate, as exemplified by the abandonment of a new VAT on electricity measure, the revenue number seems likely to be stuck around 13% of GDP.
Clearly, the country will not be ready for the next IMF review in the Spring of 2024, with analysts now hinting at a June or even mid-summer timeframe, at least for the next tranche disbursement. Nonetheless, given that this is also the timing market observers are working with for the completion of the Eurobond debt restructuring exercise, it would seem as if a confluence of good news around this time should vindicate the rosy forecasts of a continuing economic rebound into December. Still, the reader may recall the downside risks posed by the concept of uncertainty apathy.
These likely positive developments involving the progression of the agreement in principle with the country’s bilateral creditors to a full closure and the possible resolution of current impasses (such as the Ghanaian demand for an extended debt service moratorium and investors’ preference for a contingent instrument, through which their recovery rates will track Ghana’s economic performance) stalling a quick deal with Eurobond investors are not being decisively factored into domestic economic sentiment. So, as the ongoing domestic-side demand crunch and supply-side gloom prevent an alleviation of the cost of living crisis, the government’s international focus will slacken. The ruling party’s push for the government to ditch even the half-hearted push for real austerity will intensify.
The new finance minister will be under unbearable ruling party pressure to undo some of the patchwork of measures the previous minister set up to pile arrears and defer government obligations to release long overdue payments across the economy. Such fiscal backtracking may prematurely unwind a massive arbitrage circuit involving the overvaluation of the domestic currency that has led to a doubling of “transactions in liabilities to non-residents” between the first half of 2022 and the first half of 2023, a possible proxy for borrowing in forex by speculators to buy high-yielding local debt. The effect would, naturally, be felt in renewed pressure on the exchange rate, now at 13.20 units to the Dollar in the open market window. Should the arbitrage unwind quickly, a slide past 15.00 will materialise within three months.
The central bank’s unprecedented commitments to open market operations to defend the monetary policy rate, now at 29%, and sterilise accumulating reserves to evenhandedly offset the effects of a continuing expansion of broad money, will keep straining its balance sheet to a point of incontinence. The central bank, having already hiked the reserve requirements for banks, has precious few tools left in the box. It is a classic stagnation trap.
There is thus a very real chance of significant slippages in the IMF program.
Recent rolling blackouts have served as a reminder of uncleared arrears across the energy value chain. Whilst the government claims that “reconciliation” has brought energy sector debt to just $1.2 billion, industry insiders continue to insist that taking the full span of liabilities into account, the amount exceeds $2 billion. In a recent speech to Parliament, the President cooed about how by sticking strictly to a deal to pay power producers a flat amount of $43 million a month, the woes in the sector are receding. Only for data in January to debunk this claim: the country has been struggling to pay even $9.5 million a month, and half of the companies got nothing that month. The state-owned electricity distributor says that it has not created any more arrears since July 2023, yet the country’s biggest private power producer adduced evidence in a recent standoff with the government to show that about 80% of its invoiced bills are not cleared in some months.
We have also witnessed to heightened risks of insolvency across the cocoa value chain, a situation that is partly responsible for a reduction in volumes by more than 40% in Ghana’s cocoa output from recent peaks. Both the state-controlled cocoa aggregator and downstream processor are effectively bankrupt. A few weeks ago, creditors had to resort to auctioning off the assets of the former.
In light of these facts, it was incredibly baffling to see the likes of Fitch and EIU projecting 2024 year-end inflation at ~18% taking their cue from the Bank of Ghana, which projects a 13.5% figure. Due, once again, to the slow pricing-in of weak rainfall trends, food inflation has been dragging out as the effects build up over time. Long-delayed transport fare adjustments, and clear signs that without a tariff adjustment, the water and electricity utilities will crumble, should all have fed into inflation anticipation in any other setting. But in Ghana, these obvious forward developments have only been steadily infusing into inflation numbers. The reality will keep dawning on economic actors as the year progresses, pushing year-end inflation closer to the 30% mark.
In an economic environment exhibiting greater aversion to uncertainty, many of these adverse information points would, in fact, have been “priced in” from the last quarter of 2023. The alluring imagery of recovery would not have emerged, and the government would have been forced to make greater efforts to deal with structural problems much earlier in the IMF program. Because this was not done, and decisive actions keep being postponed, it is very likely that rather than the sharp turnaround and steady upswing towards much better times expected by the IMF and the authorities, we must brace for a long drawn-out adjustment to subdued economic activity, stubbornly persistent inflation, extended pressure on the currency, and even timeline distensions for key IMF and debt restructuring milestones.
Whilst Ghana offers some compelling examples, Nigeria is the living spectacle of the uncertainty apathy effect writ large. Decisions taken by the previous government failed to exert their full effects in time to spur sufficient crisis reaction. Nearly a year into the tenure of a new administration, the prolonged impacts are only now being fully felt. Multinationals that should have adjusted more sharply two years ago are now declaring massive financial losses, the currency is in free fall, and hunger and despair is threatening to crush the spirit of an indomitable people. The new government’s rush into liberal market reforms without adequate institutional foundations happened because the extended playout of economic disaster deceived them about the sheer extent of the macroeconomic rot. Now they know. Ghana, sadly, is underestimating similar lagging, snowballing, phenomena.
Slow-motion economic info-signalling paradoxically requires decision-makers, planners and analysts to develop extra keen senses to buck the usual trend of decisiveness. Else, like frogs in boiling water, by the time the heat gets under the skin, an explosion would already be underway.
