Ghana’s economy, the once touted shining star and gateway to Africa, is now one of the struggling and ‘junk economies’ on the continent. However, the recent revelation by the Finance Minister, Ken Ofori-Atta that Ghana’s current account recorded surplus might give many economic watchers the impression that the economy is on the right path to recovery with a boom in employment and other macro economic indicators.
Ostensibly, a current account surplus means an economy is exporting a greater value of goods and services than it is importing. A country with a current account surplus will have a deficit on the financial/capital account. That is, a country with a current account surplus will have surplus foreign exchange it can use to invest in other countries.
Delving deeper into the fundamentals of current account balance, it means that in theory, one could expect a current account surplus (X-M) to boost employment because it is indicative of higher domestic demand. Moreover, high exports (X) leads to increased employment in the export sector.
The reverse is true, as lower import spending may mean Ghanaians are spending more on domestic goods rather than buying foreign goods. Greater demand for domestic goods helps domestic employment.
Nevertheless, the only reason Ghana registered current account surplus for the first time in several years is the suspension of external debt service by the government, which helped the current account balance into surplus.
According to data from the Bank of Ghana, the trade surplus widened in the first 4-months of 2023, hitting $1.6 billion (2.2% of Gross Domestic Product) compared to the ¢1.2 billion (1.6% of GDP) recorded in the same period last year.
The wider trade surplus was supported by a sharper compression in total imports to $4.0 billion (-13.9% year-on-year) compared to a 3.6% year-on-year decline in total export revenue ($5.6 billion).
The wider trade surplus combined with an improvement in the services accounts swung the current account balance from a deficit in quarter 1, 2022 into a surplus of $661.4 million (0.9% of GDP) in first quarter of 2023.
Increase in Remittances
In addition, the country managed to increase its remittance inflows which also contributed to the current account surplus – a positive development for the economy.
During quarter 1, 2023, inward remittances increased by 16.3% year-on-year to $1.2 billion, combining with the debt service suspension and the trade surplus to churn out a surplus on the current account.
Ghana, one of the world’s biggest producers of both gold and cocoa, is suffering its worst economic crisis in a generation. The country has just signed a new bailout programme with the International Monetary Fund (IMF) worth $3bn over three years to help ease the problems.
Consequently, the country received the first tranche of the International Monetary Fund cash of $600 million under the ongoing Fund programme.
According to the Bank of Ghana, the forex Inflow also supported the gross international reserves to $5.7 billion, equivalent to 2.6 months of import cover as of last month, 2023.
Even with the IMF loan, the shocker is, the country is unlikely to make it out of the trenches. Despite recently declared the number one producer of gold in Africa, one of Ghana’s basic problems is that it does not earn enough through exports to pay for everything it imports.
The IMF programme is expected to significantly slow the rate of inflation and ensure a stable local currency. All of this will benefit ordinary Ghanaians through stable prices of basic commodities including imported ones. However, if past experience is anything to go by, this cash injection from the IMF will not necessarily solve the country’s long-term economic problems.
This new bailout programme is for a maximum period of three years and after that, many are asking whether things will get bad again? Even though the information minister Hon Kojo Opong Nkrumah once said “We have other programmes to help us to bring back growth, help the private sector and get the cost of living under control,” the obvious answer based on the previous bailouts is that the bailout will address current challenges, it will not lead to poverty reduction, job creation or salary increases.
All in all, even though the current account recording surplus is a positive thing for the economy, a potential resumption of external debt service in 2024 will revive pressure on the current account balance if debt restructuring is not secured ahead of debt service resumption.