Reset Ghana’s External Sector -IFS

The Institute of Fiscal Studies (IFS), an economic policy think tank, has recommended to the government to reset Ghana’s external sector to ensure proper management of the economy.

According to the IFS, the government could reset the external sector by changing the control structure of the country’s two major merchandise exports.

The recommendation is one of six “critical areas of economic management” the IFS has proposed ahead of the first budget of the Mahama government.

Presenting the six areas of priority for potential economic rebound in Accra,on Wednesday, February 26, 2025 the Senior Research Fellow, IFS, Dr. Said Boakye, noted that Ghana’s merchandise export has had little effect on the strength of the cedi relative to foreign currencies.

He showed a table on PowerPoint to illustrate the insignificant effects of merchandise exports on the strength of the cedi.

The table showed that in 2017-2019 average merchandise exports were US$14,815 million; 2020-2021 was US$14,600 million, and 2022-2023 was US$17,099 million.

For average merchandise trade balance, in 2019-2020, it was US$1,751 million; 2020-2021 was US$1,571 and 2022-2023 was US$2,784 million.

The average current account balance for 2019-2020 was US$1,970 million; 2021-2022 was US$2,338 million; and 2022-2023 was US$-55 million.

“These clearly show that merchandise export (and its effects on merchandise trade and current account balances) is an insignificant determinant of the value of the cedi against foreign currencies,” Dr. Said remarked.

He continued that, “It is important to note that the dependence on external borrowing as the means of managing the value of the cedi, which causes external debt buildups and external debt service difficulties, has been very problematic in Ghana.

“This is because it has largely been the cause of the numerous exchange rate crises Ghana has experienced, which has usually triggered full-scale macroeconomic crises. The current economic crisis, which began in 2022, is a case in point. To stop this from recurring in the future, IFS calls on the new government to reset Ghana’s external sector.”

MEASURES NEEDED

In order to reset Ghana’s external sector, the IFS has proposed to the government to change the ownership structure of the country’s major merchandise exports. The institute wants the government to get actively involved in the gold and oil sectors by taking commanding interests through joint venture arrangements.

An alternative to the above, the IFS said, is the use of a production sharing agreement, explaining that these will ensure that the bigger part of export revenues from these commodities returns to Ghana in hard currencies for the defence of the cedi and thus help prevent future crises.

Thus, taking controlling interests in the extractive sector through joint venture arrangements or the use of production sharing agreements is of critical importance for two reasons: (1) it is needed for the generation of adequate fiscal revenue for effective fiscal management, and (2) it is instrumental in helping the country generate enough actual export revenue in foreign currencies for the stabilisation of the cedi without the negative effect of external debt buildups and large foreign debt service payments, which make Ghana’s economy crisis-prone. 2.4 Set realistic budgetary targets to ensure fiscal credibility.

OTHERS

The other five critical areas recommended by the IFS were ensuring macroeconomic stability through strong fiscal consolidation and reduced monetary growth; boosting economic growth to reduce unemployment through expenditure prioritisation and strategic intervention in agriculture; setting realistic budgetary targets to ensure fiscal credibility; refraining from returning to the international bond market at the least opportunity; and fighting corruption with seriousness and effectiveness.

DAUNTING

Concluding the presentation, the IFS, through Dr. Said, acknowledged that the Mahama government has a daunting task ahead owing to the backgrounds of the selected priorities and recommendations.

“We, however, believe that if the government is able to muster courage and implement what we have recommended in this paper with dedication and commitment, significant strides can be made,” the IFS added.

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