IMF-induced austerity to drive down growth 2.3% – Report

Databank Research is projecting an economic slowdown this fiscal year, on the back of the impending International Monetary Fund (IMF) deal which it says will result in compelled austerity.

It is estimating growth to range from 2.3 percent to 3.3 percent in 2023 – lower than the real gross domestic product (GDP) growth of 3.6 percent for the first nine months of 2022. The lower end of the projection also falls short of official growth projections at 2.8 percent for 2023.

This was disclosed in Databank’s Quarterly Strategy Report titled ‘In the Woodland, Banking on the IMF to Discover Path’, wherein it also anticipated slower than expected growth in specific sectors.

“Ghana’s post-COVID economic recovery is in for a long ride. While the imminent IMF programme is expected to revitalise the economy, the inevitable austerity path associated with the deal dims our outlook on the economy in 2023. We expect the deal will lead to a protracted journey toward pre-pandemic growth levels,” the report read in part.

“We believe economic compression is inevitable under an IMF programme, as an austerity path chartered by an IMF deal is expected to slow down growth. We forecast Ghana’s GDP growth to reach between 2.3 percent to 3.3 percent in full year 2023, lower than the real GDP growth of 3.6 percent for the first nine months of 2022,” it added.

Sectoral analysis

According to the report, the agriculture sector is anticipated to experience a slight contraction with a growth rate of 3.7 percent, as the fishing and livestock subsectors are expected to be negatively impacted by illegal fishing operations and high feed costs.

The industry sector, however, is projected to have a subdued growth rate of 1.0 percent, with the manufacturing sub-sector predicted to shrink due to the burden of high input costs and currency pressures. Meanwhile, weaker growth of 3.5 percent is expected in the extractive sector due to the uncertain outlook for oil and gas, as global geopolitical tensions continue to undermine the viewpoint for oil and gas.

In contrast, the services sector is anticipated to expand by 3.9 percent. Nonetheless, high price levels are likely to impede consumer demand, especially in the trade and hospitality sub-sectors; and the financial sector’s profitability and growth will be affected by the debt exchange programme.

However, the analysts at Databank Research expect that reducing the E-levy to 1 percent may entice more electronic transactions – with increasing patronage of digital solutions expected to drive demand for Internet data and consequently growth in the Information and Communication Technologies (ICT) subsector.

Review

Databank Research’s forecast comes after a deceleration in the actual GDP growth to 2.9 percent year-on-year (y/y) in the third quarter of 2022, marking the slowest pace since the contraction of 3.3 percent in third-quarter 2020 during the COVID-19 pandemic. In addition, non-oil growth also reduced to 3.6 percent in third-quarter 2022, which dims the prospects for domestic demand in 2023.

The agriculture sector’s yearly growth decreased to 4.6 percent from 7.6 percent in the third quarter of 2021, although all four sub-sectors expanded – with the fishing sub-sector recording the highest growth. However, the fishing subsector’s growth rate slowed to 10 percent in the third accounting period of 2022 from 29.5 percent in the corresponding period of the previous year, due to increased incidents of illegal, unreported and unregulated (IUU) fishing.

In quarter-three 2022, the services sector expanded 3.9 percent; but this was slower than the growth rates of 5.2 percent in the preceding quarter and 13.4 percent in the comparable period of 2021. The industry sector grew by only 0.2 percent in the third quarter of 2022 due to lower growth in manufacturing and construction subsectors caused by increased costs. However, a recovery in the extractive sector partially offset the impact from other sub-sectors.

The fact that the economy is likely to experience compression under the IMF programme is concerning. The agriculture and industry sectors are essential to the nation’s growth, and if they do not perform well it will have a significant impact on the overall economy. However, developments in the ever-expanding ICT subsector offer cause for optimism.

Storm before the calm

Despite projecting a fall in growth to 2.8 percent in 2023 from an anticipated 3.5 percent in 2022 – on the back of perceived impact from fiscal adjustment and implementation of a possible debt management strategy as part of measures to ensure fiscal and debt sustainability – fiscal authorities are bullish about a rebound, beginning in 2024.

At the 2023 budget presentation in December, Finance Minister Ken Ofori-Atta said he anticipates a medium-term average growth of 4.3 percent between 2023 and 2026, with projections of 3.9 percent, 4.9 percent and 5.6 percent in 2024, 2025 and 2026 respectively.

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