President Kufuor's Quest for Stability in Ghana

In his inaugural speech delivered at Independent Square on January 1, 2001, President John Agyekum Kufuor vowed to rid Ghana of corruption, safeguard the country’s multi-party democracy, bring about macroeconomic stability, and encourage the development of the private sector—all prerequisites for healthy economic growth. Little over a year has passed since the new administration took office, and Ghana’s economic landscape has improved dramatically.

The bold economic measures implemented by the new administration have proven very effective; allowing it to comfortably meet the inflationary target laid down in its economic program, while also stabilizing the rapidly depreciating currency. Tight monetary policy and restrained government spending have brought spiraling inflation down substantially. Indeed, the rate of inflation fell from nearly 41% in the Kufuor administration’s first month, to below the 25% target by the end of last year, despite significant increases in minimum wages, electricity and water tariffs, and fuel prices.

Another key factor in stabilizing the economy has been the generous support offered by international donors and bilateral creditors. The World Bank and the IMF, content with Ghana’s democratic transfer of power, offered enhanced financial assistance. Furthermore, in a bid to reduce the country’s debt-servicing burden—estimated at a one-fourth of annual revenues—the government decided to apply for debt relief under the Heavily Indebted Poor Countries (HIPC) initiative, despite fervent opposition at home. The government estimates savings in annual debt service will range from $773 million to $875 million over the next three years, with $170 million in debt relief expected as soon as February 2002. The decision to apply for debt relief under the HIPC initiative has also led to an agreement with the G-8 countries to write off all bilateral loans contracted between 1983 and June 1999. All of these moves have had a stabilizing impact on the currency, which lost less than 4% of its value last year, compared with a near 47% loss in 2000.

On the domestic front, the Kufuor administration has cut back drastically on government spending and restrained its previously heavy borrowing in the domestic market. It has also convinced domestic creditors to swap 3.05 trillion cedis ($425 million) in maturing public debt with three-year government bonds. This has allowed interest rates to come down to around 33% by year-end, versus more than 50% a year ago. Although still extremely high, the lower rates will stimulate investment, while also helping to tame inflation.

Although the new government has come a long way, much remains to be done, as economic growth has yet to pick up. Not much impetus for growth comes from the external sector, since commodity prices remain weak. Moreover, cocoa output, one of Ghana’s major foreign-exchange earners, has been recently revised down more than 12% due to increased smuggling activity and black pod disease. Some argue that reflation could be the sole solution for stimulating domestic demand, a path the government is unlikely to take. Instead, the Ghanaian government strives to attract foreign and domestic investors by providing a more stable economic environment and “opening the economy for business.” With the world economy yet to recover from its current slump, however, foreign investment is unlikely to rise significantly in the short term. President Kufuor’s approval rating is on the rise for now, with the majority of the population patiently waiting for the economy to turn around. Nevertheless, failure to deliver economic growth beyond the country’s rapid population growth rate, and thus improve Ghanaians standard of living, could end President Kufuor’s prolonged political honeymoon.