By Renaissance Capital Analysts
Special to THE AFRICA BAZAAR magazine
June 2015

The gas station explosion that killed dozens of people during a recent power outage and rainstorm in Ghana earlier this month couldn’t had come at a worser time for the country as it faces considerable woes and immediate challenges, including clearing of its arrears, shrinking a wage bill, halting monetization of debt and finding immediate solutions to the power crisis.

The country’s outlook, according to analysts at Renaissance Capital, hinges on Ghana proving it can control its commitments, especially in an election year.

Ghana’s Outlook Hinges on Reforms

One of the most important aspects of Ghana’s new plans with the International Monetary Fund program is the phasing out of the Bank of Ghana’s (BoG) financing of the budget deficit to 5 percent of the previous year’s revenue in FY15E, and 0 percent from FY16E, which is expected to slow cedi weakness, implying rate cuts from 2016 are likely.

The bank’s financing has weakened the capacity of monetary policy and also partly explains the sharp 26 percent year to date (YTD) cedi depreciation of recent years- attributed to a $494mn financing gap in the balance of payments in 1Q15- which had to be met with foreign exchange (FX) reserves. This gap was due to an 80 percent year-on-year (YoY) fall in the capital and financial account surplus to $55m, which failed to fully finance the $549m current account deficit.

In addition to clearing up existing arrears, the running up of arrears is not permitted under the new IMF program.

Some of these arrears include those to the power sector and fuel importers.

The peak demand for power in Ghana is 2,300MW, which is more than threefold the current supply of 700MW. This power crisis spurred the IMF to downwardly revise its growth forecast to 2.3 percent in 2015 (vs 3.5 percent previously).

The Fund also initially projected a 20-25 percent cut in gold output on the back of the initial power rationing plan for miners, which has since been revised in favor of miners. Power barges from Turkey, due before year end 2015, will supply 200MW, according to a Development Finance Institution. The clearing of arrears to the Volta River Authority (generation facility) and planned concession of the Electricity Company of Ghana should help draw investment into the power sector.

Overall, the repayment of arrears is positive for the banks and the procure-to-pay system that is now in place should help improve expenditure control at commitment level and in so doing reduce the build-up of arrears.

The opinions expressed are that of the Renaissance Capital team. Edited with permission by Kemi Osukoya.

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