Ghana, one of the most respected countries in Africa, is currently experiencing an economic turmoil. Indeed, the West African nation is facing one of its worse economic crises in decades. Soaring inflation is compounding the sufferings of many Ghanaians who now have to dig deeper into their pockets to afford essential goods. Ghana has long been considered a success story and a model for African development. It is a major producer of gold and cocoa and had one of the region’s highest gross domestic product per head. A robust democracy since the early 1990s, it has a relatively well-run government that provides decent levels of public service, including free education. The global African diaspora seeking a connection with their ancestral land regards it as a must-visit destination. In a nutshell, Ghana was an example of a truly functioning democratic society with a robust economy in Africa. Now, this reputation that Ghana built over the years is taking a massive toll.
Ghana's Inflation Rate
Source: The Financial Times
Ghana had agreed to a $3 billion bailout from the International Monetary Fund when it defaulted on its debt last December. Moreover, and more importantly, inflationary pressures drastically surged between late 2021 and February 2023. Indeed, during these two years, inflation soared to more than 50%. While Ghana’s inflation dropped sharply from 52.8% in February to 45% in March, inflation remains extremely high, and inflationary pressures remain the real issue that is impeding the Ghanaian economy. The government says Ghana’s economic misfortune has been caused by the dual external shocks of COVID-19, which ground the economy to a halt, and Russia’s invasion of Ukraine, which sent global food and energy prices soaring. These were the “malevolent forces” that President Akufo-Addo said were hurting his country.
While the President blames inflation on exogenous factors, it is important to assert that the current inflationary pressures in the Ghanaian economy are based on endogenous factors. The first endogenous factor is the use of expansionary monetary policy. Certainly, the Ghanaian economy took advantage of the period of cheap money. Interest rates were low, the Ghanaian government printed a lot of money, and that credit money outpaced the level of national output. Since March 2022, Ghana found itself shut out of international debt markets as concerns over its ability to repay what it owed. Thus, the Ghanaian government has since been forced to rely heavily on a domestic capital market, in which the Ghanaian central bank injected more than $3.2 billion. The second endogenous factor is the depreciation of the Ghanaian Cedi. As inflationary pressures began to dramatically increase, the Ghanaian Cedi started to depreciate due to the inflated prices of goods and services.
These two endogenous factors are the real reasons why Ghana is currently experiencing this economic turmoil. Commodity prices have been increasing for months, gnawing away people’s purchasing power. Ghana’s over-dependency on imported goods also increases prices. According to Ghanaian economist John Gatsi, excessive lending to the central government by the Bank of Ghana to finance government activities was the fundamental reason for the economic crisis that the country is currently undergoing. If the Ghanaian economy was properly managed, the exogenous factors that President Akufo-Addo enumerated as the reasons for the crisis would, in fact, have not much effect on the Ghanaian economy.