Ghana's economic expansion this year will likely fall short of a government forecast as soaring inflation reduces private consumption and investment.
The second-biggest West African economy will expand 5% in 2022, according to the median estimate of five economists interviewed by Bloomberg. That compares with the government's projection of 5.8%, made in November, though it said last week that it will revise that figure.
"I expect to see a sharp slowdown in economic activity in the first half, primarily due to higher fuel and food prices weakening private consumption, with investment also likely to be weaker," Mark Bohlund, a senior credit research analyst at REDD Intelligence, said by phone.
The inflation rate in Africa's biggest gold producer soared to a 12-year high of 19.4% last month, driven by disruption to the global food supply chain, higher oil prices, currency depreciation and Russia's invasion of Ukraine.
Ghana's economy grew at 5.4% last year, a strong comeback from a 37-year low rate of 0.5% in 2020, when the Covid-19 pandemic struck. But this year growth is likely to be hobbled by Finance Minister Ken Ofori-Atta's proposed 30% cut to government spending.
Ofori-Atta deepened budget cuts last month to stem a sell-off in Ghana's dollar bonds to assure wary investors it will meet fiscal targets, rein in debt and regain market access it lost this year. Portfolio investors also exited cedi bonds, contributing to the currency's 17.8% loss against the dollar this year and fueling inflation.
The central bank has responded by raising its benchmark interest rate 350 basis points since November to 17% in order to restrain inflation, which it targets in the range of 6% to 10%. The Bank of Ghana may raise rates by as much as 200 basis points to curb inflation, said Courage Boti, an economist with Accra-based Databank Group.
"That will make cost of credit more expensive for the private sector, thereby stifling growth," he said. "Revenue may fall short significantly by mid-year and government may need to cut expenditure again."
Databank raised its year-end inflation forecast to between 12.9% and 14.9%, from between 8.9% to 10.9%, on continued risks to supply chains from the war in Ukraine. "We perceive lingering upside risk to Ghana's inflation through higher prices of food items, petroleum products and construction materials," it said in a note to clients this week.
Ghana's real private-sector credit growth, an indicator of private investment, posted positive growth for a second straight month in February at 1.2%, after contracting the past five months. But this will likely wane again as lending rates rise, said Victor Asante, managing director of FBN Bank Ghana Ltd.
"There are already signs of distress in industries that are dependent on a lot of imports," Asante said. "Some have already asked to restructure of their existing facilities."