The speed of Ghana’s economic transformation has in recent years set it apart from other economies in the region.

Its report card reads positively, growth has increased, inflation has declined, and according to the latest International Monetary Fund (IMF) findings released at the end of May, Ghana’s external position is ‘reasonably comfortable’.

Growth of 6.2 per cent last year was the highest since the early 1990s and Ghana is on track to achieve its goal of halving poverty well ahead of the Millennium Development Goal (MDG) target date of 2015.

The country’s recent capital account liberalisation allowing foreign investors access to longer-dated domestic bonds, as well as its post-debt relief eurobond issuance, due later this year, have both increased the level of foreign investor interest in the country.

But despite the success, the price of oil remains a longstanding vulnerability.

Recent events have compounded this. Declines in rainfall last year, and subsequent falling water levels in Ghana’s Akosombo Dam, have necessitated power cuts. Hydro electric power generation at the Akosombo dam is now reportedly down to only two turbines out of the usual six.

Power rationing has increased to 12 hours, every other day. The economy is already feeling the brunt of the energy crisis. Press reports suggest that some mining companies have had to close temporarily or reduce hours, although plans are underway to build a new 80 MW power plant in a joint initiative involving at least four different mining companies which is due for completion by July 7 this year.

Manufacturers and other businesses have had to face the cost of increased use of generators and thermal sources of energy.

Anecdotally, capacity is under strain, and manufacturers must contend with pressure on margins. For the economy as a whole, oil imports have risen.

Energy crisis Although completion of the West African Gas Pipeline – which will allow Ghana to export electricity to the region – is due later this year, for now there are few mitigants in place.

A new 126 MW thermal generation plant is due for completion in September 2007, but this will still contribute to a higher oil import need. It is difficult to assess the full cost of the energy crisis to Ghana, given evidence that the impact is varied, by sector as well as firm, and sector-level data is not readily available.

However, in this analysis we examine the likely consequences of the energy crisis, based on the data that has been published. We conclude that although the energy crisis represents a key test to Ghana, it is unlikely that temporary load shedding will derail much of the achievements of recent years.

The industrial sector Industry only contributes 23 per cent of the country’s Gross Domestic Product (GDP), agriculture 37 per cent and industry 23 per cent which the services contribute 40 per cent.

Despite an end to fuel subsidies, the country’s high energy intensity is intact. For a number of years now, the country has not subsidised domestic fuel prices.

Steps towards full price recovery were key to the country’s economic turnaround, with economic setbacks in 1998 and 2000/01 directly attributable to the negative impact of fuel subsidies on the fiscal balance.

However, years of availability of cheap fuel have left Ghana with a high degree of energy intensity - high energy consumption relative to its economic size. This is only likely to improve over the medium term.

With subsidies still in place on some utilities, further fiscal slippage is threatened unless the authorities are able to move towards full cost recovery pricing. The associated inflation risks also have policy implications.

Ghana’s Harmoniation Economic Plan (HEP) shortfall and resulting load shedding have now been in place since September 2006.

Despite anecdotal evidence of the negative impact on business activity, it is worth noting that the latest Composite Index of Economic Activity rose 5.2 points over the course of the first quarter in 2007, from strong levels previously.

According to the Bank of Ghana which produces the index, this result still points to above-trend growth. Although declines were noted in port activity, cement sales and – unsurprisingly – electricity consumption; employment, exports, imports, commercial bank credit and tourism all made positive contributions.

Nonetheless, Bank of Ghana surveys of both business and consumer confidence show expectations dipping slightly from favourable levels recorded in previous quarters.

The survey history is too short to be able to deduce whether there is a robust relationship with GDP growth, but the dip in expectations may signal somewhat weaker growth ahead.

On the basis of confidence surveys alone, it is difficult to tell.

According to official data, the banking sector is in good shape. Crucially, given Ghana’s history where fuel subsidies and losses at the state-owned oil refinery had once threatened the banking sector (a situation since resolved with the end of fuel subsidies and securitisation of the debt owed by the oil refinery), recent credit trends appear far more benign.