Ghana generates over 80% of its export revenues from three primary commodities - gold, crude oil and cocoa exports. It is classified by UNCTAD as commodity dependent, making it vulnerable to sharp drops in commodity prices.

Since the COVID-19 pandemic demand for oil dropped precipitously due to a sudden reduction in industrial production, trade, travel, and movement of freight. Prices fell dramatically as a result.

Revenues from the newly established oil and gas industry have had a profound impact on Ghana’s macroeconomy, even though oil and gas accounted for just 3.8% of Ghana’s GDP in 2018.

Cocoa, a key ingredient in chocolate, a luxury food product, has also seen a decline in demand. Ghana is the second largest cocoa bean supplier globally, with an estimated 1 million Ghanaian smallholder farmers and their communities depending directly on cocoa for their livelihoods.

The only commodity that did well of Ghana’s main exports was gold. The country is the largest gold producer in Africa. Demand – and the price – of gold increased.

Ghana achieved strong economic growth in terms of real GDP in the 2000s and reached lower middle-income status in November 2010. Middle-income countries generally have a diversified economic structure but Ghana remains heavily dependent on primary commodity exports for foreign exchange earnings.

As a result the impact of the fall in the price of oil and cocoa has been severe. Ghana’s credit rating was downgraded to B- in September 2020 and the International Monetary Fund approved the disbursement of US$1 billion to improve confidence of the country’s creditors. At the end of 2020, GDP growth was confirmed at 0.9%.

The COVID-19 crisis hit Ghana and other commodity dependent economies through three mutually reinforcing impact channels:

A price channel: the collapse of commodity prices in the wake of a global recession.

A supply chain channel: disruptions of global commodity-based supply chains.

A financial channel: the overlap of financial and commodity price cycles resulting in procyclical capital flows and debt servicing costs.

In our paper, we looked at how the interplay of these three channels can be particularly damaging. And how this played out in the case of Ghana.

None of these channels is unique to the COVID-19 pandemic. However, the size and the speed with which the demand for commodities collapsed was unique, as was the simultaneous shock to demand and disruptions to global supply chains.
What’s different this time round?

The pandemic caused a massive and instant reduction of global economic activity. Between February and March 2020, global merchandise trade shrank by 8%. Between January and April 2020, industrial production dropped by 30% in the EU and and 20% in the US – two major trading destinations for Ghana.

The significant decline in economic activity led to reduced demand for commodities, representing a substantial demand shock, and leading to a sharp drop in commodity prices. This wasn’t true for all commodities. But supply chain disruptions due to hold ups at ports when importers or exporters went into lock down disrupted commodity exporters’ revenues streams.

The squeeze in revenue streams reduced commodity dependent economies’ access to foreign exchange and made debt servicing and financing of essential imports (including medical supplies) difficult.

These dynamics were accompanied by an unprecedented net-portfolio outflow in March 2020 as financial investors moved their assets to safety and a downgrading of credit ratings for many commodity exporters. Ghana was one such country.

As market-based credit became unavailable or unaffordable, sovereign wealth funds suffered a triple-drain: a decline in value of financial assets that the funds had invested in, a commodity price slump squeezing funding allocation, and a liquidation of assets by governments to increase their fiscal space. Ghana, running out of fiscal space, was forced to tap into its Petroleum Fund and indicated a planned liquidation of US$0.2 billion.

Mitigation strategies

The COVID-19 pandemic is likely to have a long-term negative effect on commodity dependent countries’ finances in two ways.

First, there is likely to be a reduction of productive capacity of primary commodities. This could be either due to a loss of existing productive capacity or due to lack of investments and key inputs as suppressed prices make investments unattractive. Planned oil explorations in Ghana are now unlikely to proceed. The result is a reduction of future revenue streams.

Second, there is likely to be an increase in the debt burdens of countries. This results in an increasing outflow of revenue dedicated to debt servicing in the future. In 2019, a staggering 39% of Ghana’s revenues were spent on debt servicing. This has increased to 55% over the COVID-19 crisis.

Based on our findings we suggest a number of strategies for commodity dependent countries like Ghana.

One, a long-term resilience strategy would be to create local clusters of production and processing to make supply chains more resilient to disruptions. It would also contribute to promoting export diversification towards higher value products.

But restructuring supply chains and economies requires large-scale investments and capacity building, so this will take time.

In the short-term, the ability of the Ghanaian economy to cushion the impact of the crisis, mitigate the risk of long-term adverse consequences, and preserve the ability to invest for future generations, depends on the availability of loans.

Because credit ratings and credit availability move in lockstep with global commodity cycles, market-based sources of credit are unavailable in times of crisis.

Hence, commodity dependent economies like Ghana are particularly reliant on concessional loans – and on the international financial institutions such as the International Monetary Fund (IMF) providing them.