In the context of recent years, private investor interest in African economies has been growing. Despite some setbacks of the COVID era and the challenges of the environment and infrastructure, experts predict that the private sector will play a critical role in the economic development of African countries, propelling them to a strong recovery (Eyraud et al., 2021). The continent holds significant opportunities for private investment, given its growing population, urbanization, rapid industrialization, and abundant natural resources. Ghana is one of the fastest-growing economies in Western Africa, expected to recover at 5.1% annually in 2021-23 and building upon the foundations established in the pre-COVID-19 years (The World Bank, 2021). It is rapidly meeting its millennium development goals and is viewed as one of the key models for political stability in the region. This paper will explore the opportunities and challenges of private investment in Ghana going forward.
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Relevant Background and History
Ghana is a West African nation of approximately 29.6 million people. It borders the Atlantic Ocean and the countries of Togo, Cote d’Ivoire, and Burkina Faso. Known as the Gold Coast, it was a sub-Saharan British colony trading in gold and later slaves. It was the first black African nation to achieve independence in 1957. At first, like many of its neighbors, the country dissolved into political instability, corruption, and mismanagement. However, after a coup in 1981, the country sought to adopt a system of democracy and economic stability, supported by the 1992 constitution, which allows for a multi-party system present to this day. Over the last decades, Ghana has made strives towards a transparent democratic system and regional administration that is seen as an example for African economic reform and development. There are a number of social issues prone on the continent, such as an underdeveloped healthcare system, poor environmental control, and strong social division stratification, both by income and gender (UNDP, 2021).
Economic Status Quo
Ghana’s economic growth has been robust, with the source of growth dependent on natural resources and extractive and capital-intensive services sector, which does not necessarily contribute to the reduction of poverty. Regions of the country are in poverty, constrained by poor infrastructure and lack of public support, with the majority of economic activity leading to urban centers. At the same time, much progress has been made as it is the first country in Sub-Saharan African to reduce poverty by half, thereby attaining UN Millennium Development Goal 1. Ghana’s primary exports are gold, cocoa, and recently oil, with the country being in the top leading exporters from the continent (UNDP, 2021). Even though it is rapidly seeking to develop new industries and resources, its legislative framework is lagging behind in identifying key areas of priority.
The political quo also benefits economic stability. Stable and successful democratic elections in the last several election cycles are strengthening public institutions and increasing investor confidence. President Nana Akufo-Addo, who has been in power since 2017 and has recently been reelected for a second term, has been a strong driver of the economy, with his electoral goals including implementing economic diversification and decreasing the growing national debt. Prior to COVID-19 lockdowns, Ghana was growing at an average of 7% in 2017-2019. Ghana is experiencing a potential debt crisis due to the slowdown of the global economy, with the fiscal deficit doubling to 15.2% and public debt increasing to 81.1% of the GDP (World Bank, 2021).
Private Business Environment and Policy
The business environment is complicated in the country. It remains relatively weak, which is seen as a barrier to productive investment in key sectors such as manufacturing. Companies operating in the country are constrained by unreliable energy supplies and access to affordable financing, affecting SMEs in particular by not allowing them to increase production, create jobs, and improve the quality of life for the population. In general, investment prospects are favorable for Ghana as the government seeks to diversify and industrialize, particularly in sectors such as mining, manufacturing, and agro-processing. The local government realizes that attracting foreign direct investment (FDI) is critical to filling the deficit in its annual infrastructure and development budget. Under the 2013 Ghana Investment Promotion Center (GIPC) Act, all foreign investors must register with the government body which monitors all activity. There are also capital requirements for private FDIs, 200,000USD for joint partnerships, 500,000USD if fully owned by a non-Ghanaian, and 1 million USD for trading companies owned by non-Ghanaian entities, with companies required to employ at least 20 local skilled workers (U.S. Department of State, 2021).
The majority of Ghana’s economic sectors are open to private investment. There are only eight economic sectors that are prohibited to foreign entities according to Ghana’s investment code, including the likes of lotteries, taxis, beauty salons/barber shops, and production and retail of pharmaceuticals and drinking water. Other sectors which may have some limits and government contractual obligations are banking, telecommunications, fishing, mining, real estate, and petroleum (U.S. Department of State, 2021). Ghana does not recognize or follow OECD responsible business conduct (RBC) law, but corporate social responsibility (CSR) is taking on more weight in the local population. Overall, the country realizes the potential of FDI and is implementing waves of reforms, both successfully and unsuccessfully, to stimulate the business environment. These reforms are aimed at addressing aspects of the trade, industrial policy, financial sector, business licensing, land registration, and judiciary. The professional coordination at the Ministry of Trade and oversight of the private sector are contributing to the development and more open access to funding (Baidoe-Ansah, n.d.).
Opportunities and Benefits of Investment
Based on the government policies of successive political parties, it is evident that Ghana has embraced the approach of private sector-led growth. Ghana has realized that private investment is a critical prerequisite for economic growth as entrepreneurs stimulate business activity by bringing resources to produce the goods and services needed for a vibrant economy. Rapid and relatively sustained growth is achieved by private investment leading to higher productivity, generating more wealth for further investment. In the process, the money trickles down to the population both directly and indirectly through job creation and salaries as well as the introduction of new technologies, improvement to infrastructure, and institutional development (Frimpong & Marbuah, 2010). The stable socio-political environment established in Ghana serves as a key starting point necessary for the accelerated growth of the private sector. The well-functioning democratic system has a significant effect on investor confidence due to policies friendly to business such as protected property rights, intellectual property protection, civil society, judiciary, and parastatal institutions being resources and monitored to provide growth of investment in Ghana.
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Multiple sectors in Ghana are currently expanding and provide significant opportunities for foreign investment. Ghana is seeking to work with international development partners to upgrade and expand its electrical transmission and distribution systems. The country seeks to become a regional exporter and bring down costs for excess power capacity. The energy sector will be vital to virtually every other industry in the national economy. Renewable energy (outside hydro) is also a potential area of development, currently making up just 1% of power production, but the government seeks to increase it to 10% by 2030 (International Trade Administration (ITA), 2020). Government policy is aimed at increasing commercial petroleum output and energy sources. The petroleum industry is grouped into upstream and downstream sectors. The upstream aspects consist of exploration, production, procurement, and decommissioning of crude oil, while downstream revolves around refinement, distribution, and marketing. There are three primary commercial oil fields in Ghana, averaging 72.1 million barrels and 140,853 million standard cubic meters of natural gas production annually (GIPC, 2021). There are significant opportunities in the sector as oil is the second-largest export after gold, the upstream sector is significantly open for development, and renewable energy in the country remains largely untapped.
Another sector that is rapidly growing in Ghana is mining and mineral processing. The country has high exports of gold, bauxite, manganese, and diamonds. Ghana is the number one gold producer on the continent. Mining and quarrying contribute 4.2 billion USD annually to the country’s GDP. Investment in the industry is seeing annual growth of up to 17.5%. The government is stepping up support for commercial production of a range of other minerals, including the strategic aluminum value chain. Private-public partnerships have been vital in this sector and based on strong regulation for the industry and favorable incentives, it serves as an attractive venture (GIPC, 2021).
Agriculture is an industry in Ghana that is troublesome yet has significant potential. It is the sector on which the livelihood of a majority of the population depends and remains “one of Ghana’s predominant preserves for wealth creation comprising of crop and livestock farming, fishing and forestry” (GIPC, 2021, para.1). The sector is valued at 11.5 billion USD, contributing 17.5% to the nation’s GDP. Ghana’s climatic conditions, availability of water resources, and widespread arable land makes commercial farming a possibility. Cocoa is a major product for export can create billions in revenue if developed, with a revenue of 378 million USD in 2018. Government initiatives include mechanization, greenhouse development, zero percent tax on agricultural input imports, and food processing development (GIPC, 2021). The industry, more than others, perhaps depends on transportation infrastructure, which is severely lacking in the country.
There are many more sectors of Ghana’s economy which could be discussed, but the general conclusion is that as a growing economy, the country offers multiple pathways for private investment. For many private investors seeking alternatives to oversaturated markets, Ghana presents itself as an excellent location for growth, especially given its stable socio-political and economic environment, rarely seen on the continent. Although with its weaknesses and some neglected industries, the above sectors of the economy, as well as some that are more nuanced, such as real estate, telecommunications, and ICT/fintech, more often seen in richer countries, are seeing tremendous growth and potential. However, it requires entry and support from FDI with the capital and expertise to work with the government in order to reform and establish business operations across the industries, eventually contributing to infrastructure development, strong legal frameworks, and educational development for more local experts (World Bank Group, 2018). Ghana has a mixture of factors that some experts label as the ‘Ghana advantage’ – the combination of geographic location, annual growth rate, population size, and socio-political stability that makes the country so beneficial and appealing to investment.
Beyond the internal factors, Ghana’s internal system of investment laws and economic structure are generally attractive to investors. Legislature is not extreme in terms of ownership requirements, and with a high enough price, allows for 100% foreign ownership and repatriation of profits. There are also elements of tax concessions for certain industries and subsidies for local development and production. The country’s investment institutions such as the GIPC are aggressively pursuing FDI to serve foreign investors to the best capacity, making the climate as business-friendly as possible without compromising local interests. Ghana also has a strong public-private partnership record, presenting opportunities for investors that are looking for government guarantees in the long-term existence of the business, critical for investor confidence in a region where fraud is commonplace (PWC, 2018). Ghana is on a pathway to growing its economic power and becoming a leading locale for foreign investment in the next decades.
Challenges of Investment
One of the primary challenges to investment in Ghana is high costs, this includes costly power and water supplies, high infrastructure costs (often having to be built from scratch), and high costs of supply chains and cross-border trade (U.S. Department of State, 2021). There are resource deficiencies which limit the development of new ventures, and new firms are at a significant disadvantage, have different and inferior levels of resources and expertise than existing incumbents. As a consequence, the entrepreneurial ability to identify and exploit market opportunities is decreased. Companies are forced to operate with overburdening efficiency and potentially unhealthy levels of innovation and cost-cutting in order to maintain a competitive advantage (Amankwah-Amoah & Hinson, 2019).
A supplemental issue to the problems above is the state of business financing in Ghana, making it incredibly challenging to access funds much needed at the initial stages of private business investment. Sourcing funds for capital-intensive projects is notoriously difficult. Macroeconomic indicators do not favor private business growth, so official sources of financing are out of reach based on the testimony of local business owners (Amankwah-Amoah & Hinson, 2019). Commercial bank rates average at 28 percent, which is overwhelming even for multinational corporations. Companies exporting or outsourcing to Ghana without beneficial financing options will find themselves at a disadvantage (ITA, 2020). Banks are the dominant force in the country’s financial sector, out of the 32 billion USD of capital in the formal system, banks account for 70%, using debt as the primary instrument in the ecosystem (Aspen Network of Development Entrepreneurs, 2020).
SMEs and startups generally struggle to access formal financial resources for early-stage financing, as well as growing businesses seeking capital between 100,000 and 2 million USD. This is prevalent throughout all sectors. There is a lack of capital, inefficient management systems, gaps for key economic actors such as SMEs, and a general lack of venture capital. As a result, healthy, innovative, and growing firms, both foreign and domestic, are struggling to gain funds for operations, marketing, salaries, and others. The financial system itself is incomplete. Examining the consumer side, businesses in Ghana are often informal, lack accurate financial information, and have higher than average default rates. From the perspective of banks, they lack the staff/capacity as well as the technological capabilities to efficiently evaluate business loan applications and determine risk. SMEs are not viable to serve most banks as well. There are also stricter government regulations on financial institutions as of 2019, which is beneficial from the standpoint of cracking down on poor business practices, but new capital requirements and rules of operation have placed the formal financial system in a precarious position (Aspen Network of Development Entrepreneurs, 2020).
Another element to consider is the institutional and policy environment in Ghana. Despite efforts by the government, the system is underdeveloped and weak. This results in inadequate institutional barriers and poor legal enforcement systems. Property rights, which are a significant asset for companies, are weak, leading to hampering innovation in new firms. Instead of focusing on peak performance, companies have to navigate the difficult bureaucracy, weak political system, and an unfulfilled regulatory framework., adding costs to business operations and limiting growth. One of the fundamental aspects of institutional voids is a lack of critical infrastructure, particularly in transportation. This results in isolated markets and high costs of serving the lowest socioeconomic classes. Meanwhile, inadequate legal enforcement systems are negative for investors, and business confidence as this allows for fraud to flourish and limits the companies’ ability for contract enforcement, intellectual rights protection, and increases costs of doing business due to unofficial channels of the regulation (Amankwah-Amoah & Hinson, 2019).
Asiamah et al. (2019) and Frimpong & Marbuah (2010) analyzed some of the determinants currently existing or could be changed in the prospective future that influence foreign direct investment in Ghana. Both studies determined that macroeconomic variables play a role in private capital formation in the country. Some concerns include the impact of external debt, the depreciation of the real exchange rate, and the over-liberalization of the economy. Meanwhile, positive effects include the user cost of capital, coefficient of inflation, public investment supplementing private investment, and the positive long-run impact of real GDP.
Growth of real output and aggregate demand conditions are the engines of private sector investment growth in Ghana. Improving productivity and efficiency through advanced technologies in manufacturing and agriculture, along with subsidies, are key to long-term growth. There is also a positive contribution in terms of government public investment and boosting of private sector initiatives. Working together with parastatals and private companies, the government should prioritize projects in infrastructure and human capital, which complement and enhance the performance of private sector firms in key industries (Frimpong & Marbuah, 2010). Some examples of this include the government collaboration with the primary electricity company Volta River to expand electricity production to maintain power stability, with rampant power outages being a major barrier to modern industries. Investment into communications in the country through investment into telephone subscriptions and data access in the country being a strong contributor to private business investment (Asiamah et al., 2019).
Going forward, the government should maintain certain economic policies. First, the Bank of Ghana should strive to keep the inflationary rate as low as possible to stabilize the economy. More pragmatic policies in stabilizing the exchange rate are also necessary and one of the critical elements to FDI since exchange rate stability is vital to moving financial resources in and out of the country for foreign entities, and a predictable rate ensures investor confidence and long-term planning. This can be done through regular monitoring and strategic planning to support the local currency (Asiamah et al., 2019). Increasing the country’s GDP will continue to attract FDI to services and key sectors of the economy. Finally, efforts should be made to improve financing and borrowing, primarily by lowering interest rates long-term. Access to funding by the private sector or vice-versa, the Bank of Ghana being able to borrow from the private sector will contribute to the resiliency of the economy and boost development into the financial sector, which needs to grow to boost the economy.
Ghana is a prospering Democratic country in West Africa, serving as an example for sociopolitical stability and economic development for the continent. It is rich in natural resources, and government policy is gradually putting the economy on track for rapid and sustainable growth. There are multiple sectors which are appealing for foreign direct investment, and businesses of various sizes have the potential to function effectively in Ghana, particularly in strategic sectors of the economy. While there are still challenges remaining characteristically of developing nations, such as weak public and economic institutions, lack of infrastructure, and bureaucratic hurdles, the business environment for private investment in the country remains generally positive. Recent and current political leadership has recognized the importance of attracting FDI to the country’s development and is actively enacting domestic legislature and macroeconomic policies that are aimed at creating a highly productive climate for companies to operate in Ghana.
Asiamah, M., Ofori, D., & Afful, J. (2019). Analysis of the determinants of foreign direct investment in Ghana. Journal of Asian Business and Economic Studies, 26(1), 56–75.
Aspen Network of Development Entrepreneurs. (2020). Ghana – financial constraints to entrepreneurs in Ghana
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