Ghana’s government is poised to inject billions of cedis into the economy by settling outstanding debts to road contractors before the end of July. This move, while crucial for revitalizing stalled infrastructure projects and fulfilling contractual obligations, carries the potential risk of destabilizing the local currency, the cedi, which has recently experienced a period of relative stability. The injection of a substantial amount of cedis into the market, without a corresponding increase in foreign exchange inflows, could trigger a surge in demand for dollars, potentially depreciating the cedi against other major currencies. This situation presents a delicate balancing act for the government, which must weigh the need for infrastructure development against the importance of maintaining a stable currency.
The debt owed to road contractors has accumulated due to a practice of awarding contracts without securing adequate funding, leading to a backlog of unpaid bills for completed projects. The Minister of Roads and Highways has previously acknowledged the unsustainable nature of this practice, revealing that certified road project arrears alone have reached approximately GHS 21.2 billion. This figure represents only the completed projects awaiting payment and does not include the GHS 105 billion in outstanding commitments for awarded but unexecuted or incomplete contracts. This substantial backlog highlights the magnitude of the financial challenge facing the government and the construction sector. Addressing this challenge requires a significant financial outlay, which, while necessary for stimulating economic activity and fulfilling obligations, could have unintended consequences for the cedi’s value.
The cedi’s recent stability has been attributed to a confluence of factors, including increased gold export earnings, enhanced regulatory oversight of the gold trade, and a tight monetary policy implemented by the Bank of Ghana. President Mahama has also highlighted the positive impact of reforms in the gold sector, particularly the establishment of the Gold Board, which has contributed to a significant increase in foreign exchange inflows. These inflows have bolstered the Bank of Ghana’s reserves, providing a cushion against external shocks and supporting the cedi’s value. However, the planned disbursement of billions of cedis to road contractors could potentially offset these gains if not managed carefully.
The government’s decision to settle the outstanding debts signifies a commitment to restarting stalled road and transport projects, which are essential for economic development and improving connectivity across the country. This move is part of a broader effort to reset Ghana’s infrastructure development agenda and address the backlog of projects that have been hampered by funding constraints. While the injection of funds into the construction sector is expected to stimulate economic activity and create jobs, the government must carefully manage the disbursement process to mitigate the potential negative impact on the cedi. This requires a strategic approach that balances the need for infrastructure investment with the imperative of maintaining macroeconomic stability.
The upcoming mid-year budget review is expected to provide further details on the government’s strategy for balancing infrastructure spending with exchange rate stability. This review will offer a clearer picture of the government’s fiscal performance over the past six months and outline its plans for managing the economy in the coming months. Market watchers will be closely scrutinizing the budget review for indications of how the government intends to mitigate the potential risks associated with the large disbursement of funds to road contractors. The government’s ability to maintain the cedi’s stability while simultaneously stimulating infrastructure development will be a key test of its economic management capabilities.
The situation presents a complex economic challenge for Ghana. The need to address the significant backlog of infrastructure projects and fulfill contractual obligations to road contractors is paramount for economic growth and development. However, the potential impact on the cedi’s stability necessitates a cautious and strategic approach to the disbursement of funds. The government must carefully balance the need for fiscal stimulus with the imperative of maintaining macroeconomic stability, leveraging recent gains in foreign exchange reserves and implementing measures to mitigate the potential inflationary pressures arising from the injection of billions of cedis into the economy. The success of this balancing act will be crucial for Ghana’s economic outlook in the coming months.
