Rise in electricity, food prices and inflation push about 850,000 Ghanaians into poverty – World Bank

Not long ago, Ghana’s strong economic growth in the last 20 years reduced the country’s poverty rate in half, from 52.6 per cent to 21.4 per cent between 1991 and 2012, based on Ghana’s national poverty line.

But as recently as during 2022, close to 850,000 Ghanaians are estimated to have been pushed into poverty on account of larger-than-expected rise in prices.

A new World Bank report; 7th Ghana Economic Update: Unraveling Inflation’s Toll on Poverty and Food Security has found that most Ghanaian households are estimated to have experienced a deterioration in living standards, particularly toward the end of 2022.

According to the report, the impact on welfare is simulated by relying on the first quarter of the Annual Household Income and Expenditure Survey (AHIES) of 2022, collected by Ghana’s Statistical Service.

“Results suggest that the increase in prices between January 2022 to December 2022, all other things equal, led to an average purchasing power loss of 15.7 per cent. The poorest 20 per cent of the population lost 16.1 per cent of their purchasing power to inflation in 2022, while the richest 20 per cent lost 15.5 per cent 2022. Household purchasing power losses became more pronounced toward the end of the calendar year as inflation heightened at the end of 2022,” the report said.

The report says the energy sector continues to require significant budgetary support.

A combination of electricity underpricing, poor performance of distribution companies, excess power generation capacity and excess gas supply contracts has resulted in the accumulation of sectoral arrears (legacy arrears) totaling about $2.3 billion as at the end of 2022, equivalent to about 3.2 per cent of GDP, it said.

The Bank warned that without corrective action, these arrears could reach over $8 billion by the end of 2025.

It says in 2019, the Ghana government launched the Energy Sector Recovery Program (ESRP), a roadmap to enhance the governance and restore the financial viability of the energy sector. As the ESRP’s implementation has faced several delays, the plan has been unable to prevent the yearly accumulation of liabilities. Even though the government managed to increase electricity tariffs by 27.15 per cent in September 2022 and 29.96 per cent in February 2023, exchange rate depreciation eroded the gains from higher tariff as a substantial portion of generation costs is incurred in US dollars.

In 2022, a transfer of close to 1 per cent of GDP was made to the power sector by the government; in addition to this, new payables from the sector amounted to 1.5 per cent of GDP.

In May 2023, the Public Utilities Regulatory Commission (PURC) announced a further 18.36 per cent increase in electricity and natural gas tariffs (from June 1, 2023) for all consumer groups, following its review of the second quarter of 2023, the report noted.

It also says domestic policy channels -and specific policy design choices, also played a role. Significant increases in electricity tariffs since September 2022, while necessary for fiscal sustainability, were particularly regressive (it affected the poor more than the rich) in their design. Average electricity consumption among the poorest households is nearly 70 kWh per month and the revised tariffs particularly affected this group.

The main change in the tariff was the lowering of the lifeline tariff, from 50 to 30 kWh, and the elimination of the lifeline tariff (for the full consumption) as soon as a consumer’s electricity consumption exceeded 30 kWh, it added.

The report notes that between September 2022 and June 2023, the Public Utilities and Regulatory Commission (PURC) conducted three quarterly adjustment of electricity tariffs by 27.15 per cent in September 2022, 29.96 per cent in March 2022 and 18.36 per cent in June per month.

“Consequently, the real increase (combining the impact of changes to pricing and application of the lifeline) was highest for those consuming between 30 and 200 kWh per month. As a result, the implicit subsidy fell but became even more regressive,” the report indicates.

It also said the depreciation of the cedi has contributed to inflation by driving up the prices of imported goods and services, and also putting pressure on prices of domestic substitutes.

“Indeed, there were similar inflation rates for both imported and locally produced food as well as imported and locally produced non-food items. In sum, the exchange rate depreciation led to increases in prices of imports and passed through to domestic production,” the report noted.

The report further states that the general inflation experienced by Ghanaian households during 2022 eroded their purchasing power, adding that wages and salaries among the poorest often do not keep pace with movements in the prices of goods and services.

According to the report, consistent with this, minimum wages in Ghana increased by 10 per cent in 2022 even as general price levels rose by over 53 per cent, implying that workers’ real incomes dropped by over 43 per cent.

“A drop in real incomes means purchasing less preferred food stuffs and delaying the purchase of non-necessary items. Overall, household budget shares towards non-food items such as clothing and entertainment are expected to have fallen, with households increasingly having to rely on savings and on selling assets to support their needs,” the report said.

In his remarks, Pierre Laporte, World Bank Country Director for Ghana, said the past year has been challenging for Ghana as the economy entered difficult times just after the twin crisis of the pandemic and the Russia’s invasion of Ukraine.

“Ghana was deeply hit as pre-existing fiscal vulnerabilities were compounded by adverse global economic conditions. The challenges in 2022 were particularly acute. These pre-existing vulnerabilities, particularly high debt accumulation, are currently being manifested in many economies across the globe especially those of the Developing Economies and there is the need to address them,” he said.

Laporte notes that in 2022, a combination of large financing needs and tightening financing conditions worsened Ghana’s debt sustainability concerns, which effectively shut off Ghana from the Eurobond market. Large capital outflows, combined with monetary policy tightening in advanced economies, put significant pressure on the exchange rate and this created a feedback loop with inflation.

The domestic financial sector therefore became a major funding source of the fiscal as interest rates became less affordable particularly for the private sector. Banks built unhealthy exposure to the sovereign and these developments interrupted the post COVID-19 recovery of the economy, he said.

Citing statistics captured in the report, Larporte said it indicates the burden of the challenges (particularly, high inflation and low growth) has fallen on all, but especially on the vulnerable segments of the population.

“Estimates suggest that overall poverty increased in 2022. The inflation shock alone is believed to have pushed over 800,000 Ghanaians into poverty. The poorest among the population were the most affected, but the shock was felt by most Ghanaian households. Furthermore, food insecurity worsened by the last quarter of 2022 when inflation was at its peak,” he said.

By Emmanuel K Dogbevi
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