1. Rescuing the Ghana Cedi!
An account of the
currency crisis of
one of Africa’s most
promising economy!
A Review by Hemal Mehta.
(January 2015)
2. Why has been the Ghana Cedi Collapsing?
In early 2014, the Country’s President John Mahama cited the global
effects of the American Federal Reserve's recovery on tapering, as having
led to currency reactions in emerging markets.
On the contrary Experts maintained a drastic stand that – “While the Fed's
policy has had an impact on the main capital markets, including 'frontier
markets' such as Ghana, the main cause for the depreciation of the cedi
cannot be imputed to the United States, but rather to major structural
imbalances of the Ghanaian economy."
They add "The Fed policy has virtually played no role in the cedi's
depreciation. It is an entirely domestic issue, with the budget deficit being
at its core".
It is to be noted that while the cedi lost 4.4% of its value against the
dollar in the first seven weeks of the year 2014, it has fallen by about
40% in the past two years alone.
Rescuing the Ghana Cedi!
Hemal Mehta. (Jan. 2015).
3. Why has been the Ghana Cedi Collapsing?
Unlike a number of African countries, Ghana has been far from exemplary
when it comes to the management of public finances.
Between 2011 and 2013, Ghana's budget deficit slipped very rapidly from
5.5% to 10.2% of GDP, as expenditure increased sharply from 25% to 31%
of national wealth. Roughly in Mid 2012, the government adopted a new
public salary structure, leading to an increase of all wages from 5% to
10%, as per Ecobank.
In the meantime, the price of cocoa, the country's second export
generator, continued to decline and in March 2013 it was nearly 40%
below the February 2011 level.
The price of gold, the country's premier source of foreign exchange, also
nose-dived, losing more than a third of its value between October 2012
and the end of 2013.
The loss of earnings amounted to about US$1 bn, (€728.6) million in total.
Hence it was like a perfect storm scenario and Oil revenue was not
enough to compensate these problems.
Rescuing the Ghana Cedi!
Hemal Mehta. (Jan. 2015).
4. Why has been the Ghana Cedi Collapsing?
An oil producer since December 2010, Ghana hoped to contain the
slippage in expenditure and the drop in income through newly discovered
resource. But production had still not reached the expected level of 120000
barrels per day. And in the first years, 90 to 95% of funds goes to petroleum
companies in order to cover their investments. Not to the state.
As a consequence, in addition to the public fiscal deficit, there was a
dramatic deterioration of the current account balance, falling in a space of
two months from -5% to -13% in 2013. This "twin deficits" phenomenon
had been characterized by an escalation of domestic and foreign debts, and
by a constant depreciation of the cedi's value.
Interest rates hikes, from 12.5% to 18% in one year, had not been enough
to stabilize the currency. Mahama's government had tried to slow down
the increasing dollarisation of the economy without real success. And there
arose an argument that the new measures could encourage a black market
boom for the greenback.
Rescuing the Ghana Cedi!
Hemal Mehta. (Jan. 2015).
5. Why has been the Ghana Cedi Collapsing?
This came in the face of waning general trust as a result of a significant
inflation and the central bank's rather thin currency reserves.
While economic growth could have become the key driving force for the
improvement of Ghana's finances and currency, the exceptional 2011
economic growth and its real GDP increase of 15% seemed, to belong to a
bygone era.
Ghana's growth fell to 0.3% in the third quarter of 2013. There were clear
signs of a slowdown.
Part of this decline was linked to a one-off slump in gold production.
Even though growth recovered in the last quarter of 2013, reaching 6% as
in the beginning of the year, a more precise data showed that it was less
than 5% over the year as a whole.
Rescuing the Ghana Cedi!
Hemal Mehta. (Jan. 2015).
6. Why has been the Ghana Cedi Collapsing?
This came in the face of waning general trust as a result of a significant
inflation and the central bank's rather thin currency reserves.
While economic growth could have become the key driving force for the
improvement of Ghana's finances and currency, the exceptional 2011
economic growth and its real GDP increase of 15% seemed, to belong to a
bygone era.
Ghana's growth fell to 0.3% in the third quarter of 2013. There were clear
signs of a slowdown.
Part of this decline was linked to a one-off slump in gold production.
Even though growth recovered in the last quarter of 2013, reaching 6% as
in the beginning of the year, a more precise data showed that it was less
than 5% over the year as a whole.
Rescuing the Ghana Cedi!
Hemal Mehta. (Jan. 2015).
7. Why has been the Ghana Cedi Collapsing?
The Ghana Cedi appears to be coming under some pressure again only days
into 2015. This has seen the local currency go down marginally.
For instance as in December 2014, one needed 3 Ghana cedis 1 pesewa to
get a dollar from the Forex Bureau, but it is now 3 Ghana cedis 4 pesewas
to a dollar. A View attributes this to increasing demand for dollars for
imports.
Industries may be needing more dollars to also import whatever
commodity they work with which could account for the slight depreciation
of the cedi, it is supposed.
Government advised traders not to panic saying “it is early days yet”.
Meanwhile, Experts say government might have to come up with some
new measures to halt any free fall. They will have to be proactive and
anticipate to be able to put all scenarios into consideration and do a better
prediction of how the currency is going to be.
Rescuing the Ghana Cedi!
Hemal Mehta. (Jan. 2015).
8. Why has been the Ghana Cedi Collapsing?
Recently, renowned cleric Archbishop Duncan Williams prayed for the
national currency to start rising in value.
"I command the resurrection of the cedi," he told worshippers at his Action
Faith Chapel in Accra.
Rescuing the Ghana Cedi!
Hemal Mehta. (Jan. 2015).
9. What Next?
Although room for fiscal maneuvering has shrunk in Ghana in recent
months, the government’s subsequent efforts to tighten spending and
boost revenues is being welcomed by investors and lenders.
Cuts to public expenditures and lower oil income will likely further slow
growth in 2015, but strong output from the agriculture industry and
improving performance from service sectors should help ensure a
favorable medium-term outlook.
Rescuing the Ghana Cedi!
Hemal Mehta. (Jan. 2015).
10. Tighten the Belt!
Ghana has been one of Africa’s outstanding performers in recent years, with
strong GDP growth, a wave of FDI, revamped tax regimes and improved data
collection. However the country’s weaknesses were exposed in 2014 as
commodity prices dropped, helping to widen the budget deficit and put
pressure on the currency.
While GDP growth remained around 5% for 2014, according to official forecasts,
it may likely decline to 3.9% in 2015. The figure, though still robust compared to
advanced economies, is a far cry from the heady days of 2011, when Ghana
experienced 15% growth on the back of its fledgling oil industry.
The biggest challenges have been fiscal in nature. The 2015 budget – unveiled in
November – aims to cut the fiscal deficit to 6.5% of GDP in 2015 down from a
projected 9.6% in 2014, through measures including a 17.5% petroleum tax and
the extension of a temporary hiring freeze for public sector workers, with the
exception of those in the health or education sectors. The current budgetary
deficit is far lower than what it was several years earlier, when the shortfall
often ranged in the double digits, but high current spending during the bull
years has left the Ghanaian government re-balancing the budget at a time when
growth is slowing.Rescuing the Ghana Cedi!
Hemal Mehta. (Jan. 2015).
11. Structural Reform String Attached -
The country has already sold a $1bn Eurobond at a rate of 8.125% in Sep 2014 to
help address the deficit – an issuance that was three times oversubscribed – but
is also working to secure a loan deal from the IMF. To this end, discussions are
already under way to cut public wages, on which the government spent in
excess of 70% of its tax revenue in 2012 and more than half in 2014.
The government’s budgetary measures have been welcomed by the IMF thus
far. In Nov, IMF lauded the country’s commitment to cutting the budget deficit
to 3.5% of GDP by 2017, adding that other proposed measures – such
reductions in energy subsidies – would also be beneficial.
However, ratings agency Fitch predicted the IMF deal would probably not be
concluded until April. As of Dec, projected was a fiscal deficit of 8% of GDP in
2015, categorizing the government target as “exceptionally ambitious” and
echoing concerns about the difficulty of raising government revenues in the
midst of an economic slowdown. Fitch has also warned that the cedi could come
under further pressure in early 2015 if an IMF deal is still not in sight. The
currency’s steep fall in 2014 – down roughly 40% against the dollar – made it the
world’s worst performing currency that year. This in turn has pushed up
inflation, as imports have become more expensive.Rescuing the Ghana Cedi!
Hemal Mehta. (Jan. 2015).
12. Sweet relief:
The cocoa sector may prove to be a ray of sunshine amidst this gloomy
backdrop. In October the government announced a near 63% increase in the
price paid to farmers for the crop. The move is likely to boost production in
the world’s second-largest cocoa exporting nation, while the higher price
promises to help farmers make investments in new equipment and
technology to increase yields.
Cocoa beans account for more than 20% of Ghana’s export earnings –
further bolstered by recent market price increases triggered by the Ebola
outbreak in the region. The sector received another boost in September in
the form of a $1.7bn financing deal for COCOBOD, the state’s marketing
agency and watchdog, to purchase this season’s cocoa crop, which is
expected to top 1m tons.
Rescuing the Ghana Cedi!
Hemal Mehta. (Jan. 2015).
13. On the brighter side…
The country’s service sectors are seeing strong growth. Ghana’s banking sector
performed well in 2014 despite the economic slowdown, with credit expanding
and non-performing loans under control. While banking penetration remains
fairly low – due in part low to lending rates among small and medium-sized
enterprises and less affluent households – it is likely to witness continued
growth in the coming years.
Tourism is flourishing, with the decline of the cedi making Ghana an even more
affordable destination for foreigners. The World Tourism & Travel Council has
said the sector’s direct contribution to GDP could increase by 9.7% in 2014, up
from an estimated 2.4% of GDP in 2013. This growth in tourism has led to a
wave of investments in upmarket hotels and resorts, targeting business travelers
in particular. However Ebola subject needs to be managed! Connectivity is
expected to grow. Accra’s location in the heart of West Africa, its relative
political stability is attractive.
While 2015 will be a slower year for the Ghanaian economy, replete with
significant downside risks, an IMF deal would do much to boost investor
confidence, rein in bond yields and bolster reform efforts in the run-up to the
2016 elections. Furthermore, a variety of sectors – ranging from tourism to
banking – could continue to enjoy robust growth.
Rescuing the Ghana Cedi!
Hemal Mehta. (Jan. 2015).
