3 Rescuing the Ghana Cedi

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)

Why has been the Ghana Cedi Collapsing?

In early 2014, the Country’s President John Mahama cited the globaleffects of the American Federal Reserve's recovery on tapering, as havingled to currency reactions in emerging markets.

On the contrary Experts maintained a drastic stand that – “While the Fed'spolicy has had an impact on the main capital markets, including 'frontiermarkets' such as Ghana, the main cause for the depreciation of the cedicannot be imputed to the United States, but rather to major structuralimbalances of the Ghanaian economy."

They add "The Fed policy has virtually played no role in the cedi'sdepreciation. It is an entirely domestic issue, with the budget deficit beingat its core".

It is to be noted that while the cedi lost 4.4% of its value against thedollar in the first seven weeks of the year 2014, it has fallen by about40% in the past two years alone.

Rescuing the Ghana Cedi!Hemal Mehta. (Jan. 2015).


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.



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.



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.



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.



The Ghana Cedi appears to be coming under some pressure again only daysinto 2015. This has seen the local currency go down marginally.

For instance as in December 2014, one needed 3 Ghana cedis 1 pesewa toget a dollar from the Forex Bureau, but it is now 3 Ghana cedis 4 pesewasto a dollar. A View attributes this to increasing demand for dollars forimports.

Industries may be needing more dollars to also import whatevercommodity they work with which could account for the slight depreciationof 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 somenew measures to halt any free fall. They will have to be proactive andanticipate to be able to put all scenarios into consideration and do a betterprediction of how the currency is going to be.



Recently, renowned cleric Archbishop Duncan Williams prayed for thenational currency to start rising in value.

"I command the resurrection of the cedi," he told worshippers at his ActionFaith Chapel in Accra.


What Next?

Although room for fiscal maneuvering has shrunk in Ghana in recentmonths, the government’s subsequent efforts to tighten spending andboost revenues is being welcomed by investors and lenders.

Cuts to public expenditures and lower oil income will likely further slowgrowth in 2015, but strong output from the agriculture industry andimproving performance from service sectors should help ensure afavorable medium-term outlook.


Tighten the Belt!

Ghana has been one of Africa’s outstanding performers in recent years, withstrong GDP growth, a wave of FDI, revamped tax regimes and improved datacollection. However the country’s weaknesses were exposed in 2014 ascommodity prices dropped, helping to widen the budget deficit and putpressure 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 toadvanced economies, is a far cry from the heady days of 2011, when Ghanaexperienced 15% growth on the back of its fledgling oil industry.

The biggest challenges have been fiscal in nature. The 2015 budget – unveiled inNovember – aims to cut the fiscal deficit to 6.5% of GDP in 2015 down from aprojected 9.6% in 2014, through measures including a 17.5% petroleum tax andthe extension of a temporary hiring freeze for public sector workers, with theexception of those in the health or education sectors. The current budgetarydeficit is far lower than what it was several years earlier, when the shortfalloften ranged in the double digits, but high current spending during the bullyears has left the Ghanaian government re-balancing the budget at a time whengrowth is slowing.Rescuing the Ghana Cedi!

Hemal Mehta. (Jan. 2015).

Structural Reform String Attached -

The country has already sold a $1bn Eurobond at a rate of 8.125% in Sep 2014 tohelp address the deficit – an issuance that was three times oversubscribed – butis also working to secure a loan deal from the IMF. To this end, discussions arealready under way to cut public wages, on which the government spent inexcess 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 thusfar. In Nov, IMF lauded the country’s commitment to cutting the budget deficitto 3.5% of GDP by 2017, adding that other proposed measures – suchreductions in energy subsidies – would also be beneficial.

However, ratings agency Fitch predicted the IMF deal would probably not beconcluded until April. As of Dec, projected was a fiscal deficit of 8% of GDP in2015, categorizing the government target as “exceptionally ambitious” andechoing concerns about the difficulty of raising government revenues in themidst of an economic slowdown. Fitch has also warned that the cedi could comeunder further pressure in early 2015 if an IMF deal is still not in sight. Thecurrency’s steep fall in 2014 – down roughly 40% against the dollar – made it theworld’s worst performing currency that year. This in turn has pushed upinflation, as imports have become more expensive.Rescuing the Ghana Cedi!

Hemal Mehta. (Jan. 2015).

Sweet relief:

The cocoa sector may prove to be a ray of sunshine amidst this gloomybackdrop. In October the government announced a near 63% increase in theprice paid to farmers for the crop. The move is likely to boost production inthe world’s second-largest cocoa exporting nation, while the higher pricepromises to help farmers make investments in new equipment andtechnology 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 Ebolaoutbreak in the region. The sector received another boost in September inthe form of a $1.7bn financing deal for COCOBOD, the state’s marketingagency and watchdog, to purchase this season’s cocoa crop, which isexpected to top 1m tons.


On the brighter side…

The country’s service sectors are seeing strong growth. Ghana’s banking sectorperformed well in 2014 despite the economic slowdown, with credit expandingand non-performing loans under control. While banking penetration remainsfairly low – due in part low to lending rates among small and medium-sizedenterprises and less affluent households – it is likely to witness continuedgrowth in the coming years.

Tourism is flourishing, with the decline of the cedi making Ghana an even moreaffordable destination for foreigners. The World Tourism & Travel Council hassaid the sector’s direct contribution to GDP could increase by 9.7% in 2014, upfrom an estimated 2.4% of GDP in 2013. This growth in tourism has led to awave of investments in upmarket hotels and resorts, targeting business travelersin particular. However Ebola subject needs to be managed! Connectivity isexpected to grow. Accra’s location in the heart of West Africa, its relativepolitical stability is attractive.

While 2015 will be a slower year for the Ghanaian economy, replete withsignificant downside risks, an IMF deal would do much to boost investorconfidence, rein in bond yields and bolster reform efforts in the run-up to the2016 elections. Furthermore, a variety of sectors – ranging from tourism tobanking – could continue to enjoy robust growth.


www.economist.comwww.theafricareport.comwww.bbcnews.comwww.newafricanmagazine.com

BIBLIOGRAPHY.

Rescuing the Ghana Cedi! Hemal Mehta. (Jan. 2015).

http://www.economist.com/

http://www.theafricareport.com/

http://www.bbcnews.com/

http://www.newafricanmagazine.com/

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3 Rescuing the Ghana Cedi