Import dependency (and confidence) bite... Ghana on independence day

Ghana’s perennial currency volatility problems are again threatening to dent the country’s generally positive recent economic performance[1].  President Akufo-Addo recently said the issue had made him “upset and anxious” and the debate over the currency is likely to be a prominent feature of today’s Independence Day holiday.

Situation Report

  • January 2019 saw the Cedi fall 2.6% against the US Dollar compared to 0.1% for the same month in 2018. Even more dramatically, in the following month depreciation reached 9.3%[2]. The Cedi’s performance so far in 2019 has been the worst of 140 currencies tracked by Bloomberg.

  • The Bank of Ghana (BoG) has attempted to reassure citizens and investors that, despite the depreciation of the Cedi, the economic fundamentals remain strong, and that it is committed to rebuilding international reserves[3].

  • New directives have been issued to licensed foreign exchange traders[4][5]. The directives are largely procedural and are aimed at increasing transparency and, at this stage, are not likely to incentivise any significant change in traded volumes.

  • Alarmed at the rate of depreciation, the Ghana Union of Traders Association has called on government to consider using the Chinese Yuan as a major trading currency in order to reduce dollar demand and help those who import materials from China – imports totalled USD 2 billion in 2018[6].

According to BoG Governor Ernest Addison, in 2018 the central bank was releasing foreign exchange locally in order to keep the Cedi stable and consolidate significant reduction in the inflation rate but stopped or slowed that process due to falling reserves[7]. In addition, the recent banking crisis and subsequent license revocation for a number of players has reduced confidence in the system, diminishing appetite for Cedi assets. Bloomberg reports that foreign uptake of the USD 391 million worth of cedi-denominated bonds issued so far in 2019 has been only 6.3% compared to more than 30% in 2018[8].

Restoring confidence is made more difficult by differing language from the BoG itself. For example, a recent BoG report described the depreciation as likely to continue throughout the year due to factors such as oil price rises, slowdowns in the US and Chinese economies and expected rate hikes in the US[9]. By contrast, the impression from public statements of officials such as Steve Opata (Director of Financial Markets at BoG) is of something more temporary[10].

Outlook

Key triggers for exchange rate stability to be monitored in the next 3-9 months include:

  • Cash injection: Loans for the cocoa regulator, COCOBOD, are expected this month, as well as the final tranche of the USD 918 million IMF Extended Credit Facility, and will provide support for the international reserves position[11]. Indeed, according to recent press reports, the BoG expects USD 800 million to be added to the net international reserves “from cocoa, some other financial transactions that we are doing [and] oil exports[12].” Additionally, export receipts may receive a boost with first gold from AngloGold Ashanti’s refurbished Obuasi mine by end-2019[13].

  • Bond sales: Government has launched a GHS 1.92 billion (USD 347 million) bond in order to help with recapitalising some of Ghana’s struggling domestic banks. The deadline for the banks meeting the capital requirement is 31st March, as such the bond sale should be concluded by then[14]. However, waning appetite referenced above, and the rate of debt accumulation in recent years, make this a suboptimal tool.

  • Interest rate: The BoG monetary policy committee (MPC) will have its next meeting on 20th-22nd March.  Although inflation is within the 6-10% target, there will be pressure to hold or even increase the policy rate (which was reduced to 16% in January) given the knock-on effect of exchange rate movements on the price level.

  • Fiscal discipline: The official end of the IMF ECF in April will be a major test for the government’s fiscal discipline. Elections are scheduled to take place in December 2020 and ‘there is no cash in the system’ is a ready complaint on the streets. There is a natural incentive to relax public sector hiring/ freeze wages  currently in place. Such changes, if haphazard, are likely to be inflationary and contribute to currency depreciation. 

Meanwhile, a structural transformation is what’s required. For example, capital goods, intermediate goods and consumer goods were 24%, 50% and 37% of Ghanaian imports in 2017. Raw materials only 7%. Boosting local production of value-added goods is therefore the primary channel for reducing Ghana’s import dependency.

To that end, government launched its One District, One Factory Initiative (1D1F) in 2017, an industrialisation strategy, aiming at a ‘factory in each of the 232 districts of Ghana by 2020’. The roll out has been slower than some had hoped. According to February 2019 press reports, 79 such projects were at varying stages of construction.

Ghanaian officials expect oil output to double by 2023 and hit 500,000 bpd by 2025[15], providing a boost for foreign exchange reserves. But 1D1F, productivity enhancing policies such as the revived rail network, Electricity Company of Ghana reform, and ports improvement may be more important for resolving this constitutional problem.

 

[1] An increase in GDP of 8.1% in 2017 according to the World Bank.

[2] https://www.xe.com/currencycharts/?from=USD&to=GHS&view=1Y

[3] https://www.pulse.com.gh/bi/finance/the-cedi-is-depreciating-but-the-bank-of-ghana-says-the-economic-fundamentals-are/jmmm431

[4] https://www.pulse.com.gh/bi/finance/here-are-some-directives-the-bank-of-ghana-has-introduced-to-forex-market-operators/8m7273w

[5] https://www.myjoyonline.com/business/2019/february-25th/bog-introduces-new-forex-market-regulationsto-help-stabilize-cedi.php

[6] https://www.citibusinessnews.com/2019/03/04/importers-advocate-use-of-chinese-yuan-to-reduce-fx-pressures/

[7] https://www.modernghana.com/news/913543/cedi-among-worst-performing-currencies-in-emerging-markets.html

[8] https://www.bloomberg.com/news/articles/2019-02-22/cedi-weakens-to-record-as-foreign-investors-shun-country-s-bonds

[9] https://www.bog.gov.gh/privatecontent/Publications/Staff_Working_Papers/The%20Effect%20of%20External%20Conditions%20on%20the%20Economy%20of%20Ghana.pdf

[10] https://www.bloomberg.com/news/articles/2019-02-27/cedi-to-bounce-back-on-strong-ghana-economy-says-central-bank

[11] https://www.myjoyonline.com/business/2019/February-23rd/imf-board-sets-march-ending-for-ghanas-final-program-review-before-exit.php

[12] https://www.ghanaweb.com/GhanaHomePage/business/Bank-of-Ghana-to-inject-800m-into-reserves-efforts-to-stabilise-cedi-728107

[13] https://www.miningglobal.com/mining-sites/anglogold-ashanti-expects-gold-production-obuasi-begin-year-end

[14] https://www.ghanaweb.com/GhanaHomePage/business/GHc1-92-billion-GAT-bonds-go-up-on-sale-725005

[15] https://www.ghanaweb.com/GhanaHomePage/business/Ghana-s-oil-production-to-go-up-500k-barrels-per-day-by-2023-Ofori-Atta-723588

Nana Ampofo