DailySun
The Ghanaian government is grappling with a difficult challenge in the forthcoming general election scheduled for Saturday, leading to the implementation of vigorous measures aimed at stabilizing the declining Ghanaian cedi amid tough macroeconomic circumstances.
For several years, the cedi has been under pressure. Like many African and emerging market currencies, it faced substantial depreciation against the US dollar during the Covid-19 pandemic, as investors sought safer dollar-denominated assets.
The cedi further depleted in value in 2022 when Ghana defaulted on a significant portion of its external debt, attributed to rising borrowing costs, increasing interest rates, and excessive government borrowing. Since early 2020, the US dollar has risen nearly 180% in value compared to the Ghanaian cedi, which currently stands at 15 to the dollar, increasing from 11 in May 2023.
This Saturday, the ruling party candidate Mahamudu Bawumia, who is expected to succeed incumbent Nana Akufo-Addo, will face off against former President John Mahama. Economic conditions and the public’s experience with inflation may profoundly influence the outcome of this election.
Pension Fund Restrictions
In light of these conditions, the Ghanaian government has taken significant steps to mitigate further declines in the currency. Recently, authorities have sought to prevent pension fund managers from investing in offshore assets to curtail foreign exchange outflows.
Typically, Ghanaian pension funds focus on domestic assets such as government bonds. However, post-debt default, there has been a noticeable shift as more fund managers are reallocating to foreign assets.
Current regulations allow pension funds to invest up to 5% of their total assets abroad. Nevertheless, the national pensions regulatory authority has signaled that it may impose penalties on funds attempting to shift assets, according to reports from fund managers to Reuters. The authority has denied any hindrance to asset movement.
Nonetheless, numerous analysts express skepticism regarding whether such measures will meaningfully impact cedi markets.
Joseph Appiah, vice president at Accra-based investment firm Black Star Group, indicates that efforts to stabilize the cedi have “altered” market dynamics, especially with increased interventions ahead of the elections. Despite a recent recovery of about 7% against the dollar, Appiah is doubtful about the sustainability of this trend.
“The prevailing foreign exchange rate lacks solid fundamental backing, such as economic recovery or effective government policies. Instead, it depends on central bank interventions aimed at stabilizing the cedi and managing market conditions,” he elaborates.
“This approach does not reflect accurate market pricing. While the cedi is currently at approximately 15 to the dollar, I anticipate a potential rise to 18 or even 20 to the dollar in the coming year once current interventions ease.”
Inflation Likely to be a Key Election Issue
Despite these challenges, the Ghanaian government is eager to convey its determination to tackle these issues.
Ghana remains significantly reliant on imports for essential commodities, including staples such as rice and poultry. The cedi’s depreciation has resulted in significantly higher prices for these products.
Appiah cautions that a declining cedi “could pose additional challenges for Ghana as household purchasing power diminishes daily and income levels continue to fall.”
In fact, in 2023, Ghana’s inflation soared over 37%, with the World Bank noting that “high inflation—particularly in food prices—has eroded living standards, driven more people into poverty, and increased the risk of food insecurity.”
The consistently weak cedi further complicates the Ghanaian government’s attempts to escape the cycle of frequent defaults. While Ghana secured an agreement in January 2024 to restructure $5.4 billion in debts to its official creditors and bondholders recently accepted a 37% haircut on $13 billion of debt, the nation continues to confront a debt burden exceeding $50 billion. A depreciating cedi exacerbates the issue by inflating the cost of dollar-denominated debt repayments in local currency terms.
