The cedi’s renewed fragility

A 50 cedi note

Yet again, the cedi is in the news for its fragility. To be sure, its ongoing depreciation is nowhere near its nightmarish fall in 2014 and the first half of 2015, when hurriedly devised measures by a panicky Bank of Ghana worsened, rather than improved the national currency’s performance. Nevertheless, data from Bloomberg, revealing that the cedi has started 2019 by falling faster than its emerging market peers, is cause for worry.

During last year’s accelerated depreciation of the cedi, BoG Governor, Dr Ernest Addison correctly pointed out that its performance should be judged against those of its peers and in that light, the situation did not seem so bad after all. But going by this same consideration, the cedi has, over the past five weeks, exhibited troubling weakness.

Ironically, this is coming at a time that Ghana is enjoying a sustained trade surplus which , on a quarter by quarter basis, stretches back to late 2016, and which, In turn, is contributing to a narrowing of the country’s external current account deficit.

This reveals that the real culprit is Ghana’s financial and capital account. Instructively, the relatively poor performance of this account in 2018, compared with the previous year, is directly responsible for the transformation of Ghana’s balance of payments surplus for 2017, into a deficit for last year, which has put severe pressure on the cedi’s exchange value against the international trading currencies. This has happened despite the use of nearly US$700 million out of Ghana’s foreign reserves to stem the cedi’s fall.

Simply put, Ghana is now paying the price for a decade of over-reliance on foreign financing of the fiscal deficit. To be sure this does not show up clearly in official macroeconomic data because much of the foreign financing has been classified as domestic financing simply because it has come in the form of investment into cedi denominated debt securities.

However this does not change the fundamental fact that such financing comes into Ghana as foreign exchange and is taken out at maturity – or more problematically, before maturity  – as foreign exchange too.

In the past, because Ghana was enjoying net inflows of such forex, the cedi was strengthened beyond what the country’s macroeconomic fundamentals would normally have supported. True, the cedi was depreciating most of the time, but with Ghana at the time still suffering a trade deficit and a wide current account deficit too, that depreciation was slower than it should have been.

Now, with interest rates in the United States and Europe haven risen, and those in Ghana having fallen, this country is now experiencing net outflows of capital and so this is making the cedi to fall faster than its macroeconomic fundamentals – comprising a trade surplus – should have allowed.

All this gives off the impression of a country that has run a forex investment pyram or ponzi scheme that has run its course – only that in this case, the investors have to be paid, and so it is the investment scheme owner that is in trouble.

To be fair though, successive governments in Ghana over the past decade did not set out deliberately to benefit from an unsustainable scheme; rather they all hoped that increasing oil production and consequent export sales would bridge the increasing gap. Unfortunately though, the gap has widened much faster than oil revenues have grown to bridge it, because of the interest rate developments in Ghana and the western hemisphere over the past year.

Now it is time to go back to the basics. As the BoG Governor has correctly pointed out, Ghana needs to rely more on domestic sources for its deficit financing and less on ultimately fickle foreign sources. To be sure Ghana has already dug a hole for itself and further cedi depreciation cannot be avoided in the short to medium term as Ghana weans itself of its over reliance on foreign deficit financing or develops sources of bigger forex earnings from oil exports.

But this is the only sustainable course forward, along with the lessons we must learn from our current exchange rate travails.