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Ghana’s Efforts to Stabilize Cedi Ahead of Elections

The Ghanaian government is facing a challenging battle in the upcoming general election on Saturday, prompting it to implement aggressive measures recently to stabilize the declining Ghanaian cedi amidst difficult macroeconomic conditions.

The cedi has been experiencing pressure for several years. Similar to most African and emerging market currencies, it saw a significant depreciation against the US dollar during the Covid-19 pandemic, as traders flocked to dollar-denominated assets, viewing them as a safer investment.

The cedi further weakened in 2022 when Ghana defaulted on a large portion of its external debt, driven by increasing borrowing costs, rising interest rates, and excessive government borrowing. Since the beginning of 2020, the US dollar has appreciated nearly 180% relative to the Ghanaian cedi, which now stands at 15 to the dollar, up from 11 in May 2023.

On Saturday, ruling party candidate Mahamudu Bawumia, successor to incumbent Nana Akufo-Addo, will compete against former President John Mahama. This election could be significantly affected by economic conditions and the populace’s experiences with inflation.

Pension Fund Restrictions

In this context, the Ghanaian government has taken decisive action to combat further declines in the currency. Recently, authorities have attempted to prevent pension fund managers from investing in offshore assets to limit foreign exchange outflows.

Although Ghanaian pension funds typically invest in domestic assets like government bonds, this trend has shifted following the debt default, with more fund managers increasing their allocations to foreign assets.

Under current regulations, pension funds are permitted to invest up to 5% of their total assets abroad. However, the national pensions regulatory authority has reportedly indicated that it may impose sanctions on funds attempting to relocate assets, as reported by fund managers to Reuters. The authority has denied any obstruction to asset movement.

Nonetheless, many analysts are skeptical that such measures will significantly influence cedi markets.

Joseph Appiah, vice president at Accra-based investment firm Black Star Group, notes that attempts to stabilize the cedi have “altered” market dynamics, especially as efforts to maintain currency stability ramp up ahead of the elections. Despite a recent rebound of approximately 7% against the dollar, Appiah doubts that this trend is sustainable.

“The current foreign exchange rate lacks strong fundamental support, such as an economic recovery or effective government policies; rather, it relies on central bank interventions aimed at stabilizing the cedi and controlling market conditions,” he explains.

“This strategy does not represent fair market pricing. While the cedi is trading at around 15 to the dollar now, I foresee a potential increase to 18 or even 20 to the dollar in the upcoming year once the current interventions taper off.”

Inflation Likely to be a Key Election Issue

Nevertheless, the Ghanaian government is eager to demonstrate its commitment to addressing these issues.

Ghana remains heavily reliant on imports for essential commodities, including staples like rice and poultry. The weakening of the cedi has led to significantly elevated prices for these goods.

Appiah warns that a declining cedi “could lead to more challenges for Ghana as households’ purchasing power diminishes daily, and household incomes continue to decline.”

Indeed, in 2023, inflation in Ghana surged over 37%, with the World Bank reporting that “high inflation—especially in food prices—has degraded living standards, pushed more individuals into poverty, and heightened the risk of food insecurity.”

The persistently weak cedi poses a further challenge to the Ghanaian government’s efforts to break the cycle of frequent defaults. While Ghana reached an agreement in January 2024 to restructure $5.4 billion in debt to its official creditors, and bondholders recently accepted a 37% haircut on $13 billion of debt, the country still faces a debt burden exceeding $50 billion. A depreciating cedi complicates matters as it increases the cost of dollar-denominated debt repayments in local currency terms.

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