The Ghanian government, which faces a tough fight in Saturday’s general election, has taken aggressive steps in recent months to halt the decline of the Ghanian cedi amid a challenging macroeconomic environment.
The cedi has been under pressure for several years. Like practically every African and emerging market currency, the cedi weakened dramatically against the US dollar during the Covid-19 pandemic, during which time traders on foreign exchange markets sought the perceived safety of dollar-denominated assets.
The cedi took a further tumble in 2022, when Ghana defaulted on most of its external debt amid rising debt costs, higher interest rates, and excessive government borrowing. Since the start of 2020, the US dollar has gained almost 180% against the Ghanian cedi, which currently sits at 15 to the dollar, an increase from 11 in May 2023.
On Saturday, ruling party candidate Mahamudu Bawumia, who is replacing incumbent Nana Akufo-Addo, runs against former President John Mahama in a contest which could be influenced by the economy and citizens’ experiences of inflation.
Pension fund restrictions
It is in this context that the Ghanian government has taken drastic steps to try and halt further declines in the currency, with the authorities recently trying to prevent pension fund managers from investing in offshore assets in an attempt to limit foreign exchange outflows.
While Ghanian pension funds have tended to invest in domestic assets such as government bonds, this has changed in light of the debt default, and more fund managers have taken to increasing their exposure to overseas assets.
Under current laws, pension funds are allowed to invest up to 5% of their total assets abroad, but the national pensions regulatory authority has allegedly threatened to sanction funds who attempt to move assets, fund managers told Reuters. The authority denied there was any resistance to asset movement.
Nevertheless. most analysts are sceptical that such a move would be enough to have any meaningful impact on cedi markets.
Joseph Appiah, vice president at Accra-based investment banking firm Black Star Group, notes that attempts to stabilise the cedi have “impacted” market dynamics, particularly as efforts are made to maintain currency stability in the lead-up to the election period. While the cedi has regained some ground against the dollar over the past month, appreciating by about 7%, Appiah doubts this can be sustained.
“The current foreign exchange rate is not being backed by strong fundamentals, such as an economic rebound or government policies, but rather by central bank efforts to stabilise the cedi and manage market conditions,” he explains.
“This approach does not reflect fair market pricing. While the cedi is trading at around 15 to the dollar now, I anticipate a potential rebound to as high as 18 or even 20 to the dollar in the new year once the current interventions subside.”
Inflation likely to be key election issue
Still, the Ghanian government is keen to show that it is getting to grips with the issue.
Ghana remains highly dependent on imports for essential goods, including staples like rice and poultry. The collapse in the value of the cedi has contributed to significantly higher inflation on these goods.
Appiah says that a weakening cedi “could cause more problems for Ghana because day in and day out, households’ purchasing power is reducing and daily household incomes keep reducing.”
Indeed, in 2023, prices rose in Ghana at a rate of over 37%, with the World Bank reporting that “high inflation – particularly in food prices – has worsened living standards, pushed more people into poverty, and increased the risk of food insecurity.”
The historically weak cedi also poses a threat to the Ghanian authorities’ attempts finally to escape the cycle of frequent default. While Ghana reached a deal in January 2024 to restructure $5.4bn in debt to its official creditors, and last month bondholders agreed to accept a 37% haircut on $13bn worth of debt, the West African country is still grappling with a debt pile in excess of $50bn. A weak cedi is problematic because it makes dollar-denominated debt repayments more expensive in local terms.