Ghana capital controls underscore FX fallout; won’t tackle structural problem

By:
Kanika Saigal
Published on:

The west African republic’s recent interest-rate hikes and foreign-exchange regulation changes are only short-term measures to halt the free-falling cedi. Structural changes will be needed for meaningful change.

Ghana’s central bank tightened controls on foreign-currency-denominated accounts and raised interest rates by 200 basis points on Thursday in an attempt to prevent cedi from further depreciation.

Ghana follows in the footsteps of current-account-deficit countries such as Turkey and South Africa, which hiked interest rates in a bid to control further currency weakness.

The imposition of soft capital controls underscores the perennial risks of financial protectionism in volatile frontier markets, though most analysts are sanguine about the prospect in the more-developed emerging markets (EMs).

However, analysts say Ghana’s new exchange controls fail to address the root of the problem: the country’s fiscal and trade deficits.

As a substantial importer of goods, demand for dollars in Ghana is high, putting pressure on a volatile currency. And with the discovery of oil and the growing presence of multinational corporations in the country using dollars for operations, the problem has been exacerbated.

In 2013, the currency dropped by 23% against the dollar – the worst-performing African currency after the South African rand. The cedi has depreciated every year since 1995.

As part of the foreign-currency regulation changes, proceeds from exports will need to be converted into the cedi within five days, the central bank has removed transfers between accounts denominated in foreign currencies, and foreign exchange bought for the settlement of import bills must be reported in a specific margin account to be drawn within 30 days.

The central bank will also limit withdrawals to the equivalent of about $10,000, and documentation for transfers outside the country will be required.

As well as stabilizing the cedi, the changes are designed to streamline operations and create transparency. However, the market remains bearish.

“I don’t think the measures will have the desired effect on the currency,” says Derrick Mensah, senior analyst at African Alliance Securities Ghana. “All the central bank is doing is fuelling panic.

“Instead of encouraging the use of the cedi in trade, international investors and traders will just take their dollars out of the country while they can.”

Last year, central-bank regulation changes required banks to provide 100% local currency cover for vostro accounts, before introducing short-term securities, in another attempt to halt cedi depreciation.

“But all of these measures won’t hold up in the long term,” says Mensah. “It’s nothing more than firefighting.”

For long-term changes and stability, structural changes will need to be introduced, says Samir Gadio, EM strategist at Standard Bank, adding: “While hiking interest rates is not enough to deal with currency depreciation in Ghana, as so much activity is done in dollars anyway, I understand why the central bank has chosen to introduce measures on foreign-exchange usage.

“What they have done will slow currency depreciation to a certain extent. But the central bank needs to get to the core of the issue – to look at the rising fiscal and currency-account deficit to bring Ghana’s currency under control.”

He concludes: “The major risk we need to keep an eye out for now is the growth of the black market because people won’t be able to get dollars from the formal market. The formal and informal exchange rates will start to widen.”