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President of Ghana defends emergency measures; calls for rebalancing

As market doubts grow over the government’s plan to stem the free fall in the cedi, Ghanaian president John Dramani Mahama defends the actions, pledges reforms to rebalance the economy and sounds the alarm over boom/bust commodity cycles.

Ghana’s emergency plan to arrest the slide in the currency – including FX controls and interest-rate hikes – are temporary measures and no substitute for trade and fiscal reforms, Mahama tells Euromoney in an interview in London.

With a large current-account deficit at double-digits, modest foreign-exchange reserves and a large fiscal deficit – expected to be above 8.5% this year – Ghana is highly vulnerable to economic shocks.

In 2013, the cedi dropped by 23% against the dollar, becoming the worst-performing African currency after the South African rand. In recent weeks, the cedi depreciated as much as 6% against the dollar, to become the world’s third-worst performing currency after the Argentine peso and Kazakh tenge.

Capital Economics

Analysts fear soft capital controls, imposed earlier this year, will encourage capital flight and exacerbate discrepancies in the black market.

However, Ghana’s president has defended the measures.

“So far, these are short-term measures to control cedi depreciation and to stop speculation over our currency,” he says. “More medium- and long-term measures will need to be implemented so that changes will be permanent.

Ghanaian president John Dramani Mahama

“We have come from a command-and-control economy to a more liberalized economy. One cog of this was the liberalization of our foreign-exchange regime, but in making that move we have moved from one extreme to another. Our foreign-exchange regulations at the time were too lax.”

He adds: “Even though these measures should have been introduced before, we took the opportunity of the current cedi slide to tighten things a bit. In the very short term we can see that there has been a positive response. The cedi has made some gains in the last few days.”

Domestic debt-servicing costs in 2013 reached almost 40% above what the government budgeted and now consume 20% of government revenues. In a note published on Friday, Moody’s, which rates the sovereign B1 with a negative outlook, predicts the debt-to-GDP ratio forecast to reach 51.2% of GDP by the end of 2014.

In the longer term, Ghana will need to bring the deficit down, reduce import dependence and diversify the structure of the economy, explains Mahama, adding that failure to embark on substantive reforms opens up the risk the economy will be held hostage to boom-and-bust commodity-price cycles for years to come.

“When your economy is dependent on the export of primary products, you expect a cycle of booms and busts, and this is exactly what has been happening,” he says. “The prices of gold and cocoa have been fluctuating a lot and any time we see a dip in prices there is an effect on our economy.”

During the past year, with volatility in the gold and cocoa markets, Ghana has lost $1.3 billion in export revenue.

“Ultimately we need to do something about our reliance on this small store of commodities where prices are unreliable,” says Mahama.

Value-added production and diversification of the economy will be key to Ghana’s long-term adjustment. The president has high ambitions to increase total production of cocoa by 50%, and exports should consist not only of raw cocoa beans but secondary and tertiary products as well.

Ghana is also considering introducing a sliding scale of allocation with respect to cocoa production to favour producers at the advanced stage of the product cycle, notes Mahama.

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