On 4 February the Central Bank of Ghana introduced foreign exchange controls and two days later raised interest rates by 200 basis points to 18%. These measures are part of the attempt to halt depreciation by compelling demand for the national currency (cedi) and break currency sell-off. On 13 February, the Central Bank relaxed some of these control measures as a response to objections coming from the Ghanaian business community. Before the Central Bank intervention, the cedi lost 25% against the US dollar in 2013 and depreciated with another 7.8% early-2014. Investors sold the local currency amid growing concerns over the soaring double-digit fiscal and current account deficits. These imbalances persevere mainly through overruns in the public wage bill, rising interest costs, high capital expenditure since the oil boom and weakened cocoa and gold prices that create revenue shortfalls. The weakened cedi and administered price increases, have also contributed to inflation reaching 13.5% end-2013.

Impact on country risk

The capital controls are mainly oriented at repatriation of export proceeds and discouraging local credit and cash transactions in foreign currency, while it is clearly stated that imports- and foreign debt payments are not being targeted by these measures. It is expected for any effect of the capital control measures on the value of the cedi to be relatively short-lived in the absence of fiscal consolidation to address the macroeconomic imbalances. Moreover, these controls might even increase the risk of creating economic distortions by encouraging parallel market activity. On the other hand, it is presumed that the government is not selling its valuable international reserves for defending the cedi, as they still reach around 3 months of import cover, reflecting a still adequate liquidity position. To address its increased vulnerabilities, the government needs to maintain a tight monetary policy and implement bold and effective structural reforms. However, despite the fact that pressure mainly stems from domestic glitches, the US federal reserve’s monetary policy tapering and associated capital outflows from emerging markets, might also be partially responsible for the sell-off tendency.

Analyst: Louise Van Cauwenbergh,  l.vancauwenbergh@credendogroup.com