By: Dianna Games

Ghana Cedis

Ghana Cedis

HAS the bubble burst for Ghana, a long-time darling of emerging-market investors with its political stability, high growth rates and apparent prudent economic management?

It’s a question companies are starting to ask themselves as the country lurches into a situation reminiscent of the 1970s. The introduction of strict foreign exchange controls last week is a very controversial move. It has sparked concern among local and foreign investors, who anticipate a tougher operating environment.

The new controls immediately spawned a currency black market. Within days, the local currency, the cedi, was selling on the streets at three times the official rate. Banks reported people closing foreign currency accounts and Ghanaians started to send their forex abroad and to neighboring states.

The cedi has been in steady decline for more than year, recently reaching its lowest level against the dollar in two decades. The crisis was precipitated by chronic trade and fiscal imbalances. High-cost imports to build infrastructure for the oil industry have not been offset by commodity exports in an era of lower prices for Ghana’s main revenue earners, particularly gold, which lost 25% of its value last year.

The economy gets 72% of export revenue from just three commodities — gold, cocoa and now oil. Even oil production, which started in 2010 and earned Ghana $1.4bn from 2011 to mid-2013, has been unable to rescue the economy from its decline.

Problems in the oilfields have led to a significant slowdown in oil production over the past two years. The government puts the loss of potential export revenue last year at $1.3bn.

High government spending has led to large fiscal imbalances that the state is trying to tackle by getting rid of fuel and other subsidies, hitting consumers’ pockets hard.

And the inflation bogey is back. After respective administrations reduced inflation from nearly 50% in the 1980s to single digits by 2011, it is now creeping back up, hitting 13.8% (year on year) last month.

Just as the country was counting the cost of these problems, rumours of US stimulus tapering and a general pull-back from emerging markets prompted the central bank to hoard dollars to bolster its foreign reserves.

The exchange controls introduced last week include a ban on dollar transactions for purchases and sales within Ghana, which have become more common as people try to hedge against the weakening cedi. This move is likely to hit South Africa’s mall developers and financiers, who have set tenant rentals in dollars, among other investors.

Forex account-holders may withdraw dollars only if they can prove they need the money for a foreign trip, and then it is capped at $10,000. Exporters have to convert their export proceeds into local currency after 30 days and pay increasingly unfavorable rates to buy it back for future transactions.

The move harks back to the days Ghanaians thought were behind them. Until the early 1980s, foreign exchange controls were the dominant economic policy in Ghana. The black market thrived and currency trading became the biggest game in town.

They were considerably eased over time but have now been tightened up again to try to tackle several problems simultaneously. But they have sparked investor concern and worry among locals about the effect on their businesses — and on the good news story their country has become.

There are fears that the new measures will put a brake on new inward investment, further weakening the currency and pushing people to stash hard currencies at home, thereby increasing shortages in the market.

Not only Ghana is experiencing difficulties in the wake of trends in global markets, but it is a good example of the kind of risk that remains in Africa. It is a cautionary note to a narrative echoing with overly optimistic statements about “Africa rising”.

• Games is CEO of advisory company Africa@Work

February 17 2014, 07:11

Source: Dianna Games

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