Ghana looks to reverse capital flight

FACED with the challenge of significant capital flight out of the country’s embattled economy, government and its central bank are now looking up to new inflows into Ghana’s capital account from which the leakages have originated to stem the foreign exchange hemorrhage which appears to be an even bigger cause of the cedi’s sharp depreciation this year than the continuing fall in export earnings.

Altogether, government expects to raise US$3.5 billion in total over the coming months in foreign loan financing; US$2.0 billion from this year’s version of the annual, self-amortising COCOBOD syndicated loan for financing the purchase of cocoa beans from local farmers for export, and another US$1.5 billion from a planned Eurobond issue – the second in two years – which would have to be paid over the next 10 years out of government’s foreign exchange cash flow.

There is also the possibility of receiving up to US$900 million from the Chinese Development Bank (CDB), this being the yet undisbursed portion of tranche B of the controversial US$3 billion CDB loan. Government now wants to restrict itself to the second tranche of US$1.5 billion, from which it has already received US$597.3 million, primarily for financing the still on-going procurement and installation of equipment for evacuating the gas generated from the Jubilee gas field, processing it and supplying it to thermal power stations. However, going by past trends, it is uncertain when - and indeed if at all – the undisbursed balance on this second tranche will be disbursed.

Both Seth Terkper, Minister for Finance and Dr Kofi Wampah, Governor of the Bank of Ghana (BoG), emphasize that all these inflows will ease the foreign exchange supply situation, which they say is the result of the country’s merchandise trade imbalance in the face of dwindling earnings from its main traditional commodity exports.

However, while the potential positive effect of these anticipated loan inflows on the cedi’s strength are incontrovertible, data released over the past fortnight – and data that has been deliberately withheld – indicate that while Ghana’s foreign exchange travails and consequent cedi depreciation began because of a fall in export earnings leading to a widening trade deficit, it has since been driven much more by net outflows in the country’s capital account, a phenomenon generally referred to as capital flight.

Data released by the Finance Minister last week confirm that released in the one before it by the BoG’s Monetary Policy Committee [MPC] that export earnings during the first five months of 2014 fell to US$5,871.9 million, down 7.5% from the corresponding period of 2013. This confirms that indeed Ghana is still suffering from declining foreign exchange earnings from exports, particularly gold.

However, both sources also report a considerably larger decline in merchandise imports during the corresponding reporting periods, of 17.8%, down to US$6,028.4 million for the first five months of 2014.

This has translated into a dramatic reduction of Ghana’s trade deficit which declined from US$990.8 million for the first five months of 2013 to just US$156.6 million for the corresponding period of this year. This is the lowest five-month trade deficit incurred by Ghana in many years.

However, this has been accompanied by the steepest five-month cedi depreciation since the year 2000. On the inter- bank market the cedi recorded cumulative depreciation of 23.9% against the US dollar, 24.1% against the pound sterling and 21.4% against the euro during the first five months of this year.

The external position got a further boost from a slight increase in inward remittances to individuals during the period as well.

Curiously though, neither the Finance Minister nor the BoG’s MPC included any data on the performance of Ghana’s capital account for the period. This is a marked departure from the MPC’s usual reporting format in particular. This simply confirms suspicions that the capital account has suffered from significant outflows which is the primary reason for the cedi’s depreciation during the first half of the year and officialdom wants to keep mute about it in order not to further erode confidence in the cedi.

Most of the capital flight since the beginning of this year has been by foreign investors in Ghana’s public domestic debt through treasury notes and bonds with tenors of three years or more. Attracted to Ghana by higher interest rates than they could get on government treasuries back at home, the recent depreciation of the cedi has caused them currency translation losses [since they have invested in cedi-denominated instruments], that have exceeded their interest rate gains. This has persuaded them to exit their investments and this has severely compounded the cedi’s weakness.

Another source of capital flight has been speculative trading in foreign exchange. Indeed it was primarily to curb this that the BoG introduced controversial FX market restrictions in February this year which achieved some limited success in stemming the speculative activities that had been driving the cedi down. Inevitably, however, when the central bank revoked some of the restrictions in June unsatiated speculative demand kicked in and drove the cedi sharply downwards in the immediate aftermath of the review.

Both sources of capital flight out of Ghana however are the result of withering confidence in the cedi’s value. Therefore, both government and the BoG are looking to use the inflows now being expected from foreign borrowing to shore up supply, and thus confidence, on the foreign exchange market as well as increase the country’s gross international reserves which had dwindled to just 2.5 months of import cover, which will strengthen confidence among foreign investors.