Investors demand concrete proof of fiscal discipline

Investors are demanding concrete evidence that efforts aimed at reining in fiscal deficit are yielding results before regaining confidence in the cedi.

While authorities highlight better-than-anticipated economic metrics under the International Monetary Fund programme and growing reserves – including over US$2billion in gold holdings, wary investors want to see the government take decisive action to fix the fiscal gaps undermining the cedi’s performance.

Analysts believe the posture is due to concerns over the medium to long-term viability of the cedi, with reported inflows between now and the end of the year seen as merely stop-gap measures.

“While the Bank of Ghana and the Ministry of Finance have deployed moral suasion as the main tool to calm sentiments, assuring investors of adequate reserves to meet the market’s needs, it appears investors will hold out for hard evidence of fiscal discipline to complement the recovery in other macroeconomic indicators,” said GCB Capital in a research note.

The local currency has been under intense selling pressure in recent months, with sustained depreciation against it’s major trading counterparts. So far this year, the local unit has declined to hit record lows above GH¢15 per dollar.

“The pronounced revenue gap in Q1-2024 and the frontloaded expenditure for the period already yielded a higher primary deficit (on commitment) of 0.7 percent GDP versus the target of -0.2 percent,” GCB Capital stated.

“This fiscal outturn will require a stronger revenue performance through the remaining quarters of 2024 and a commitment to fiscal consolidation and expenditure rationalisation to restore a balance, which is key for anchoring sentiments,” the note continued.

Factors like speculative demand, payments to independent power producers and contractors, faster import growth and seasonality effects have exacerbated pressures on the cedi, according to the analysts.

GCB Capital welcomed the Bank of Ghana’s (BoG) targeted support to selected corporates to ease the FX pressure build-up and the partnership with the Ghana Association of Bankers to streamline documentation around foreign payments.

However, it said “beyond the clamp-down on advertised rates, stricter supervision and enforcement of FX rules could be more effective in quelling the speculative pressures”.

Speaking at the 118th Monetary Policy Committee press briefing, BoG Governor Dr. Ernest Addison acknowledged the currency’s challenges while reiterating the economy’s underlying resilience.

He explained that recent FX pressures were a reflection of a weakening of the current account surplus due to higher import demand and lower export revenue, especially a sharp fall in cocoa export earnings.

He added that the FX market pressures also reflect robust public spending on IPP arrears payment and capital expenditure outlays.

The governor warned there are “indications of increased pressures from importers diverting foreign exchange demand requirements into informal markets, increasing speculative demand for foreign exchange”.

But he stressed: “The Bank of Ghana, however, has adequate reserves to manage these shocks to the foreign exchange market, having added over US$600million to the current foreign exchange reserve levels over the first five months of the year”.

The central bank head used the opportunity to outline measures to “improve market conduct and instil sanity”, including working with banks to streamline forex documentation, directly absorbing some corporate forex demand, and clamping down on illegal operators.

“Foreign exchange bureaux monitoring will be stepped up to ensure compliance with their regulatory framework,” he stated.

He added that there would be heightened enforcement on the ban on foreign exchange bureaux (FXBs) from advertising rates outside their premises and especially on social media platforms.

The governor also urged all stakeholders to be circumspect in pronouncements which could weaken confidence in the local economy ahead of elections later this year.