Fate of Mills Administration Tied to Cedi

The exchange rate for the cedi, quoted in the Wall Street Journal as 1.95 cedis to a dollar, stands on a precipice and faces the psychological level of two cedis to a dollar. If this rate is broached, the cedi will sink faster and probably take President Mills’ government down with it.

The Bank of Ghana announced policies to resuscitate the cedi by re-introducing short-term treasury bills, requiring Banks to cover accounts held for other banks in cedis, and raising interest rates. However, these policies do not address the core issues pushing the cedi lower, which is profligate spending on the part of the government.

The International Monetary Fund (IMF), after meetings in Ghana with President Mills, the Bank of Ghana (BOG), and the Ministry of Finance and Economic Planning (MOFEP), concluded that cedi depreciation poses risks to the Ghanaian economy.

IMF cautioned the Mills administration on spending and deficits. Ballooning trade deficits, in terms of imports versus exports, and budget deficits, in terms of government receipts minus expenditure, are the cedi’s nemesis. In addition, stabilizing exchange rates in the short-term is difficult, because exchange rates reflect national policies built up over time in an economy. The exchange rate of a currency depends on the level of inflation, deficits and, the most important factor, political risk.

When inflation in Ghana dropped, the cedi should have stabilized or appreciated against the dollar, but it depreciated. Thus, the recent increase in interest rates will not prop up the cedi but will drive up the cost of doing business for Ghana’s fragile industries.

On the issue of deficits – curbing imports and cutting government spending are the solutions.

In terms of political risk, MOFEP recently raised the tempo of the debate on the national economy by attacking the opposition parties and the press. Confidence in the government erodes when a vital arm of government, like the MOFEP, turns into a political arm or becomes propaganda machinery for the incumbent government. Reports of political corruption by former Attorney General Mr. Martin Amidu and the administration’s refusal to prosecute officials accused of corruption have bludgeoned President Mills’ record on transparency and shows graft.

Lack of transparency and unfettered graft raise political risks in doing business in Ghana. As these risks rise, investors will pull money out, transfer profits out, or look for alternative destinations for their capital. Finally, it appears BOG has no solution for the collapsing exchange rate. The trend for the cedi is down, and currency dealers find the Governor of BOG’s statements that Ghana has enough dollars to defend the cedi as disingenuous because Ghana has trade and budget deficits.

MOFEP, in its Budget Statement to Parliament for 2011, stated that the cedi appreciated 0.1% against the dollar in first three quarters of 2010 (p. 33). On page 35 of the 2010 Budget Statement, MOFEP states that cedi appreciation means restored confidence in performance and positive expectations for the Ghanaian economy.

On July 7, 2012, the Wall Street Journal quoted the cedi exchange rate as 1.95 cedis to one dollar. Using the statement from the Finance Ministry as the criteria, cedi depreciation equates to a vote of no confidence and negative expectation in the Mills administration.

Trade and budget deficits will be the topic for subsequent articles. The author, Kofi Amoabin, is a market analyst with Futures Marketing Enterprises, Inc in Chicago. He holds a Master of Science in finance and Bachelor of Science in engineering.