It’s 3 p.m. in the Ghanaian capital of Accra, and 50-year-old entrepreneur Harry Larbi is sitting in front of his auto-parts dealership, still waiting for his first customer of the day.
The Ghanaian cedi’s 37 percent slump this year, the worst performance among more than 150 currencies tracked by Bloomberg, is pushing prices of Larbi’s imported Mercedes-Benz parts beyond the reach of many of his customers. With inflation in the West African country running at a record 15 percent, his isn’t the only company that’s feeling the pinch.
“Business is not good at all,” the father of four said last month outside his rented store on a city-center street, surrounded by other small businesses selling everything from computer parts to second-hand washing machines. “We have to increase the price of our goods almost every day because the dollar rate keeps going up and customers aren’t buying. They say it’s too expensive.”
Ghana’s economy is in crisis after years of uncontrolled state spending, which has pushed up consumer prices and prompted companies including the nation’s biggest buyer of cocoa to postpone plans for expansion. The continent’s largest gold producer after South Africa sought help last week from the International Monetary Fund, ending months of contradictory statements about whether it needs emergency aid.
Slumping prices of gold and cocoa, two of Ghana’s main exports, undercut steps taken to narrow the budget deficit and made targets to reduce the shortfall “too ambitious,” Finance Minister Seth Terkper said yesterday in an interview in Washington, where he’s attending the U.S.-Africa Leaders Summit. The IMF program will include support for the nation’s balance of payments, he said.
“We believe strongly that we are putting the right mechanisms in place,” Terkper said. “It is about the certainty of policy that comes with an IMF endorsement.”
Foreign-exchange traders took little cheer from the approach to the IMF, sending the cedi tumbling by as much as 6.9 percent yesterday to match the record-low of 3.95 per dollar on July 30. Today, it dropped 1.6 percent to 3.78 as of 1:19 p.m. in New York. The cedi has weakened every year since Bloomberg started collecting data on the currency in 1999.
Ghana’s indecision about how to deal with its economic issues is at the heart of worsening sentiment toward the cedi.
The currency of the world’s biggest cocoa producer after neighboring Ivory Coast slid 6.2 percent on July 30 as Ghana’s authorities said they preferred a “home-grown strategy” to an IMF loan and planned to sell $1.5 billion in Eurobonds to shore up the nation’s finances. In an about-face, the government said Aug. 1 that President John Dramani Mahama had instructed his economic advisers to “open discussions” with the IMF.
“While the government’s intentions in seeking IMF aid are laudable, we don’t believe that this is enough to shore up investor confidence,” Nema Ramkhelawan-Bhana, an analyst at Rand Merchant Bank, a unit of South Africa’s second-biggest lender, said yesterday by phone.
She points to Zambia’s kwacha as an example of how things could be different for Ghana and the cedi. From being the world’s fifth-worst performing currency from January through March, the kwacha rallied to become the biggest gainer since May after Zambia took action to curb its trade deficit.
“It was a race to the bottom for both those currencies,” Johannesburg-based Ramkhelawan-Bhana said. “But in Zambia, the central bank stepped in with almost extreme tightening measures, and the kwacha came back quite quickly. In Ghana, there has been a lot of to-and-froing so the market doesn’t have any confidence.”
Ghana raised its forecast last month for the 2014 budget deficit to 8.8 percent of gross domestic product, from 8.5 percent, as state workers’ pay ballooned to almost 70 percent of tax income. Since having most of its debt cleared in 2005 as part of a global debt-relief campaign for poorer nations, Ghana boosted borrowing while failing to keep spending under control.
Ghana issued $750 million of 10-year Eurobonds in July 2013 with a coupon of 7.875 percent notes, according to data compiled by Bloomberg. The nation is planning on going ahead with another offering of Eurobonds, Terkper said yesterday.
While an IMF loan and bond issue would help support the cedi, Ghana also needs to curb spending and narrow the deficit, said Melissa Verreyne, an analyst at NKC Independent Economists in Paarl, South Africa.
“They’re not really willing to tackle the reforms that they have to do,” Verreyne said by phone on July 30. “Until they address the fundamental concerns, I don’t think the cedi will recover.”
For companies that import goods, inflation, spurred by the weak currency, is the biggest issue. Ghanaians hoarding foreign currency has worsened a dollar shortage and further stoked consumer prices.
Produce Buying Co., Ghana’s largest purchaser of cocoa from farmers, delayed plans last month to borrow $30 million from France’s development agency as the cedi’s slide boosted its repayments. Lagos, Nigeria-based United Bank for Africa Plc suspended cross-border transactions with its Ghana unit, while the Ghana Association of Bankers said July 18 the currency’s weakness may trigger defaults among borrowers of foreign loans.
For Larbi, whose Benz Place Enterprise store is a fraction of the size of those companies, IMF support can’t come soon enough, even if it means the government has to tighten its belt.
Customers, who don’t seem to mind the shop’s peeling paint or smell of sewage from the street, are put off when they hear the latest price for spare parts for their Mercedes limousine or decades-old taxi. The car brand is a unit of German manufacturer Daimler AG. Sales were down a third in the first half to 10,000 cedis ($2,649), Larbi said.
“They’ve tried everything, but nothing is working,” he said, looking out onto a street that lacks the bustle of a year ago. “Let’s go to the IMF until we stabilize the cedi. We should suffer and gain and come back.”