Ghana’s cedi weakened to a record as the central bank set limits on foreign-exchange transactions and ordered sales and purchases be done in the local currency, in a bid to halt the second-worst decline among African currencies this year.
The cedi fell 1.2 percent to 2.49 per dollar by 5 p.m. in the capital, Accra, the lowest since at least May 1994 when Bloomberg began compiling the data. The currency has slumped 23 percent in the past year, making it Africa’s worst performer after the South African rand.
The world’s second-biggest cocoa producer joins other emerging markets taking steps to halt currency declines. Turkey, India and South Africa unexpectedly raised interest rates in the face of reduced Federal Reserve stimulus. The cedi’s drop pushed inflation to a year-high in December as companies sought dollars to pay for imports.
“This is a pretty bold move by the central bank,” Chris Becker, a Johannesburg-based strategist at ETM Analytics, said in e-mailed comments. He said it would reduce the ability of investors to “hedge currency risk” and could “cause panic in the economy and a hoarding of U.S. dollars.”
The revised rules on foreign exchange transactions in banks and change-bureaus take effect from today, the central bank said on its website. They’ll limit withdrawals to the equivalent of about $10,000, and require documentation for transfers outside the country, it said. Offshore currency deals by companies based in Ghana will be “strictly prohibited.”
“The question remains whether the changes by themselves are sufficient to support cedi stability,” Angus Downie, head of economic research at Ecobank Transnational Inc. in London, said by phone. “The informal trading sector could be shut out of the banking sector, which could lead to an immediate fall in imports.”
The steps are part of central bank Governor Kofi Wampah’s efforts to stabilize the cedi. He’s brought forward the bank’s next interest-rate decision to tomorrow, two weeks earlier than scheduled. The bank will probably raise the benchmark rate by at least 100 basis points to 17 percent, according to a Bloomberg survey of six economists.
Other new rules bar checkbooks for foreign-currency accounts, and require exporters to repatriate income from sales within 60 days of the shipments. Banks must then convert the money to cedis within five working days.
The requirement for transactions to be in cedis aims to enforce an already-existing law, Anthony Kofi Asare, head of treasury at Ghana Commercial Bank, the nation’s biggest lender by branches, said by phone. The measures will “reduce speculation, thereby helping to strengthen the local currency,” as well as cutting black-market activity, he said.
Restrictions on capital flows, ranging from Argentina’s tax on vacations abroad to Malaysia’s stabilizing the ringgit after the 1997 Asian crisis, have had mixed results in boosting investor confidence in a country’s economy. Capital outflow restrictions can be effective “if they are sufficiently comprehensive to slow a sudden ‘rush to the exit,’” according to a report by four IMF researchers released last month.
It’s not clear whether Ghana’s controls “are meant to be temporary or remain in place for a prolonged period,” Shilan Shah, Africa economist at Capital Economics in London, said in an e-mailed note.
Ghana’s economy is set to grow 6.1 percent this year, according to the International Monetary Fund. The government has pledged to reduce its budget deficit to 8.5 percent of gross domestic product this year from 10.2 percent. Fitch Ratings cut Ghana’s credit rating in October and predicted it will probably miss the fiscal target.
“The fragilities of the cedi are too big,” ETM’s Becker said. “We still see major downside risks for the currency from here.”