Seidu Haruna, the owner of a licensed foreign-exchange bureau in the capital of Ghana, says the central bank’s clampdown on dollar sales to prop up the domestic currency will hurt business, as it drives customers to black-market traders in an alley around the corner.
“People who want the dollar, they are willing to give millions of cedis to them,” Haruna, 62, who has been in the foreign-exchange business for 22 years, said on Feb. 7 as he sipped from a mug of sugary tea in Accra’s Nima neighborhood. “The problem with the cedi is not about keeping dollar accounts. It’s about the economic system.”
Haruna’s concern underscores the challenge faced by the central bank as it seeks to stem a decline in the cedi to a record low this week, the worst performer in Africa in 2014. Policy makers, who raised interest rates on Feb. 6 by 200 basis points to 18 percent, and placed limits on dollar withdrawals and transfers, said they’re prepared to do more should inflation start to accelerate.
In an economy where purchases from school fees to automobiles to rent are paid for in dollars, Ghana’s currency is under siege with emerging markets as the Federal Reserve pares back unprecedented bond purchases. The cedi has slid 5.8 percent against the dollar this year, the world’s third-worst performing currency, after Argentina’s peso, which has declined 16.6 percent, and Kazakhstan’s tenge, which was devalued this week.
The increase in Ghana’s interest rates to a four-year high pushed the yield on 91-day Treasury bills, a benchmark for local banks, above 20 percent. That compares with 8 percent for similar securities in Zambia. Fitch Ratings has both nations rated as B, five levels below investment grade.
“They’re trying to get dollar liquidity out of the broader economy and force people to use cedis,” Chris Becker, a Johannesburg-based strategist at ETM Analytics, said by phone yesterday. “Instead, rather than releasing dollar liquidity into the banking system, people are holding onto dollars out of panic and anticipation of cedi weakness.”
President John Dramani Mahama and Finance Minister Seth Terkper defended the central bank actions as necessary. The demand for foreign-exchange has been “huge” since Ghana, the world’s second-largest producer of cocoa, began exporting oil in 2010, Mahama said in Accra on Feb. 11.
“We have become an economy that imports even toothpicks,” he said. “No respectable government can have a situation like this continue. We need to build confidence in the cedi.”
Central banks from India to South Africa have raised borrowing costs this year to shore up their currencies in efforts to contain inflation. Consumer prices rose 13.8 percent in January, the fastest pace since March 2010, the statistics agency said yesterday.
The currency weakened 1.2 percent to a record 2.55 per dollar at 3:22 p.m. in Accra, bringing its decline to 6.9 percent since the central bank’s measures to contain dollar sales were announced on Feb. 5. The yield on Ghana’s August 2023 dollar bond has risen 102 basis points this year to 9.5 percent, compared with an increase of 60 basis points to 8.1 percent for Zambia’s dollar bond due in September 2022.
Concern about the cedi prompted an archbishop and the leader of Ghana’s most influential evangelical church to call on Ghanaians to pray for their currency.
The central bank is ready to intervene with its $5.6 billion of foreign reserves should the cedi weaken beyond an internal target, and inflation threatens to accelerate, Deputy Governor Millison Narh said in an interview last week. He declined to give the target.
A customer will get 2.35 cedis per dollar this week and pay 2.45 cedis for a greenback in the alleyway next to Haruna’s currency shop, according to Ibrahima Abdallah, 40, who trades money there. A week ago, before the central bank measures, a dollar would get you 2.7 cedis, and 2.85 cedis would buy you a dollar, he said.
In Argentina, the gap between the official peso rate and black-market rate widened from less than one percent before President Cristina Fernandez de Kirchner tightened currency controls in October 2011 to a high of 63 percent this year. In Venezuela, the bolivar weakened 74 percent on the black market in the past 12 months.
The measures by Ghana’s central bank won’t be enough to reverse the slide of the cedi because of the country’s budget deficit, Angus Downie, head of economic research at Ecobank Transnational Inc. in London, said. Ghana’s fiscal shortfall was 10.2 percent of gross domestic product last year, wider than the target of 9 percent.
“What is also needed is a combination of strengthening public expenditure, increased efforts to raise tax and non-tax revenues in order to narrow the fiscal deficit, and robust exchange-rate policies,” Downie said.
Dollars from companies and banks in Ghana, including the central bank, began to dry up about three years ago, said Haruna, who goes by the nickname Majesty. The owner of Majesty Forex Bureau Ltd. says he’ll probably start keeping his earnings in a safe instead of a bank because of the changes.
“I don’t like the new regulations,” Haruna said. “I get my money and deposit it and then if I want it, you are telling me I cannot take it in the same currency?”