The Ghanaian government is in the midst of a significant struggle ahead of the general election scheduled for Saturday, prompting the implementation of stringent measures recently to address the declining Ghanaian cedi in light of challenging macroeconomic conditions.
For several years, the cedi has been under immense pressure. Like many other African and emerging market currencies, it experienced considerable depreciation against the US dollar during the Covid-19 pandemic, as traders sought safety in dollar-denominated assets.
The cedi’s value further plummeted in 2022 when Ghana defaulted on a substantial portion of its external debt, a situation exacerbated by soaring borrowing costs, increasing interest rates, and excessive government borrowing. Since early 2020, the US dollar has surged nearly 180% relative to the Ghanaian cedi, which has now risen to 15 cedis per dollar, up from 11 in May 2023.
In the upcoming election, ruling party candidate Mahamudu Bawumia, the chosen successor to incumbent Nana Akufo-Addo, will face off against former President John Mahama. Economic conditions and the public’s experience with inflation are likely to play a critical role in determining the election’s outcome.
Pension Fund Restrictions
Amid these challenges, the Ghanaian government has undertaken decisive measures to prevent further declines in the currency. Recently, authorities have sought to restrict pension fund managers from investing in offshore assets to curb foreign exchange outflows.
Typically, Ghanaian pension funds invest primarily in domestic assets, such as government bonds; however, this trend has shifted post-debt default, with an increasing number of fund managers allocating more to foreign assets.
Current regulations permit pension funds to invest only up to 5% of their total assets abroad. Reports suggest that the national pensions regulatory authority may impose sanctions on funds attempting to move assets abroad, a claim relayed to Reuters by fund managers. The authority has denied hindering asset movement.
Nevertheless, many analysts express doubt that such measures will have a meaningful impact on cedi markets.
Joseph Appiah, vice president at Accra-based investment firm Black Star Group, states that attempts to stabilize the cedi have “transformed” market dynamics, particularly as efforts to uphold currency stability escalate ahead of the elections. Despite a recent recovery of about 7% against the dollar, Appiah is skeptical about the sustainability of this trend.
“The current foreign exchange rate lacks robust foundational support, such as economic recovery or effective government policies; instead, it relies heavily on central bank interventions aimed at maintaining the cedi’s stability and managing market conditions,” he elaborates.
“This approach does not reflect genuine market pricing. Although the cedi is currently trading at around 15 to the dollar, I anticipate a potential rise to 18 or even 20 to the dollar in the next year as these interventions begin to wane.”
Inflation Likely to be a Key Election Issue
Nonetheless, the Ghanaian government is keen to illustrate its dedication to tackling these pressing issues.
Ghana continues to heavily depend on imports for crucial commodities, including staples such as rice and poultry. The cedi’s devaluation has resulted in sharply increased prices for these essentials.
Appiah cautions that a falling cedi “could result in further challenges for Ghana as households face diminishing purchasing power daily and household incomes persistently decline.”
Indeed, inflation in Ghana skyrocketed over 37% in 2023, with the World Bank highlighting that “high inflation—especially concerning food prices—has deteriorated living standards, pushed more individuals into poverty, and escalated the risk of food insecurity.”
The ongoing weakness of the cedi poses an additional hurdle for the Ghanaian government’s attempts to break the cycle of frequent defaults. While Ghana secured an agreement in January 2024 to restructure $5.4 billion of debt with official creditors, and bondholders have recently accepted a 37% haircut on $13 billion of debt, the nation still grapples with a debt burden surpassing $50 billion. A depreciating cedi exacerbates the situation, increasing the cost of dollar-denominated debt repayments denominated in local currency.
