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Economy to absorb US$3.5b within a month to bolster the cedi

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Adnan Adams Mohammed
The local currency (cedi) will gain much value as more expected foreign inflows comes into the economy. The International Monetary Fund (IMF) would this week disburse the last tranche of SDR132.84 million (about US$185.2 million) to Ghana to end the three year Extended Credit Facility program next month.

This will add up to the US$300 million from cocoa facilities as well as the US$3.0 billion Eurobond proceeds which are all expected into the economy from this week to a months’ time, making total foreign inflows of almost US$3.5 billion.
This will eventually release the pressure on the local currency, since supply of foreign is likely to be more than demand. However, some financial experts have described the recipe as a short-term breather.
The recent appreciation of the cedi is “only temporary” and will depreciate again, a former Deputy Finance Minister, Fifi Kwetey has said.
According to him, the government’s capital injection into the economy as a means to stop the currency from depreciating, will not solve the challenges with the economic fundamentals responsible for the currency’s depreciation.

Speaking in an interview on the economic situation of the country, the former deputy minister of Finance explained that, the government took a similar action in 2018 to stabilize the currency when it was being exchanged at about GHc 4.7 to a dollar, but that “stability was short-lived”.

“It is like you are suffering from a serious ailment and then you are given pain reliever and over the period, the problem seems to have gone, but the problem is still there. If around September last year, it was pushing towards GHC5.0 and as a result of the coming in of the cocoa receipts, it stayed around GHC4.7, what happened? Within no time, it went beyond the GHC5 and now pushing towards GHC6 in spite of the injection that happened last year,” he said.

The value of the cedi until earlier this week had greatly reduced, sparking concerns of serious economic challenges.

Earlier this month, it was trading at GHC5.80 to a dollar but it began gaining strength last week after a government intervention which was actually expected to yield evident results within two weeks.
Last week, the Executive Board of the International Monetary Fund (IMF) completed the last review of Extended Credit Facility (ECF) for Ghana signifying the conclusion of the four-year support programme.

The Executive Board decision allows for the disbursement of the last tranche of SDR132.84 million (about US$185.2 million) to Ghana by March 29.

The ECF-supported programme paved the way for a significant improvement of Ghana’s macroeconomic performance, though challenges remain.

Considering the Ghanaian economy managers (authorities’) resolved to tackle difficult reforms, the Executive Board also approved the authorities’ request for a waiver of the nonobservance of a few program targets.

Ghana’s three-year arrangement was approved on April 3, 2015 for SDR 664.20 million (about US$925.9 million or 180 percent of quota at the time of approval of the arrangement).

It was extended for an additional year on August 30, 2017 and is to end on April 2, 2019.

The arrangement aimed to restore debt sustainability and macroeconomic stability in the country to foster a return to high growth and
job creation, while protecting social spending.

Following the Executive Board’s discussion, Mr. Tao Zhang, Deputy Managing Director and Acting Chair, issued the following statement: “The authorities have achieved significant macroeconomic gains over the course of the ECF-supported program, with rising growth, single digit inflation, fiscal consolidation, and banking sector clean-up. Continued macroeconomic adjustment should underpin these improvements, as the 2020 elections approach.

“In a sign of the authorities’ commitment to fiscal consolidation, the end-2018 fiscal targets were met. Sustained fiscal discipline is needed to reduce financing needs and anchor debt dynamics. As stronger revenue mobilization is critical, the submission of the tax exemption bill is welcome, but needs to be complemented by efforts to strengthen tax compliance. Fiscal space is needed to support priority programs, while off-budget expenditures should be avoided”, a statement from the IMF extolled the economy mangers.

It further stated that, the progress on structural reforms needs to be intensified. Plans by the government to improve public financial management and supervision of state-owned enterprises (SOEs), the establishment of a fiscal council, and the fiscal rule are welcome. Stronger monitoring of fiscal operations, including for SOEs, will help mitigate fiscal risks.

Debt management has improved, though reliance on foreign investors has increased Ghana’s exposure to market sentiment and exchange rate risk. Debt collateralization and revenue monetization should be limited to avoid encumbering revenues. Planned infrastructure projects should be transparently managed, be consistent with debt sustainability, and ensure value for money.

While achieving single-digit inflation is commendable, monetary policy should remain vigilant to guard against upside risks to inflation, also stemming from exchange rate developments. Rebuilding international reserve buffers, including through careful foreign exchange liquidity management, is welcome and critical to support greater resilience to external shocks.

“The authorities deserve praise for strengthening the banking sector and for resolving nine banks. Completing the financial sector clean-up, as planned, will support the provision of adequate and affordable credit to the economy, the IMF executive board expressed satisfactory about success of the country, and pledged to support Ghana in its quest for economic stability anytime.”

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