Ghana’s weak currency costs country dear in election year

To hike or not to hike? That is the question facing shop-owner Baldwin Goku as he weighs the prices of the Chinese electrical goods in his shop in Accra’s Okaishie market.

His problem is that Ghana’s cedi currency has weakened during an oil-fuelled boom which is sucking in capital and consumer imports and driving up demand for dollars to pay for them.

If he hikes his prices to match rising costs he loses customers. If he holds prices to keep customers he makes a loss.

“This is the dilemma we are having to deal with week-by-week, month-by-month and the options are becoming limited with the consistent cedi depreciation,” said Goku.

Ghana became one of the world’s fastest growing economies in 2011 with growth of 14.4 percent year-on-year, largely because its Jubilee oil field came on stream in December 2010. The west-African state is also a leading cocoa and gold producer and has enjoyed relatively stable politics since 1992.

But with elections in December the cedi’s 17 percent fall against the dollar this year is squeezing the purchasing power of Ghana’s 24.7 million people and troubling emerging market investors for whom the country has proved attractive.

Until May, the 52-year old Goku, who has increased prices twice this year, ran three shops selling electric switches, power sockets, circuit breakers and cables, all imported from China. He has since closed two of his shops and shed staff.

“The first option was to close those two shops to minimise losses, but I must admit that decision was not good news for four of my (shop assistants) and their dependants,” Goku said.

A second trader, Frank Agyeman, said, “It’s becoming increasingly difficult to sell, let alone break even because the exchange rate situation has rendered our goods unaffordable.”

“We plead to the government to do something about the cedi (slide), else we’ll all shutdown our businesses,” said Agyeman.

The slump of the cedi to a rate of around 1.95 to the dollar has also pushed inflation up, with the year-on-year rate rising for four consecutive months, hitting 9.4 percent in June, though still in the government’s projected single-digit target.

Ghana’s inflation, which ballooned to 20.7 percent in mid-2009, pushing interest above 20 percent, dropped to single digits a year later, reaching a 19-year low of 8.39 percent in July 2010.

POLICY PAIN

Economists question the government’s commitment to fiscal discipline ahead of presidential and parliamentary votes in December – especially since the government this week unveiled plans for further spending.

“We have a history of governments spending excessively outside the budget in election years, especially the hotly contested ones,” says economist Joe Abbey, director of Accra-based Centre for Policy Analysis think-tank.

Abbey said fiscal indiscipline in past election years led to rapid depreciation of the cedi and accelerated inflation. “This is the obvious reason for the investor uncertainty and speculation we are talking about now as we approach December.”

The cedi declined 43 percent to the dollar due to “election excesses” ahead of the 2008, Abbey said.

Others say the cedi’s weakness is also due to increased trade with China, as many traders try to accumulate physical cash in dollars due to the lack of effective transfer channels for the Yuan in Ghana.

It is also believed that many risk-averse investors have liquidated their holdings of domestic bonds in favour of foreign exchange.

In April, the Bank of Ghana re-introduced short term bills, changed bank reserve requirements and required 100 percent cedi cover for balances held by local banks on behalf of foreign banks in support of the cedi.

This was after the bank had raised interest rates and cut limits on net open positions in banks and provided more than $800 million to meet interbank market dollar demand.

But these measures have been slow in halting the cedi’s slide, a situation the government blamed on an explosion in unauthorised transactions by exchange bureaus, which control around 25 percent of the forex market.

“We have traced the problem to foreign exchange bureau operators. They’ve resorted to taking dollars from the banks at transaction rates and changing at higher rates – this is frustrating the central bank’s efforts,” Finance Minister Kwabena Duffuor told Reuters.

Duffuor, himself a former central bank governor, said there would be additional measures to streamline activities of the bureau operators “in the coming weeks.”

“We are determined to get the cedi back on track and I believe we’ll see an improvement in the coming weeks,” said Duffuor who shut some 65 exchange bureaus, a third of the total, in the first two weeks of his governorship.

POLITICAL PAIN

However the currency’s slide continues to take a toll on Ghanaian manufacturers, too. Drug maker Starwin Products Ltd said its import cost rose 17 percent in the first half of 2012 due to the cedi’s depreciation.

“It is seriously hurting us because 90 percent of our inputs are imported,” it’s general manager William Sekyiamah told Reuters, adding that the firm was considering options including raising prices to make up for the currency cost.

At street level in the Agbogbloshie food market in the western fringes of Accra, tomato paste retailer Adwoa Sasu blamed the government for not doing enough to tackle the cedi slide and inflation.

“They said we are producing oil but I am yet to feel it. We are in the worst times, the purchasing power of our cedi is becoming lighter by the day, school fees are going up, market wares are increasingly becoming unaffordable. Worst of all, workers’ take-home pay cannot take them home,” she told Reuters.

Sasu, who said she switched to the opposition New Patriotic Party (NPP) from the ruling party last year, believes the cedi’s fall was enough for Ghanaians to change government in December.

Opinion polls point to a tight presidential race pitting incumbent President John Atta Mills against the NPP’s Nana Akufo-Addo. A survey by Synovate in May put Akufo-Addo in the lead, while others have pointed to a Mills victory.

Reuters.