Ghana imposes forex controls in effort to stop currency decline

London (UK) – 06 Jan 2014 – FT - Ghana’s central bank has introduced a string of foreign exchange controls in a bid to halt the depreciation of the national currency, the cedi, resulting from chronic trade and current account imbalances.

The new measures limit access to foreign exchange and restrict trade transactions to the cedi within what was until recently one of Africa’s top performing economies and most popular frontier markets.

The regulations are intended “to streamline the collection and repatriation of export proceeds to Ghana”, the bank said after publishing a series of notices on its website on Tuesday.

The cedi fell 1.2 per cent to 2.49 to the dollar by Tuesday afternoon.

Analysts said that, while the controls might slow the pace of the cedi’s decline, its course could only be altered if the government takes tough decisions to rein in public spending and improve productivity by accelerating the delivery of offshore gas to power plants.

Some businesspeople worry that the measures would choke off foreign investment in an economy which grew at double digit pace following the start in 2010 of oil production in newly discovered offshore fields.

Other emerging markets, including Turkey, India and South Africa, have been raising interest rates in a bid to halt declining currency values in the face of reductions to the US Federal Reserve stimulus programme.

But the Ghanaian currency has depreciated by more than 23 per cent over the past year – 3.8 per cent this year alone – for mostly homegrown reasons. The government ran a budget deficit of 10.2 per cent of GDP in 2013, and may miss its pledge to reduce this to 8.5 per cent this year.

Under the new regulations, foreign-exchange and foreign-currency account holders must provide documentation for transfers outside Ghana and will only be able to withdraw up to the equivalent of $10,000 for travel abroad.

Offshore currency transactions by resident Ghanaian companies will be “strictly prohibited”, the bank said, and exporters will be required “to collect and repatriate in full the proceeds of their exports to their local banks within 60 days of shipment.” Banks would then have five working days to convert the proceeds into cedi.

Razia Khan, head of research for Africa at Standard Chartered bank, said the fact that the central bank was at last seen to be tackling the cedi’s decline might provide some reassurance locally. But she said there was no short-cut to tackling the root cause of the depreciation, which is linked to government spending and public sector salary increases that have seen recurrent costs rise to more than 75 per cent of total spending.

“Restricting access to foreign exchange is not going to be great for confidence,” she added.

There was also some scepticism in the market about how effective the central bank will be in enforcing the regulations.

As well as being a major gold and a growing oil producer, Ghana is the world’s second-largest producer of cocoa. Farmers prefer being paid in hard currency and the new foreign exchange controls could accelerate the flow of smuggled cocoa into neighbouring Ivory Coast.