Ghana’s recent currency variation is unique. This was mostly due to actions of speculators, inaccurate newspaper reportage, and rigidities International Monetary Fund (IMF) placed on the Bank of Ghana (BoG). Minister for Finance, Ken Ofori-Atta, seeks to examine structural issues underpinning the historical performance of the GHS cedi.

In his recent speech in parliament, Ghana’s Minister for Finance, Ken Ofori-Atta told lawmakers on 28 March that given the country’s current robust economic fundamentals, the Cedi’s depreciation is largely due to speculative behaviour of some portfolio investors and market participants and other market rigidities.

One major market rigidity that contributed to the Cedi’ssharp depreciation, according to Vice President Dr Bawumiah, speaking at a 3 April Town Hall meeting in Accra, was due to one (1) of seven (7) conditions Ghana had to meet under IMF’s prior actions ahead of Ghana’s exit from a bailout, negotiated under the Mahama led NDC administration. That prior action required BoG to increase its reserves by about US$ 800million.

“BoG could not sell any foreign exchange (Forex) in the market,” Vice President Dr Bawumiah said, the BoG could not intervene in the market during this particular period. So demand for Forex was not met by supply as normally happens on a day-to-day basis. And we know that when demand is greater than supply the price all things being equal goes up and this is exactly the situation Ghana currently finds itself”

Enablers

Speculation was spurred when falsehoods were spread across local media platforms in Ghana suggesting that the BoG was going to spend its reserves to prevent the cedi from depreciating against the US dollar. “Some people misunderstood the requirement from the IMF for BoG to build up its reserves by US$800million to mean that the bank used US$800million to reverse the cedi depreciation,” said the Vice President.

Earlier, a myopic 22 February article by Bloomberg, deemed as having spurred currency speculators and led to a brief dip in the Ghanaian Cedi (GH¢), attracted the attention of many concerned analysts and economists. For some, it was an enabler article meant to trigger speculation.

But the recovery of the Cedi in March got speculators scuttling to the market in droves to sell their US dollars, as Ghana’s Cedisaw a remarkable turnaround. Naysayers who enabled the flurry of activity by currency speculators moved to post-fail mode, with Bloomberg, which had led an apparent speculative charge, making a U-turn with its expression of confidence in Ghana’s economic fundamentals. This came after the country’s unparalleled success in its most recent Eurobond issuance, which was seven-times (7x) oversubscribed.

Ghana’s economic fundamentals, among other indicators, can be seen from its exponential decrease in inflation. From over 15 per cent at the end of 2016 to a single digit inflation rate of 9.2 per cent, the lowest since 2013 signifying an effective inflation targeting regime by BoG.

But the recent short-lived hike in the GH¢-USD exchange rate risked denting this gain, as speculators moved in— following what has been described as the publication of the “enabler” article by Bloomberg news. In what looked like a harbinger of speculation, that news website on 22 February had evoked troubles ahead for the Ghanaian cedi.

Quoting a single source and using a brief fluctuation in the cedi/dollar trading value, Bloomberg caused the markets to react immediately, “denting the performance of an up and coming emerging economy in one fell swoop”, said Daniel Mensah, an Accra-based financial analyst with BDAC, an Accra-based business-consulting firm. “Fortunately, its effect on the economy was brief.”

In less than a fortnight, however, the markets proved Bloomberg wrong. “It is clear from data that the depreciation of the cedi was not due to weak economic fundamentals but rather a combination of structural rigidities and the apparent speculative behaviour of portfolio investors and market participants”, said Ofori-Atta.

“It is also noteworthy that […] the Cedi has however performed better over the last two (2) years compared specifically to 2012 to 2016,” the Finance Minister said. The cedi lost its dollar parity, falling to GH¢4.60 between 2009 and 2016. Daniel Mensah argues that “the depreciation trend was almost institutionalised during those eight (8) years and looking at the current macroeconomic data the culprit in the brief depreciation of the cedi could well be enabler articles from one of Bloomberg’s local correspondents whose articles continuously reflect speculative angles,” he said.

Still, Bloomberg’s recent Cedi (GH¢) to Dollar (USD) rates reflect black market rates. Last week, as most international exchange rate platforms showed buying rates of between GH¢4.98 and GH¢5.1 to US$1, Bloomberg’s platform stayed several points ahead of its counterparts at between GH¢5.3 and GH¢5.5.

Kwame’s Story

Kwame, an economist at one of Ghana’s top finance institutions -- who asked to remain semi-anonymous, recounted his experience at Forex bureau as he attempted to change US$100 on Friday, March 29. “I walked into a Forex bureau to change a hundred dollars. To my amazement, the selling rate (selling US$for GH¢) had dropped significantly to a rate of GH¢4.5 to US$1. That didn’t worry me much, but what piqued my interest was the buying rate, which was at GH¢5.7 to US$1. Meanwhile, the banks were selling dollars not at a rate of GH¢5.1 to US$1”.

With Ghana’s highly dollarised economy, movements in currency rates tend to have quick impact on prices across the country, from fuel to eggs. And the immediate market reaction to the Cedi’s brief dip created a local media appetite for stories about the source of the local currency’s woes.

The first of such stories zoomed in on Ghana’s exports, where some economists posited lower than normal trade volumes. The second story indicated a four-year cycle involving elections in Nigeria, where Nigerians transfer their Naira to Ghana and have them changed into dollars and transferred back to Nigeria through unofficial channels. The third story, a perennial first quarter cycle event, talked about the transfer of funds by multinationals.

All three stories, among others, were all but rubbished. The official data on trade for the first quarter has yet to be announced, driving a wedge between arguments over exceptionally lower trade volumes and the cedi’s immediate performance. Concerning the second and third stories, sources at Ghana’s top bank have suggested that no unusual movements of dollars by multinationals occurred.

This suggests that the short-lived cedi crisis’s coincided starkly with Bloomberg’s falsehoods and IMF’s condition for BoG; both indicative of speculation. This is buttressed by the result of Ghana’s US$3billion Bond issuance, which registered an excess demand of US$21billion, the highest for Sub-Saharan Africa’s longest dated bond. The vote of confidence in Ghana’s economy couldn’t be more pronounced.

A remarkable Rebound

By Tuesday 19 March, the Cedi had seen a remarkable rebound, trading between GH¢4.98 and GH¢5.09 to the dollar, with experts predicting GH¢4.6 to the dollar by April/May. And as the speculation caused by what looks like an interested source dissipates, Bloomberg has expressed their mea culpa through a series of items showing strong confidence in Ghana’s economy.

Kwame, the economist, explains that Forex operators he spoke to in Accra say they are trying to recoup their heavy losses due to the sudden drop in rates, as speculators lost out following Ghana’s successful bond issuance. “At this stage, Forex bureaux operators stand to lose out to the banks if they continue trading at such ridiculous rates. Their clients risk abandoning them for the banks, that offer more interesting rates”.

According to Vice President Dr Bawumiah, one of the reasons for the sudden reversal in the sharp depreciation observed was that “the market corrected itself showing that Ghana’s fundamentals are indeed strong.”

The Minister for Finance is planning to set up a committee to examine structural issues underpinning the historical performance of the cedi and expects to see participation from a wide array of stakeholders.

In the meantime, as part of a long-term move to ensure irreversibility of Ghana’s strong macroeconomic gains, a Memorandum of Understanding between BoG and Ministry of Finance on zero Central Bank financing of government has been extended through 2020 to strengthen inflation-targeting regime of the BoG.