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Opinions of Tuesday, 1 September 2015

Columnist: Harrison P. Adjimah (Lecturer and Economist, Ho Polytechnic)

Strengthening the Ghanaian cedi - Some quick fix solutions

The high and excessive depreciation of the Ghanaian cedi and inability of policymakers to ensure some stability is a mind boggler. The pressure on the cedi both in terms of level and volatility has never been so high.

Recent attempts by the Bank of Ghana, in March and June for example, to curb the excessive development in the exchange rate have only led to short live appreciation of the cedi creating greater volatility and uncertainty problems.

Puzzlingly too, many economists and politicians who have extensively commented on the weak cedi, are short of practical, direct and doable immediate solutions— at least to Mr Terkpe, the Minister of Finance and Dr Wampah, the Governor of the Bank of Ghana. Perhaps more directness of the Bank of Ghana, an embargo on non-essential government imports and immediate issuance of diaspora bond can provide quick fix solutions.

Some economist have criticized the Bank of Ghana for promising to pump $20m and more daily to shore up and stabilize the cedi and have questioned the cost, the effectiveness and the sustainability.

The Bank has a responsibility of ensuring exchange rate stability and it is right that steps are taken to sterilize the exchange rate development. What Dr Wampah should not and cannot afford is to keep the cedi overvalued. The Bank should define ‘50 pesewas stability band’ around the equilibrium price of the dollar—the exchange rate without any intervention which is certainly above GH4 now—of say GH4.40 to GH4.90, and assure the market that it will buy or sell dollars to ensure the exchange rate remain within this band for a reasonable long time.

To ensure stability, it is key that that the stability band is appropriately set and the Bank buys forex during periods of upward pressure just as it can sell during downward pressure. This band can be narrower or move up or down after some time depending on the market conditions.

Many have agreed that the weak currency is as result of Ghana’s structural twin deficit— trade (current account) and fiscal deficits and cutting the deficits can strengthen the cedi. However this prescription, even if doable at all, is a long term solution. The way the country can reduce its trade deficit is to expand its exports and/or reduce imports. Export expansion efforts are usually long term in nature and our export promotion strategies have not been that effective for a number of reasons—some beyond the control of policymakers.

Import restrictions policies—such as higher tariff, licencing and other regulations—can show immediate results but boorish and hurried import restriction policies could even have a more serious impact on the economy. In the scheme of things as the economy is largely import based, such policies can lead to shortage of essential commodities, higher inflations, falling standard of living and falling government revenue among others.

Of course, the government can easily limit its own non-essential imports. Without even looking at the detail trade data, one can be confident that if Mr Seth Terkpe can place moratorium on public sector purchase of cars particularly luxury and fuel guzzling ones—as he has placed on employment—the deficit positions could improve. The cedi will strengthen. The advantage of limiting government imports is this: it reduces both the current account deficit and the budget deficit thus killing two birds with one stone.

Another way to strengthen the cedi is to find innovative ways to increase financial inflows. There are genuine concerns about increasing debt and debt burdens, however, the truth is Ghana still needs huge financial inflow in order to strengthen the cedi and finance economic expansion.

A country can experience current account deficit for some time and still maintain a stable currency. This can happen if the country can attract strong financial inflows—Donor support and remittances, concessionary loans, Foreign Direct Investments (FDIs), Eurobonds, Local and Foreign Deposits from Ghanaian expatriates (LCDs and FCDs) etc. The balance of payment consist of two main components: current account and financial account. Deficits in currents account has to be compensated by a surplus in the financial accounts. Part of the downward pressure on the cedi is as a result weak financial inflows, particularly from traditional sources, which is limiting supply of foreign currencies.

Apart from Donor support, which is dwindling, the most preferred form of foreign inflow in terms of debt burden, is FDI. FDIs are, however, so difficult to get, and expensive as so much has to be given up for it and future repatriation increases financial outflow. There are also concerns about foreigners increasing their claim over domestic assets—the complaints about Lebanese and Nigerian influence, for example.

If the current account deficit cannot be cut immediately and traditional sources of foreign inflows are dwindling then it makes sense to think about new sources. Indeed the Government of Ghana issued first Eurobond of 1bn dollars in 2007 and has since continued intermittently.

The problem with the Eurobond is that it is too expensive, 8% ca. compared with the current 1% ca. interest rates in the developed countries. The interest and repayment burden is rather worsening the balance of payment problem in the medium to long term. Mind you, bulk of the planned $1bn new issue are to repay the first 2007 issue maturing in 2016.

With the high domestic interest rates, oversea working Ghanaians (OWGs) can be encouraged to save at home. The higher Treasury bills rates had indeed attracted some OWGs. However, LCD channel is hindered by the unstable cedi exchange rate. Plus using domestic interest rates to attract foreign inflows can detrimentally constrain domestic monetary policy.

To limit the exchange rate risks associated with LCDs, abroad diaspora can be encouraged to save in foreign currencies at home. In mid 2000s commercial banks marketed offshore account to OWGs. It allowed oversea working Ghanaians to open and save (FDCs) in foreign accounts back home.

The offshore accounts were initially very popular, but faded out and failed to become a major channel for attracting foreign inflow partly due to no to low interest it pays. Subsequent over regulation by the Bank of Ghana also reduced the interest of the commercial banks. Perhaps Dr Wampah and his advisers have to look at this again.

The potential of diaspora investment money has not been well exploited. LCDs and LCDs from diaspora can be volatile as depositors can withdraw their money at any time. A more stable and low cost source of foreign capital is the diaspora bonds. Diaspora bond is a debt instrument issued by a country to raise financing from its overseas diaspora usually during the period of balance of payment crisis or to fund infrastructure projects.

In the specific case of Ghana, issuance of such a bond would increase reserves, avert/resolve balance of payment problems, enable the country to retire other problematic external debts and it will strengthen the cedi. Israel, India and Lebanon are forefront examples of countries that have used diaspora bonds to turn things around.

Diaspora bonds are denominated in foreign currency but can either be paid back in either foreign or domestic currencies. This vehicle could allow investors to secure the value of their investment in a hard currency but at the same time allow the country to borrow hard currency and pay back in domestic currency, thereby limiting debt burdens. Most OWGs have current or contingent liabilities at home or even retirement plans for home and may not be averse to accumulating secured domestic assets.

Ghana could make issuance of diaspora bonds, just as the Treasury bill, a regular and continuous source of funding or just like the Eurobond make intermittent issuance. Israel for example natured its diaspora inflows by offering a flexible menu of investment options and successfully kept Jewish diaspora engaged.

Apart from interest earnings, patriotism and implicit charity drive interests in diaspora bonds. While diaspora bonds can be a low cost and stable source of finance, the diaspora investors may see it as both investment opportunity and an opportunity to help their home country. The Ghanaian diaspora investors may initially provide little patriotic discount, but prices could be less than that of the Eurobonds, and investment not being paid back in foreign currency and chances of non-repatriation are pluses.

It is rather surprising Ghana is still yet to explore the diaspora bond as the thought has been around since mid-2000s. Some constraints to successful issuance of diaspora bonds are complexities of bond instruments, limited awareness by policymakers, unfamiliarity of regulators of such bonds, registration with regulating agencies such as US SEC, dealing with rating agencies and identifying sizeable number of wealthy diaspora.

However given the experience from issuing the Eurobond, the expertise at the Bank of Ghana and the Ministry of Finance, these limitations can easily be overcome. Some of the investment options may not even require the use of international retail market, meaning the Bank of Ghana in some cases can bypass external regulation with direct issuance just as the Treasury bills.

Given the current level of technology products and the procedure for purchase can easily be advertised on the Bank’s website and the popular Ghanaian websites such as, and by word of mouth through Ghanaian churches abroad.

If the Government can get 10% of Ghana’s estimated 3 million diaspora population, 300,000 people, buying an average of $2,000 worth of dollar, pound or euro bonds a year, the country can easily raise $6bn to fund its infrastructure projects and by so doing have enough reserves to stabilize the cedi.