FOREX Africa: Ghana Seeks Help From The IMF As Cedi Tumbles

By Jeffrey Cavanaugh AFKI Original Published: August 19, 2014, 3:10 am

As a frontier market, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.

Luckily, the ups and downs of the African currency markets aren’t one of them if you know where to look. To help with that, AFKInsider has compiled all the news you need to know now in order to slim down your currency risk in the week ahead. Let’s see what’s happening out there.

Another miracle that isn’t

Over the past week or so it has emerged that the government of Ghana had decided to avail itself of assistance from the International Monetary Fund (IMF) due to the continuing collapse of it currency, the cedi.

Since the beginning of the year the cedi has lost 40 percent of its value against the dollar, compounding double-digit losses it accrued against the greenback over the course of 2013.

At the start of the year the Cedi could buy $0.43, now it has sunk to around $0.27 with no indication that the Ghanaian currency will stop tumbling to new lows against the dollar anytime soon.

Cedi/USD Exchange Rate

Jan. 2014 —Aug. 2014

 Cedi 1H14

Given the calamities that have struck West Africa this year—a deadly Ebola outbreak in Sierra Leone and Liberia and a deadly Islamist insurgency in Nigeria—one could perhaps be forgiven for not following what has been happening in Ghana.

Yet, in a sense, one does not have to have been following Ghana at all to understand the country’s current economic problems for the simple reason that they are all too common in developing-world commodity producers to really mention notice.

In brief, the story is typical and one seen earlier in June when Zambia’s currency, the kwacha, was crushed by lower prices for copper—the country’s primary export commodity—and it too has since called in the IMF.

In Ghana’s case the story is more mixed as its economy is a bit more diverse.

Instead of relying on only one primary product it has several—oil, gold, and cocoa—but the result is pretty much the same despite the addition of a few more natural resources into the commodity mix.

In short, an influx of wealth caused by an unsustainable commodity boom led to an influx of spending in the public sector and on private imports that has put inevitable downward pressure on the currency.  As a consequence the country’s hard currency reserves are run down and there comes a point where devaluation, a bailout package, or both must come.

The IMF has said it is considering Ghana’s request and it is probably likely that the country—known to be a favorite of US President Barak Obama—will receive a structural adjustment package of some sort.

Already Ghana’s government has initiated a series of measures to deal with the crisis that the IMF has looked kindly upon such as imposing levies on certain import sectors, eliminating fuel subsidies, raising electricity and water tariffs, raising value-added taxes, rationalizing the bureaucracy, and enacting a tighter monetary policy by raising interest rates.

All this will no doubt certainly cause a great deal of economic pain in the coming months as the Ghanaian economy inevitably contracts in the response to these tightening conditions.

While this may be enough to stabilize the country’s bond ratings for the time being—Fitch reports that it expects that the government’s moves and any IMF stabilization package will likely lead the country to keep its B- investment grade rating—the ruling National Democratic Congress will likely take a hit in popularity that could cost it dearly when election are held in 2016.

The virtues of a diversified economy

However, while Ghana will recover from the pain it will soon have to endure the situation both it and Zambia are in once again raise serious questions about the ultimate sustainability of the so-called African growth miracle.

Much of it is has been premised on primary-product exports to ravenous Asian economies that until recently have shown little but ever greater hunger for African resources.

When that hunger diminishes even a tiny bit there is little to pick up the slack in countries like Ghana and Zambia and so, inevitably, the bubble bursts with often little to show for it except fat wages for government workers and a plethora of imported luxury items for those connected to the export sector.

What needs to happen to avoid this commodity bubble pitfall is to go beyond the typical measures taken in its wake, such a raising interest rates or rationalizing the public sector, by creating a diversified economy that does more than simply focus on commodity exports.

This means above all investing in creating a viable manufacturing sector that can take advantage of the sinking cedi by using a less valuable currency to boost its export competitiveness.

Doing so would create an automatic economic stabilizer that would prevent the fallout from a bursting commodity bubble being too terrible while also working to prevent one—or at least allowing it to grow too large—to begin with.

One would think Ghana would take this advice to heart. After all, this is the third time country has been forced to ask world’s pay-day loan lender to help tide it over until sunny days come again, and as in prior instances the fault—excessive spending due to a commodity-driven boom—was the cause.

As patterns go this would seem to be a pretty strong one and one not just limited the case of Ghana.  Globally, the pattern seems to be that single-sector economies inevitably fall into this sort of boom-bust cycle no matter who is in power.

Left wing governments, for instance, may exacerbate it by spending too much while times are good.  But right-wing governments due their bit by ultimately doing little to develop the economy beyond merely making it a better place to do business for those seeking to extract the country’s natural resources as cheaply and expediently as possible.

Indeed, in the end both left and right in a single-sector economy like Zambia’s or Ghana’s collude in their own way to keep the bubble economy going.  That’s because doing anything different is risky and often alienates each’s core base of supporters.

What’s needed is a third-way that bridges the difference between the two approaches that uses market thinking and adroit state intervention to create a viable manufacturing base that is competitive on global markets.

For Ghana that is a quite a challenge, but it should be remembered that at the outset of the post-colonial era countries like Ghana were roughly as rich as their counterparts in East Asia.

East Asia took the long, hard route away from primary-product extraction to build, over the course of several decades, manufacturers competitive with the West. Africa needs to do the same—but one wonders whether Africa’s current crop of leaders have the vision, or leverage, to pull it off.

 

Jeffrey Cavanaugh holds a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider, Mint Press News and BAM South. 

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