According to data from Bloomberg, the cedi was trading at US$1 to GH¢4.9 as at the start of this year. By the close of trading today US$1 will get you GH¢5.765. That is a depreciation of over 17% in less than 3 months. Crazy!

So what is causing this depreciation? After researching and talking to some people, the following reasons are the most convincing to me in no particular order.

Monetary policy easing. The Bank of Ghana (BoG) caught everyone off-guard by reducing the policy rate by 100 basis points from 17% to 16% at the end of January. Simply put, the BoG made it cheaper for banks to borrow and this sparked investor fears that the country was going to increase the money supply and reduce the value of the currency, thus sparking investors to change their cedis to dollars and hurt the exchange rate.

IMF leaving. The IMF’s programme to restore the country’s fiscal position (balancing government revenue and expenditure) is coming to an end in April this year. External investors fear that without the oversight of the IMF, the country could return to running large fiscal deficits again despite the passage of the fiscal responsibility act.

Foreign investors tired of cedi bonds. This is linked to the two points already stated. When the government issues cedi bonds, some foreign investors bring in foreign exchange, convert it to cedis, and buy the bonds. Now this is very convenient for government, as it helps to stabilize the currency. However, with the fears over monetary and fiscal trouble ahead, the investors have significantly reduced their purchase of new bonds (according to Bloomberg) and are pulling out their matured investments (according to an industry person who prefers to remain anonymous). This has cut off a source of dollars into the economy and also put pressure on the cedi as investors convert to dollars before repatriating their returns.

BoG Forex rules. According to an industry person, the BoG has made it more difficult for offshore speculators (people seeking to buy or sell the cedi for a quick profit) to fund their cedi positions in an attempt to reduce speculation in the currency. However, this has also made it more difficult for offshore investors (people seeking to invest in the cedi long-term) to earn interest on their cedi positions when it is not in a bond and this motivates them to immediately convert to US dollars and repatriate it.

Banking and liquidity crisis. The banking crisis is one reason why the government has issued several bonds which has scared investors away. When the government took over the banks, they had to issue bonds to pay off the customers of the defunct banks. For example, the government issued GH¢5.76 billion in bonds to finance the Consolidated Bank of Ghana (CBG) in August 2018. Out of that, the BoG (indirectly) bought GH¢3 billion to provide liquidity to CBG. With many more financial institutions needing liquidity, it is clear that the government would be called upon to issue more bonds in the near future.

Worsened current account balance. There was generally fewer capital inflows into the country in 2018 than in 2017. This moved us from a current account surplus of US$1.1 billion in 2017 to a deficit of US$671.5 million in 2018.

Election approaching. There’s the usual skittishness of investors ahead of elections that causes some to pull out their funds. (All this vigilante talk must not be helping as well.)

A common theme that runs through all the points is how dependent the exchange rate is on investors pulling their monies out. I have already written about my fears about the rapid accumulation of foreign debt and the problems it brings. Therefore the stability promised by the finance minister’s pursuit of $3 billion in Eurobonds (dollar-denominated debt in the international capital markets) and $900 million in COCOBOD financing would be a welcome relief, but will not fix the fundamental problem.

Before capital markets in developing countries were opened to foreign capital, there used to be rules to prevent funds flowing into a developing country and being pulled out fast because of the devastating consequences it could have on that country’s currency. But the days of strict capital controls are long past and now it is on governments of countries such as Ghana to ensure they practise good credit management.