Despite the government’s consistent reassurance of curbing over-spending this year, rising concerns over election-related over-expenditure still remain a major downside risk to near-term cedi performance.
A Databank Africa Strategy quarterly report indicates that through increased election-related expenditure or speculative safe-haven demand by investors remains a major worry to the stability of the local currency.
“Ahead of the country’s general election in November 2016, demand pressures from election-driven expenditure also pose a risk to sustained decline in inflation and a return to price stability,” it said. Consequently, maintaining a tight monetary regime and avoiding central bank financing of fiscal operations would be required to mitigate election-related risks to boost the local currency.
Fiscal reforms
Although the ongoing fiscal reforms could minimise the potential risk of fiscal slippages, it was expected that investor-risk aversion could fuel demand for safe-haven assets that could undermine efforts to restore price and macroeconomic stability, the Databank report added.
Ghana has completed the first cycle of its three-year fiscal adjustment programme with the IMF which commenced in April 2015, with reviews of key performance indicators turning out generally satisfactory.
The country will hold presidential and parliamentary polls in November this year. While past election years have been marked by heavy over-spending, the 2016 vote will, for the first time, be organised under a restrictive IMF programme.
With technical assistance from the IMF, the country’s fiscal indicators at the close of last year have taken a re-assuring turn and are pointing to an improved prospect of a return to macroeconomic stability for private sector investment.
The local currency is, therefore, expected to remain stable and resilient, supported by ongoing fiscal and monetary policy reforms under the IMF programme and subsequent disbursement of donor support, as well as a US$700-million Eurobond issuance.
Tight monetary policy
Analysts say the cedi’s gains were anchored on the successful implementation of a tight monetary policy regime pegged at 26 per cent, ongoing fiscal reforms and an improvement in foreign exchange (FX) liquidity management.
Seasonal FX demand was adequately contained by continuous Bank of Ghana (BoG) interventions through the repatriation of export proceeds onto the interbank market and the absorption of excess cedi liquidity through the sale of 14-day BoG bills at 26 per cent yield.
The Ghana cedi was further cushioned by an influx of offshore investors as financial market turbulence in Europe and Asia (coupled with a dim outlook for US interest rates) fuelled capital flight towards higher-yielding emerging market securities.
Ultimately, the cedi’s reassuring performance bolstered investor confidence in Ghana’s macroeconomic outlook, thereby unlocking substantial offshore inflows to fuel the cedi’s continued stability.
But there are also speculations that Nigerian businesses may be using local subsidiaries to buy dollars from Ghana due to restrictions in Nigeria. Beside the monetary phenomenon, the country’s inflation dynamics also reflect the impact of high cost-push factors which significantly determine the direction of inflation rate due to its heavily weighted components.
Headline inflation
The surge in headline inflation rate to 19 per cent in January 2016 was due to the lagged effect of the hike in utility tariffs in December 2015 which pushed inflation for utilities to 45.5 per cent year-on-year in January 2016.
The outlook for cost-push factors is fairly balanced, with marginal tendencies to the downside as the decline in global crude oil price appears to have bottomed out but sustainable recovery is undermined by high global inventories.
But addressing the media on the state of the economy on February 9, 2015, the Finance Minister, Mr Seth Terkper, said the economy had made a turnaround.
“The country’s fiscal consolidation is bearing fruits, our gap between revenues and expenditure is narrowing. Our deficit has reduced from 11.5 per cent of GDP in 2012 to a provisional 7.0 per cent of GDP in 2015, while primary balance is expected to be positive in 2016. This is the first positive turn we have had since 2005,” he said.
Using seven indicators, including fiscal balance, primary balance, current account balance, real GDP growth and inflation, as his yard stick, Mr Terkper said improvement in those indicators was an affirmation that the economy had made tremendous improvement and was experiencing the turnaround.
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