Ghana's currency falls to all-time low despite interest rate rise

An unexpected interest rate rise by the Bank of Ghana to stem inflation failed to stop the debt-stricken nation's currency plunging to an all-time low on Wednesday.

The cedi lost as much as 1.7 per cent and hit a nadir of 3.955 against the dollar before recovering slightly to trade at 3.915, following a surprise 1 percentage point increase in the main borrowing rate to 22 per cent.

Ghana's currency has tumbled by 18 per cent in 2015, underlining the economic difficulties faced by a country that was long one of Africa's top performers but which has suffered from the fall in global commodity prices.

Accra was forced to seek a $918m bailout loan from the International Monetary Fund in March to plug a budget deficit that is expected to come in at 7.5 per cent of gross domestic product this year.

Henry Kofi Wampah, the central bank governor, told a news conference the rise was intended to stabilise the cedi and rein in expectations for inflation, which hit 16.8 per cent last month on the back of a lower exchange rate.

"The higher interest rate should also serve to make the country less vulnerable to the adverse implications [of US interest rate rises]," he added.

While economists said the tightening would do little to anchor the currency in the short term, some said the move could renew investor confidence by providing evidence of the government's commitment to fiscal consolidation demanded by the IMF.

"Having made a sizeable contribution to the financing of the deficit last year, the Bank of Ghana needed to do more to restore its anti-inflation credibility," said Razia Khan, head of African research at Standard Chartered bank in London. "Unquestionably, it's the right thing to do."

"The key is still whether the Bank of Ghana will be able to meet IMF targets on a consistent basis," said Ms Khan.

Ghana's deal with the IMF in February marked the fund's first intervention in sub-Saharan Africa since the vulnerability of the continent's booming commodity exporters was laid bare by the fall in oil prices. Ghana is the world's second-biggest cocoa producer and also sells gold and oil.

Finance Minister Seth Terkper told the Financial Times in March the financial aid programme would buoy the economy and help it rebound within three years to the soaring growth rates that saw it lead African frontier markets at the start of the decade.

However, Ecobank said in a note the monetary tightening was likely to push up the cost of debt denominated in the local currency.

The pan-African lender estimates total public sector debt could reach over 70 per cent of GDP by the end of 2015. "[This] suggests Ghana's debt situation is reaching a crisis point, underlining the urgency of successfully implementing the IMF-advised reforms," analysts wrote.

Other analysts were sceptical about the central bank's decision to push the benchmark rate to its highest level since 2003.

Renaissance Capital economist Yvonne Mhango said the cedi would only stabilise moderately before continuing to depreciate .

"It's positive in the near term for the cedi but structurally, a lot more needs to take place."

Additional reporting by Roger Blitz in London

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