The Ghanaian government is grappling with a tough fight in the forthcoming general election this Saturday, leading to the introduction of proactive measures aimed at stabilizing the weakening Ghanaian cedi amidst challenging macroeconomic conditions.

For several years, the cedi has been under significant pressure. Like many African and emerging market currencies, it witnessed a notable depreciation against the US dollar during the Covid-19 pandemic, as investors sought safety in dollar-denominated assets.

The cedi further deteriorated in 2022 when Ghana defaulted on a substantial portion of its external debt, a situation fueled by soaring borrowing costs, rising interest rates, and excessive government debt accumulation. Since early 2020, the US dollar has increased in value by nearly 180% compared to the Ghanaian cedi, which now trades at 15 to the dollar, rising from 11 in May 2023.

This Saturday, ruling party candidate Mahamudu Bawumia, who is the successor to outgoing President Nana Akufo-Addo, will face off against former President John Mahama. Economic conditions and the population’s experiences with inflation could play a pivotal role in the outcome of this election.

Pension Fund Restrictions

In light of this situation, the Ghanaian government has acted decisively to mitigate further depreciation of the currency. Recently, authorities have sought to restrict pension fund managers from investing in foreign assets to curb foreign exchange outflows.

While Ghanaian pension funds generally focus their investments on domestic assets like government bonds, this trend has shifted following the debt default, with more fund managers opting to increase their investments in foreign assets.

Pursuant to current regulations, pension funds can allocate up to 5% of their total assets for overseas investment. However, the national pensions regulatory authority has reportedly warned of potential sanctions against funds attempting to relocate assets, according to fund managers cited by Reuters. The authority has denied any hindrance to asset transfers.

Despite this, many analysts doubt that such measures will have a substantial impact on the cedi markets.

Joseph Appiah, vice president at Accra-based investment firm Black Star Group, observes that the efforts to stabilize the cedi have “altered” market dynamics, particularly as initiatives to maintain currency stability intensify leading up to the elections. Even with a recent rebound of around 7% against the dollar, Appiah expresses skepticism regarding the sustainability of this trend.

“The current foreign exchange rate lacks robust fundamental support, such as an economic recovery or effective governance; instead, it hinges on central bank interventions aimed at stabilizing the cedi and managing market conditions,” he states.

“This approach does not reflect a fair market price. While the cedi is currently trading at approximately 15 to the dollar, I predict a potential rise to 18 or even 20 to the dollar in the coming year once the current measures diminish.”

Inflation Likely to be a Key Election Issue

Despite these challenges, the Ghanaian government is eager to showcase its commitment to addressing these pressing issues.

Ghana relies heavily on imports for essential commodities, including staples such as rice and poultry. The depreciation of the cedi has significantly driven up prices for these items.

Appiah cautions that a falling cedi “could introduce further complications for Ghana as households’ purchasing power declines daily, and household income continues to shrink.”

Indeed, inflation in Ghana soared above 37% in 2023, with the World Bank indicating that “high inflation—particularly in food pricing—has worsened living standards, thrust more individuals into poverty, and increased the risk of food insecurity.”

The consistently weak cedi further complicates the Ghanaian government’s efforts to escape the cycle of recurrent defaults. While Ghana secured an agreement in January 2024 to restructure $5.4 billion of its debt with official creditors, and bondholders recently accepted a 37% reduction on $13 billion of debt, the country still grapples with a debt burden surpassing $50 billion. A depreciating cedi exacerbates the situation by inflating the cost of dollar-denominated debt repayments in local currency terms.