Fitch Says Ghana's Massive Rate Hike Alone Unlikely To Support Cedi

Rating agency Fitch said on February 7, that the massive interest rate hike and new foreign exchange controls by Ghana's central bank alone may prove inadequate to stop the currency, the cedi, from depreciating further.

On 6 February 2014, the Bank of Ghana raised the key policy rate by 200 basis points to 18 percent. The cedi weakened 14.6 percent against the U.S. dollar in 2013 and has depreciated 7.8 percent this year as on January 31.

In recent days, Ghana has also imposed forex controls including restrictions on foreign currency-denominated loans, repatriation of export proceeds, margin accounts for import bills, and revised operating procedures for foreign-exchange bureaus.

The interest rate hike and forex controls must be complimented by accelerated fiscal consolidation to address growing domestic macroeconomic imbalances, Fitch said. The agency blamed the African country's budget deficit, which has averaged 11 percent over the past two years, as the root cause of the imbalances.

In October, Fitch downgraded Ghana's credit rating to B from B+, mainly due to a slowdown in fiscal consolidation and the risk of further fiscal slippage. "Any deterioration in public and external finances that puts debt on an unsustainable path and jeopardizes Ghana's external financing capacity would place the rating under pressure," the agency said.

The huge budget gap, which rose to 12.3 percent of GDP in 2013, has constrained the central bank's capacity to add to reserves, which have hovered around three months of import cover, Fitch pointed out.

Further, concerns about funding twin deficits in excess of 10% of GDP have weighed on the currency and made it one of the hardest hit Sub-Saharan African currencies since the US Federal Reserve first discussed tapering in May last year, the firm said. Loose fiscal policy and the weakening exchange rate has pushed inflation sharply higher.

Credit: RTT