- Cedi not out of trouble
In the aftermath of funds and permission from the International Monetary Fund (IMF) for a US$3 billion Extended Credit Facility (ECF) arrangement, the country’s gross reserves are anticipated to potentially increase.
According to the Bank of Ghana’s summary of economic and financial data, there was a marginal increase in gross reserves for April, rising from US$5.1billion in March to US$5.2billion at the end of the year’s fourth month.
The central bank statement acknowledged this progress, noting that as of May 19 reserves had further risen to US$5.7billion – which is equivalent to 2.6 months of import cover. However, despite this improvement, the figure falls short of the IMF’s recommended threshold of three months’ cover.
Since beginning of the year reserves have declined by nearly 17 percent, mainly due to central bank interventions in the foreign exchange (FX) market. These measures were implemented to slow down depreciation of the cedi amid a challenging fiscal and macroeconomic backdrop, aggravated by a growing scarcity of the US dollar.
Nevertheless, trade balance data support a positive outlook. The latest figures indicate that the nation’s trade balance remains favourable, with a notable improvement of 2.2 percent of gross domestic product (GDP) compared to the same period last year when it stood at 1.6 percent of GDP. This improvement can be attributed to a decrease in imports, which have declined by 14 percent year-to-date compared to the previous year.
Furthermore, the current account recorded a surplus of US$661million in the first quarter of 2023, compared with a deficit of US$554million during the same period in 2022. This improvement is attributed to the larger trade surplus, lower services and income payments due to the external debt service suspension and higher remittance flows.
A note by RMB Africa Research indicates that the funding received from the IMF, coupled with fiscal discipline and prudent monetary policies, could open doors for additional multilateral funding if the country continues adhering to strict fiscal prudence.
“Growth of the trade surplus, coupled with a reduction in capital and financial account outflows, could lead to a significant improvement in reserves,” the RMB note stated.
Successful management of trade surpluses and reduced capital outflows are key elements for achieving significant improvements in the country’s reserves.
With government and the central bank working toward enhancing fiscal stability, the nation is well-positioned to benefit from potential economic growth and increased investor confidence, RMB Africa noted.
“If the trade surplus continues to grow, boosting the current account; and if the capital and financial account outflows taper this year, we can expect a meaningful improvement in reserves,” the note added.
Rebuilding the Balance of Payments (BoP) accounts comes as a key factor in the country’s economic recovery, with a target of achieving at least three months’ worth of import cover by 2026. The IMF has projected that the nation requires a total US$15.06billion in BoP support over the programme’s duration (2023-2026) to reach this goal.
The US$3billion financing from the IMF, which accounts for only 20 percent of the estimated BoP needs, is not sufficient on its own. The World Bank is expected to disburse approximately US$1.6billion to support the programme, but a majority of the funds, around US$10.5billion, is projected to come from external debt service relief. This debt relief will account for nearly 70 percent of the estimated BoP needs.
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Meanwhile, despite the facility’s approval rallying the cedi – as it closed last week 9.5 percent stronger, bringing it to an 8.6 percent appreciation against the US dollar – the domestic currency could face an uncertain outlook in the coming months, as the initial positive news effect wanes and negotiations on external debt restructuring take centre-stage, suggest analysts at GCL Research.
In a note signed by its Research Lead, Courage Boti, GCL noted that the external debt restructuring negotiations’ success remains crucial in determining the currency’s future and overall economic stability of the nation.
“We anticipate that investors will look beyond reforms proposed under the programme, and consider actual performance in warming up to the sovereign,” the research arm of GCB Capital said in a note, highlighting the need for tangible results.
While additional financial support from the African Development Bank and other development partners will alleviate the burden of relying solely on debt restructuring, a successful external debt operation is fundamental to rebuilding the country’s external buffers.
“The anticipated savings from external debt restructuring will play a pivotal role in achieving the desired BoP targets,” noted GCL Research. It further highlights that meeting the IMF’s definition of reserves is essential for restoring confidence in the economy and attracting further investment.
The first review’s outcome will be crucial in boosting market sentiments, potentially leading to a rating upgrade and increased foreign direct investment flows that can stimulate economic growth.