The Cedi Panic: When prayers don’t work you go for currency controls

The Ghanaian cedi has lost more than 30% against the US dollar over the past year and the sell-off in the currency has escalated since the beginning of the year as the Ghanaian markets have been hit by the same turmoil we have seen in other Emerging Markets.

The sharp cedi sell-off has sparked widespread concerns in Ghanaian society. One of the more bizarre examples of this came on Sunday when Archbishop Nicholas Duncan-Williams  actually prayed for the cedi to recover! Just listen here.

The prayers didn’t work – so now the Bank of Ghana has introduced draconian currency controls

However, Duncan-Williams prayers did not work and the sell-off in the cedi has continued this week and that has caused the Ghanaian authorities to introduces draconian measures to prop up the currency.

First we got the introduction of currency controls on Tuesday. This is the statement Bank of Ghana issued on Tuesday:

Further to Bank of Ghana Notices Nos. BG/GOV/SEC/2007/3 and BG/GOV/SEC/2007/4, it is announced for the information of all authorized dealer banks and the general public that with effect from February 5, 2014, the rules governing the operations of FEA and FCA have been revised.

These rules are intended to streamline the operations of these accounts and bring about clarity and transparency in their operations as well as ensure compliance with Bank of Ghana Notice No. BG/GOV/SEC/2012/12 dated October 10, 2012 on the pricing, advertising receipts and payments for goods and services in foreign currency in Ghana. The Notice states that all transactions in the country are required to be conducted in Ghana cedis, which is the sole legal tender.


The Bank of Ghana has revised the mode of operation for the FEA and FCA as follows:

a. No cheques or cheque books shall be issued on the FEA and FCA.

b. Cash withdrawals over the counter from FEA and FCA shall only be permitted for travel purposes outside Ghana and shall not exceed US$10,000.00 or its equivalent in convertible foreign currency, per person, per travel.

c. Authorised dealers shall not sell foreign exchange for the credit of FEA or FCA of their customers.

d. Transfers from one foreign currency denominated account to another are not permitted.

e. All transfers outside Ghana from FEA and FCA shall be supported by relevant documentation.

Margin Account for Import Bills

f. Foreign exchange purchased for the settlement of import bills shall be credited to a margin account which shall be operated and managed by the bank on behalf of the importer for a period not exceeding 30 days.

Foreign Currency Denominated Loans

g. No bank shall grant a foreign currency denominated loan or foreign currency linked facility to a customer who is not a foreign exchange earner.

h. All undrawn foreign currency denominated facilities shall be converted into local currency with the coming into effect of this Notice. However, existing fully drawn foreign currency denominated facilities and loans to non-foreign exchange earners shall run until expiry.

Banks and the general public are hereby advised to note the above and be guided accordingly.

Frankly speaking I don’t know what is most stupid – praying for the currency to recover or introducing currency controls of this kind, but as if that was not enough the Bank of Ghana today announced that it had hiked its key policy rate by 200bp to 18% from 16%. So not only is this likely to lead to a completely stop to any foreign direct investments into the economy – the Bank of Ghana will also send domestic demand into a free fall.

The first of many? Lets pray it is not

Luckily not many countries have done what Ghana just did over the past five years. There is only two other countries – Iceland and Cyprus – which have introduced major capital controls since 2008. I have followed the Icelandic economy closely for years and in my mind there is no doubt that the capital controls are having a very negative effect. Most notable has been the extremely negative impact on foreign direct investment into Iceland. It has completely disappeared and I don’t that this is a result of the capital controls. Furthermore, even the Icelandic government said that the controls would only temporary there are no signs that we will see any major liberalization of the controls anytime soon.

One could certainly fear that the same thing will happen in Ghana. The currency controls will become permanent. As Milton Friedman  once said “There is nothing as permanent as a temporary government program”.

The question many investors now are asking is whether other Emerging Markets will copy Iceland and Ghana and introduce capital controls. I pray that that will not happen and investors are certainly nervous that it could happen. If that fear gets more widspread then we are likely to see a lot more Emerging Markets turmoil.

PS If you ask me what the Bank of Ghana should have done I would tell you that the Bank should have introduced an Export Price Norm and pegged the cedi to a basket of the USD dollar and the prices of the main commodities Ghana is exporting such as cocoa, petroleum and liquefied natural gas to ensure a stable development in nominal spending growth. And obvious all capital and currency controls should be abolished.

Leave a comment


  1. Ognian Davchev

     /  February 7, 2014

    Do you consider the Export Price Norm regime to be better than NGDP targeting for example or simply easier to implement?

    • Ognian,

      That is a very good question. There is not necessarily a conflict between the two. Instead I think of EPN as a way of ensuring nominal stability (stable nominal GDP growth). However, many Emerging Markets do not have very liquid financial market and often economic data is of a pure quality. Therefore, I think EPN as a practical way of ensuring stable NGDP growth. Therefore, it might be more obvious for countries like Ghana, Angola and Peru to introduce a variation of EPN than it would be for countries like Australia or Norway. That said, I also think it is useful to think of EPN as a INDICATOR of monetary conditions in commodity exporting countries – both developed markets and Emerging Markets.

  2. jamesxinxlondon

     /  February 8, 2014

    Iceland, Cyprus, Ghana …. And now Ukraine joins the infamous club, too. Turkey, next. I hope not.

  3. qwellian

     /  February 10, 2014

    Pardon my ignorance (medical training not economic) but reviewing the above referenced statistics from the OECD it doesn’t look like Iceland is that bad off overall; imports and exports are higher than pre-crash levels, unemployment is down for 2 years in a row to an enviable 6%, interest rates are at pre-crash levels, deficit is shrinking to -3%, gdp is low but positive, and per-capita gdp and gni are returning to pre-crash levels.

    Yes FDI is negative but if I remember correctly, a lot of the precrash foreign investment was EU nations chasing Cypriot style banking account interest. Maybe it’s not so bad to lose those as it would be hard to put those to work locally with actual real world investment into Icelandic infrastructure?

    This situation looks a lot better than many countries, especially EU nations. I wasn’t able to easily find the imposed capital controls they have yet to unwind but along with the monetary depreciation they either helped or had no significant negative effect if depreciation was the primary cause for the economic stabilization.

    So a long-winded setup for the questions that assume the above facts represent a mild recovery or stabilization (I recognize I could be wrong here due to my lack of training):

    1 If the capital controls are a such negative factor why did they have such a negligible effect on the situation?

    2 What was the actual cause of the “stabilization”?

    3 Assuming everyone agrees the control measures should be stopped (which I think we do) is there a best way to do this? All at once? Gradually? What would be the predicted effects(I assume money will flee the country but won’t depreciation help exports?) of the two approaches?

    4 Why is FDI considered a marker of health? Again courtesy OECD, 2005-2012 the US was only net positive in one year and the other years inflows seem to have yo-yo’d around with most precrash years better than postcrash.

    Apologies for ignorance but I read your blog to specifically get a point of view different than a Keynsian so I can compare and contrast and try to improve my overall knowledge.

    Thank you for sharing your thoughts on your blog.

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