Ghana’s Currency, Millennium Challenge and Economic Prospects

The Millennium Challenge Corp. recently signed a second compact with the Republic of Ghana.http://www.state.gov/secretary/remarks/2014/08/230295.htm  This compact’s focus on the power sector addresses a major challenge to Ghana’s economic growth and to Ghanaians’ overall quality of life. The signing of the MCC compact is a good time to reflect on current economic and business conditions in Ghana.
Ghana is potentially a strong economic engine for the region and Secretary of State Kerry is right to cite Ghana’s commitment to good governance and economic prosperity. However the country faces some major challenges. Among them is the rapid depreciation of Ghana’s currency. Our data shows that the cedi lost about 27% in the 1st half of the year and has continued to fall since then. Currency weakness in Ghana is a symptom of persistent trade deficits as well as rising government spending. The financial community has noticed and has raised the issue in several forums and publications. It doesn’t change the longer term story of Ghana’s growth potential (in fact dollar based investors might find favorable prices for Ghanaian assets) but it does raise questions about how government will handle the problem while remaining investor friendly.
Red flags went up earlier this year when the government began to restrict the movement of currency, damaging Ghana’s reputation for financial openness. The more sensible answer is to change the character of Ghanaian trade. Surpluses might be a lot to ask but Ghana should at least aim for smaller trade deficits. Ramping up the nascent oil sector would help but there should also be greater orientation toward exporting in several sectors. This is why reliable electric power is so crucial. It’s location, general business friendliness and political stability make Ghana a logical export platform for the West Africa region as well as destinations further abroad. However for indigenous and foreign investors to locate in Ghana reliable electric power is essential. For that reason we should all hope for the success of this second MCC compact.

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