Ghana strengthens currency controls with new rules for foreign-exchange transactions to tackle cedi's weakness

The Bank of Ghana (BOG) announced new rules for foreign-exchange and foreign-currency accounts on 4 February. The central bank also gave notice concerning the repatriation of export proceeds, and announced additional operation procedures for foreign-exchange bureaus in Ghana.

New rules for foreign-exchange and foreign-currency accounts

The BOG's new mode of operation for both foreign-exchange accounts (FEA) and foreign-currency accounts (FCA) mandates:

• No over-the-counter cash withdrawals unless for travel outside the country, with a USD10,000 limit per traveller (or an equivalent amount in convertible foreign currency) and relevant documentation required;
• No cheque or cheque book issuances;
• No transfers between foreign-currency-denominated accounts; and
• No foreign-exchange sales by authorised dealers to credit customer FEA or FCA.

For foreign-currency-denominated loans, the BOG now requires banks to convert all undrawn facilities into local currency and not to grant any foreign-currency loans or facilities to customers that are not foreign-exchange earners. Concerning the purchase of foreign exchange to resolve import bills, the BOG requires that such funds be credited to a margin account, which the bank will operate and manage on the importer's behalf for up to 30 days. According to the BOG, these new rules will be used to "streamline the operations of these accounts", "bring about clarity and transparency in their operations", and enforce its previous notices on "the pricing, advertising receipts and payments for goods and services in foreign currency" in the country.

Notice on repatriation of export proceeds

The BOG's notice served primarily as a reminder for authorised banks, exporters and other actors involved with the repatriation of export proceeds. It highlighted that that in accordance with the Foreign Exchange Act 2006 and its operational guidelines, all exporters are "to collect and repatriate in full the proceeds of their exports to their local banks within 60 days of shipment". Additionally, banks that receive export proceeds are to convert them into the cedi currency within five days "based on the average Interbank Foreign Exchange Rate prevailing on the day of conversion with a spread not exceeding 200 pips". Concerning retention accounts, the BOG directed exporters to "continue to operate these accounts in accordance with their retention agreements". Banks that purchase retention proceeds are required to convert them into cedis "based on the average Interbank Foreign Exchange Rate prevailing on the day of conversion with a spread not exceeding 200 pips". However, the BOG strongly ruled out any offshore foreign-exchange deals by resident companies. Overall, its main goal is to "streamline the collection and repatriation of export proceeds".

Additional foreign-exchange bureau operating procedures

The BOG also authorised additional operating procedures for foreign-exchange (forex) bureaus in the country after consultations with the Forex Bureau Operators' Association. All forex bureaus are now not allowed to buy or sell more than USD10,000 or its equivalent in one customer transaction. They are also required to:

• Computerise their operations using only BOG-approved software by 30 April;
• Provide electronic receipts for all purchases and sales in the BOG's prescribed format;
• Keep electronic records of all transactions with detailed customer information (name, transaction date, amount transacted, and proof of identity in the form of either a passport, driver's licence, national ID and voter's ID); and
• Electronically submit monthly returns to the BOG within five working days of the end of the month. The cut-off date for any manual receipts or returns is 30 April.

The BOG maintains that these new operating procedures will help to "modernise, enhance and address anti-money-laundering issues".

Outlook and implications

The new rules for foreign-exchange transactions highlight the BOG's strong desire to contain the significant negative pressures facing the cedi currency. The cedi has continued to depreciate strongly against major foreign currencies, falling by 7.8% against the US dollar by the end of January. This comes on top of its 14.6% depreciation against the greenback in 2013, compared with 17.5% in 2012, as reported this month by the Bank of Ghana. The cedi's continued weakness underscores broader foreign-exchange constraints in Ghana, as strong demand for US dollars continues to outpace supply. The BOG's approval on 14 January for local banks to trade the Chinese yuan aimed to ease US dollar demand as an intermediary currency for traders. However, while this could help over the longer term, given Ghana's growing import trade with China – which rose 56.5% to reach USD5.43 billion in 2012 from USD3.47 billion in 2011 – it is unlikely to significantly stem near-term pressures on the cedi.

We have dampened our outlook on the cedi's position over the near term. Despite the BOG's announced changes, we believe that depreciation risks for the cedi will remain strong despite the new rules. This view is supported, first, by our assessment of prevailing risks to Ghana's foreign exchange earnings from export receipts from goods and services – which could fall short of the government's projections given global economic conditions, pressure on global gold prices, and the lower expected 2014 production levels for both gold and crude oil. Second, the government has yet to rein in the large and recurrent fiscal and current-account deficits which are straining the cedi currency's position. Third, Ghana's struggle to raise gross international reserves comfortably above the three-month import cover minimum threshold means that the BOG will remain notably constrained in any attempts to defend the cedi's position on foreign-exchange markets. Finally, we expect a further erosion of confidence in the cedi from double-digit inflation rates.

The cedi's woes reflect broader trends observed in global capital markets since the start of the year, which has seen marked depreciation in emerging-market currencies against the US dollar, especially those of Argentina, Turkey, and South Africa. While Ghana has only frontier-market status, its economy is still vulnerable to foreign investor sentiment. We expect heightened concerns over the cedi's prospects to directly weigh on the business environment and possibly precipitate a shortage of foreign exchange, raise risks for transferability of funds, and increase payment delay risks for some business operators. Uncertainty over the cedi's strength going forward could lead to a rise in foreign-currency hoarding, greater currency speculation, and an upsurge in parallel foreign-exchange market activity. The downside risk of capital controls being imposed by Ghana's central bank is high, and if implemented will hit financial and insurance services first and then filter through to other economic sub-sectors, including mining and quarrying, hotels and restaurants, and information and communications – with negative repercussions for real economic activity.