How Ghanaian movies can save the falling Cedi

Add Africa’s currency markets to the mix of this season’s blockbuster hits. While it may lack the steamy late night frolicking or themes of “aspiration, corruption, and morality” of its more esteemed rival shows, it nevertheless makes a compelling case for a date night, with its sudden twists and plots.

 

In its fifth year, the highly successful Chale Wote Street Art Festival in Accra highlights the potential of the creative sector as a major source of foreign exchange earnings. Moviegoers in Africa are in for a treat this season.

An Africa City captures the joys and frustrations of five “single and fabulous” women of the African diaspora who return home, while Pastor Paul tells a tale of an American man who travels to West Africa, gets cast in a Nollywood film, and is subsequently possessed by a ghost.

Add Africa’s currency markets to the mix of this season’s blockbuster hits. While it may lack the steamy late night frolicking or themes of “aspiration, corruption, and morality” of its more esteemed rival shows, it nevertheless makes a compelling case for a date night, with its sudden twists and plots.

Take Nigeria’s currency markets for example. In August, the government tried a rather odd way of stemming a slide in the value of its currency chopping down trees that line up the streets of its capital, Abuja. Yes you read it correctly. In an interview with the Financial Times, a chainsaw-wielding laborer indicated, “the government does not want the trees because people [black market money operators] are doing illegal work under them.

” Five hundred kilometers to the west in Ghana, investors in the local currency, the cedi, have been in for a wild ride. From having the world’s worst performing publicly traded currency for parts of 2014 and the second worst performing currency in the first half of 2015, the cedi rallied over the summer to become the best performing currency.

It has since resumed its slide and is “finding its correct level”, in the words of Ghana’s President, John Mahama. How did we get to this point? Opinions have ranged from economic mismanagement to supernatural forces, as Ghana’s lively chattering classes duke it out on who deserves the most blame.

True, the US Federal Reserve Bank’s signal to begin raising interest rates has added to the lure of US assets – leading to reversal of funds back to the US, away from countries such as Ghana. This occurred against the backdrop of a gaping current account deficit.

This deficit meant Ghana consumed more in imports than it generated from export revenue, a situation not helped by the fall in commodity prices. All things being equal, excessive reliance on imports leads to decline in the value of a nation’s currency. Since foreign vendors do not accept Ghanaian cedis, there is an increase in demand for foreign currency to pay for the imports, hurting the cedis in the process.

Previously, increased foreign investment, mostly in the form of portfolio flows into Ghana’s equity and debt markets helped increase the supply of foreign currency in the market to meet demand.

However, portfolio flows are notoriously flighty. Unbudgeted government spending leading up to the 2012 presidential elections saw Ghana’s fiscal deficit increase from 4 percent to 11.8 percent of GDP.

Unnerved investors sold their cedi holdings, hurting the local currency along the way. To be fair, there have been other contributing factors beyond the control of Ghana’s fiscal authorities. The nation had become a victim of its recent successes.

Strong economic growth averaged 8 percent in the preceding five years, peaking at 20 percent in the second quarter of 2011. These trends made investors get a bit ahead of themselves – and they are just beginning to re-adjust their positions. Also, a review of Ghana’s economy in 2010 revealed that its GDP was 60 percent bigger than had been previously assumed. This exercise catapulted the nation into the rank of middle-income status – and with that, a loss of access to concessionary development finance.

The decline in the value of the currency together with these trends created a perfect storm that have led even locals to switch their assets into dollars to prevent further losses on their cedi holdings – while speculators have piled in to make a quick buck on expectation of the currency’s continued losses.

Where does this leave us? The IMF, for the 16th time has been called in to help put the nation’s fiscal house in order, in a three-year program. However, the current account deficit situation will require long-term structural reforms.

The Ghana government has drawn out an ambitious plan to nearly double revenue from non-traditional exports to $5 billion by 2019, with emphasis on agriculture, processed/semi-processed products and handicrafts. The country’s creative sector offers promising opportunities.

Thankfully, it has become a beehive of activity – in fashion and entertainment, which can become robust sources of sorely needed export revenue, if harnessed properly.

Tourism – in particular roots tourism – presents additional opportunities. A tiny share (less than one-twentieth) of this narrow sliver of the market, in which Ghana is ideally placed, this year alone would have generated $4.4b (over 10 times projected oil revenue for 2015), with significant upside potential.

The currency crisis has helped concentrate minds on the need to hit the reset button and re-structure our economy away from excessive reliance on a narrow export base. Rahm Emmanuel, former chief of staff to President Obama once observed, “never let a serious crisis go to waste.” We’d be wise to heed his words.

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