Founding CEO of the Chief Executives Network Ghana and the Ghana CEO Summit. An intellectual commentary on the ECG forex debt situation in Ghana.

Ghana’s Electricity Company of Ghana (ECG) recently highlighted that a significant part of its financial woes stemmed from foreign exchange deficits, particularly debts owed in US dollars rather than Ghana cedi.

This revelation raises crucial questions about the country’s monetary sovereignty, foreign exchange guidelines and broader implications for the financial stability of state-owned enterprises.

To address these issues, this commentary delves deeper into Ghana’s legal and regulatory framework, examines the operational challenges facing the ECG, and offers policy recommendations.

1. Sovereignty and use of money in state transactions

One of the main indicators of a sovereign state is its ability to control and regulate transactions within its borders, including the denomination of those transactions in its local currency. The preference for dollar-denominated contracts or bonds raises concerns regarding:

A. Erosion of sovereignty:

By accepting foreign currency-denominated bonds, Ghana exposes itself to exchange rate volatility, which undermines fiscal stability. This raises questions about the effectiveness of Ghana’s foreign exchange laws, particularly those governing the naming of domestic transactions.

b. Legal framework for Forex in Ghana:

The Foreign Exchange Act, 2006 (Act 723) provides the legal basis for foreign exchange transactions in Ghana. Although the law allows some foreign currency transactions, it emphasizes the use of the cedi for local commerce and services. State-owned companies like ECG are not exempt from these regulations, but they appear to face pressures – either from foreign investors or operational inefficiencies – that require foreign currency-denominated bonds.

c. Investor Perceptions and Trading Dynamics:

Foreign investors often require dollar-denominated contracts to protect against the risks of currency depreciation. However, this dynamic challenges Ghana’s sovereignty if public entities are forced to absorb the cost of exchange rate fluctuations.

2. ECG’s financial and operational challenges

The ECG’s reliance on dollar-denominated bonds exacerbates its financial instability. Issues to be resolved include:

A. Foreign exchange deficits and income mismatch:

ECG generates revenues primarily in Ghana cedis, but its liabilities are in dollars. This creates an inherent imbalance that worsens during periods of cedi depreciation. For example, Ghana’s currency has experienced high volatility in recent years, with double-digit annual depreciation rates.

b. Debt accumulation and operational threats:

Foreign exchange deficits are said to have pushed ECG’s debt to unsustainable levels, threatening its operational viability. This is particularly worrying for a utility provider, as the provision of electricity is essential to both households and industries.

c. Regulatory weaknesses:

ECG’s predicament suggests a lack of strong regulatory oversight or policy enforcement related to forex. The Bank of Ghana (BoG), responsible for ensuring foreign exchange stability, must reassess its role in managing foreign currency transactions, particularly those involving strategic national institutions.

3. Recommendations for a sustainable way forward

To address the challenges raised, Ghana must adopt a multi-pronged approach that strengthens its monetary sovereignty, supports the financial recovery of ECG and reassures investors of fair treatment. Key recommendations include:

A. Review and strengthen Forex regulations

– The Bank of Ghana should strictly enforce the provisions of the Foreign Exchange Act, ensuring that transactions in Ghana are denominated in cedis, barring exceptional circumstances to the contrary.

– Government-investor agreements involving foreign exchange obligations should be negotiated transparently, with emphasis on minimizing dollar commitments.

b. Hedging against currency risks

– ECG should adopt financial instruments such as foreign exchange hedging to mitigate the impact of exchange rate fluctuations.

– A national stabilization fund could also be created to provide exchange buffers to state-owned enterprises during periods of currency depreciation.

c. Improve revenue collection and efficiency

– The ECG must address inefficiencies in revenue collection, including reducing electricity theft and ensuring timely payments from private and government entities.

– Tariff adjustments must reflect the reality of costs, while taking care to avoid an excessive burden on consumers.

d. Engage in transparent debt restructuring

– ECG’s existing dollar-denominated debt should be renegotiated where possible. Working with creditors to restructure payment terms can alleviate immediate financial pressures.

– Future contracts should give priority to the local currency, unless foreign exchange obligations are absolutely necessary.

e. Strengthen institutional governance

– ECG and similar SOEs need improved governance frameworks to ensure financial accountability and operational sustainability.

– Capacity building initiatives should aim to equip ECG management with the necessary tools to address complex financial challenges.

f. Diversify energy sector financing

– The government should explore alternative financing models, including public-private partnerships (PPPs), to reduce the budgetary burden on ECG.

– Renewable energy projects, which often attract concessional financing, could be a strategic area of ​​investment.

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Conclusion

The ECG foreign exchange debt crisis is symptomatic of broader structural problems within Ghana’s financial and energy sectors. At its core, the problem reflects a tension between national monetary sovereignty and the demands of a globalized financial system. By enforcing its foreign exchange laws, addressing inefficiencies within the ECG, and renegotiating unsustainable debt obligations, Ghana can safeguard its sovereignty and stabilize its public services sector.

Ultimately, a collaborative approach involving government, the Bank of Ghana, the ECG and investors is essential to ensure that the ECG remains a viable and strategic national asset.

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