Ghana’s currency has grabbed the headlines of late. The depreciation of the cedi has been the hottest subject in the current political and economic discussions. The country is experiencing its tough times with the depreciation of the Ghana cedi almost day in and day out. This current economic scenario has created anxious moments to the various industrial sectors of the country.
The experts in this field perceive the situation in different manners. Some consider it as highly depressed and threatening canker; whereas others consider the situation as a disincentive to both business and standard of living. There are various negative impacts which are being predicted by experts. The cedi depreciation, no doubt, will affect all sectors of the economy.
This spectacular decline of the Ghana cedi to other foreign currencies will cripple investors and the citizenry’s confidence in the country’s growth prospects. Though, the government is taking various measures with the objective of developing a stabilised floor for the Ghana cedi. Mr. Ken Ofori-Atta, Ghana’s Finance Minister, has shown reflections of hope in the present crisis.
However, the Ghanaian citizenry expects only the right mix of experience, economic exuberance and proven skills from the Ministry of Finance in the management of the country’s currency against the foreign ones. The foreign currencies most of times, drill crisp finishes on our local currency through the latter’s continuous depreciation. The cedi’s uncharacteristic collapse in the first quarter of the year is really strange, compared to its usual fourth quarter rampant depreciation.
It is inconsiderate to hear discussants mumbling and muttering about the arbitrarily free fall of the Ghana cedi. Alarm bells in the economic indicators should be set for the forex market to monitor closely the performance of the cedi against the foreign currencies. It is however ventured to pontificate that economic proactiveness ought to supercede reactiveness.
Recently, every Ghanaian economic and political discussions toss around the subject of the upsetting news of the cedi depreciation and its effects, both long term and short term on Ghana’s economic context. It is an undisputed factual that the cedi has experienced considerable depreciation of value in recent times and that has affected even the bottom lines of Ghana’s economic scenario.
Ghana’s currency depreciation, as the name suggests, refers to fall in value of the cedi with respect to other currencies especially the dollar. In year 2008, one US dollar was exchanged for one Ghana cedi. However, at the close of first quarter of year 2012, one US dollar was exchanged for one Ghana cedi seventy four Ghana pesewas. This sharp decline of the cedi was met with consternation in the media.
The government then was shrouded with a stern test to stabilise the cedi because businessmen and consumers become victims of unfair systems. A point to note is that during the global economic crises of 2008-2009, the cedi depreciated by 25% against the US dollar. The cedi has experienced a sharp nosedive in this first quarter of year 2019. It is said that the cedi has depreciated by 8.6% in this first quarter of year 2019.
This means that year-on-year decline of the value of the Ghana cedi to the US dollar has been prevalent in Ghana. The value of the cedi has weakened so worthless that the Oil Marketing Companies (OMC) have threatened to increase the prices of petroleum products. As the Ghanaian currency is sharply depreciated against the dollar, as well as against the other currencies, it is imperative to understand the factors contributing to the fall of the cedi. Some of the major factors causing the depreciation of the Ghana cedi are discussed below:
a) Demand and Supply Rule.
Demand and supply rule means that if there is more demand for dollars in Ghana’s currency market and not adequately matched by the supply, other things remaining equal, the cedis price of the dollar will go up or the cedi will depreciate. Demand for dollars may be created by importers requiring more dollars to pay for their imports, foreign institutional investors withdrawing their investments and taking dollars outside the borders of the country. On the other hand, supply of foreign currencies in the country is created by exporters bringing in more dollars from their revenues. Since there is no import restrictions in Ghana, almost everything is freely imported into the country, ranging from cars, furniture, food items, clothing, construction materials to toothpicks. As a people, no one cares about whether there are local closed substitutes for particular imported goods, for instance furniture, we will go ahead without any favour for our own economy, to import same for local consumption.
The ruling government, opposition and the public, they all know this as a fact. I stand for correction, the furniture being used in parliament now, were imported in dollars from China. Assuming these furniture is cheaper in China, Ghana only gets the furniture for the comfort of our Parliamentarians. However, these same furniture purchased at exorbitant prices locally will be paid in Ghana cedis.
The Ghanaian supplier of these furniture can employ Ghanaians with such a huge contract and these employees may utilise their earnings on their dependants and as they patronise Ghanaian goods, the multiplier effect cannot be assessed. Regarding our incessant importation of rice into the country, we all know the chunk of dollars that Ghanaian importers wire outside the country year in year out.
It seems we remain clueless in its solution. We have the potential to grow enough rice locally but the stiff competition awaiting these local rice renders it unattractive to the local farmers to produce more local rice. Common toothpicks made of bamboo are often imported from China. The knowers of economics and all governance practitioners watch with their microscopic spectacles without questioning. All these expose how our economy is prone to such currency fluctuations and its occasional lapses.
Our spending pattern is brimmed with excessive consumption of imported goods. From Ghana’s economic history, it seems the most reliable and main provider of dollars into our economy is cocoa. Cocoa is highly-fancied as highest foreign exchange earner in Ghana, however, the Ghanaian farmer’s momentum on cocoa production has subsided. There is an obvious drift from cocoa production to cashew production. It is incumbent on us all to address this situation now than to defer it to a later date.
b) Wider Current Account Deficit
Wider current account deficit can be regarded as another reason for the fall of the Ghana cedi. A current account deficit occurs when a country is importing more goods and services than it is exporting. Ghana’s current account deficit has kept on exploding over a couple of years. This wider current account deficit usually creates demand for dollars which result in cedi depreciation. The deficit can be bridged either by using the country’s forex reserves or from capital inflows. Ghana’s successive governments become proud of increased Foreign Direct lnvestments (FDI) into the economy.
Truly, the stamp duties that these foreign investors pay on the FDI increase more revenue to the government and the country’s forex, as well. However, the country in turn suffers increased demand for forex when these same investors start repatriating their investments. In certain jurisdictions, the moment their economies start experiencing depreciation of their currencies against the foreign currencies, the government and central bank take several steps, including hikes in luxurious goods and restrictions on certain imports to address the situation. In the case of increase in the supply of foreign currencies in the economy, these governments institute pragmatic measures to boost exports.
c) Improving the Strength of the US Economy
Improving the strength of the US economy or the dollar gaining strength against other currencies is another likely reason for the depreciation of the cedi. In an attempt to strengthen the US Economy, Donald Trump was emphatic in his campaign promise that, “Every American agrees that their tax code is crazy. The federal tax code is 74,608 pages long. Nobody can really understand it, not even the Accountants who try to help taxpayers fill out their forms. An entire industry springs up every year just to help Americans figure out how much money they owe to the government.
The reality is that the current tax code takes too much money from the people who need it most, while allowing others to find ways to reduce their tax burden. It discourages major corporations from reinvesting foreign profits at home and makes it hard for small businesses to grow”. These words are inclusive of Trump’s campaign promises. In his reign as US President, he has addressed the said anomalies and these have strengthened the US economy and the dollar as well, against other currencies.
On the other hand, the US Federal Reserve has shown good signs to end their stimulus. Stimulus is a plan by a central bank to counter a weaker economy, by taking various actions like lowering interest rates, increased government spending and quantitative easing. The side effect of this policy includes weakening other currencies, hence, it helps to strengthen the US dollar against other currencies. There is therefore the need for the government to review our tax systems to prevent repatriation of foreign investments in Ghana. All these entail increase in the demand for our meagre foreign currencies as against the crumpled supply in the country.
d) Lower Economic Growth
Another reason attributed to the depreciation of the cedi is lower economic growth. That is due to the lower economic growth, foreign institutional investors are deemed to be pulling off their investible funds from the economy. In some years past, Ghana’s economy suffered serious drop in its growth rate. The park out of these foreign investors by means exert more pressure on the cedi and as a result a concomitant depreciation of the cedi becomes rampant. This stimulates people’s loss of confidence in the economy and a number of Ghanaians tend to rely on economic trend of speculation to buy more dollars as a store of wealth.
e) High Fiscal Deficit and Lack of Clarity on Policy Reforms.
The dichotomous appearance of the government’s receipts and spending is another contributory factor to the depreciation of the cedi. A situation where the government was unable to meet its revenue target has dire consequences on the currency market. The higher fiscal deficit could lead to speculative attacks on our currency. In the case of high deficit, the government may pounce on the country’s forex reserves to finance the deficit. This will therefore lead to lowering of these reserves and if there is any speculative excess demand for foreign currencies, the government may not have adequate forex reserves to leverage the situation.
Lack of clarity in policy reforms can adversely affect the fluctuations in the cedi exchange rates to the foreign currencies. People’s perception of lack of clarity on the policy front is also fanning speculative demand for foreign currencies. The government’s policies on the currency market should be transparent and made available to forestall speculative demand for foreign currencies in the country.
To conclude, withdrawal by investors affects the cedi to decline in value. The economic slowdown of many industries in the Ghanaian economy, the weakness of the foreign market for the government to implement sound economic policies are increasingly worrying to businesses, importers and consumers. The depreciation of the cedi is extremely worrisome, all because of the devastating impact it has on the country’s economic fundamentals.
The government should accelerate the sale of bonds to non residential investors to increase the inflow of more dollars into the economy. Granted that the government has the political will to implement, there should be the need to formulate strong policies and restrictions on imported goods which can be easily produced locally. Again, the Bank of Ghana and government should work tirelessly hand in hand to find out policy measures to stabilise the alarming scenario.