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Rapid Cedi Fall: Cause And Solution


In 2017 when I heard the central bank has decided to reduce the policy rate by 200 basis points I got worried. Not because I didn’t want market rate to trend down. Not because I didn’t believe customers deserve lower rates on their borrowing. I was worried about the sudden decline in the yield on cedi assets and its impact on the FX market. It is said that the market abhors surprises. Consequently, cedi asset yield has declined from an average of 25% in 2016 to an average of 16% at the close of 2018. Perhaps this is one major factor in the unprecedented cedi depreciation over the last two months.

Others have stated that the flight of funds by Chinese investors returning home to celebrate the Chinese New Year is the prime reason for the rapid depreciation of the cedi. That is a factor but the impact from the Chinese, which has been the case for a while cannot, be a prime cause.

Other analysts have blamed the cedi free fall on the uniformed interventions by the central bank in closure of some banks without thorough planning for aftershocks and the unforeseen deterioration in confidence for local banks, the drying up of liquidity for key savings and loans and microfinance institutions with some of such institutions being insolvent/illiquid due to panic withdrawals/credit defaults.

None of the above factors surprised me than a sudden reduction in the policy rate to 16% when it was clear that for the first quarter of each year that there will be foreign currency payments for dividends, management services, licences, foreign loan repayments, etc and thus a pressure on the cedi. This required that yields on cedi assets must stay up to keep the market fairly balanced between cedi investors and FX price speculators. However, I think the technical people advised the decision makers wrongly on this one.

Devoid of the politics we have been playing with our economy, we need to come together to allow those who understand the issues to tackle them. There will not be easy and quick fixes but with boldness and good thinking we can solve this.

My solution for these problems are as follows:


1. BoG should increase the policy rate to 18% and also increase the 91 days tbill rate to 16%. Increase the 56 days bill to 20%. These make the short-term credits are more attractive than they are today.

2. BoG should engage in currency forwards as was the case previously to alley fears of currency buyers and also to provide some level of certainty for foreign currency demand.

3. BoG should enforce its own FX rules to ensure compliance.

Medium term

1. introduce more stringent foreign currency control regime which makes it more difficult for FX flight especially cross border movements, fraudulent management services payments by foreign entities operating here.

2. liaise with NIA to use the biometric ID cards as the sole ID for bank account opening, forex bureaus as well as mobile money accounts.

3. government must introduce controls into sectors such as cocoa, downstream oil and gas, utilities, retail business, etc with the aim of moving control of such business to Ghanaians to limit repatriation of dividends and fictitious payments for management services by multinational institutions in Ghana

4. Trade, finance and agric ministries to come together to institute policies aim at increasing local production of consumables, promoting exports and raising the barriers for importation of goods readily available in Ghana.

5. restore confidence in indigenously owned financial institution by restructuring the regulatory regime and consciously limiting government business to local banks.

6. Reform the financial sector with the sole aim of moving control of the sector to indigenes over the next 15 years. The same policy should be pursued in the area of construction, telecoms, etc

7. BoG to restructure and clean up the Savings and loans and microfinance sub-sectors by establishing a GAT like entity responsible for managing their toxic assets and recapitalization.

As I have said, the journey will not be an easy one but these steps can help to put a perennial problem behind us.

S. A. Baiden
CEO Bemuder SAB

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