Cedi to fall further, economists doubt workability of BoG rescue plans
“Then we have also come to a point where the foreign currency is not only a medium of exchange in terms of international trade, but also an investment asset of people. So, the demand factors have become multiplied; and the ability of that US$800million depends on the strength of those demand factors,” he added.
“The reality on the ground regarding cedi-depreciation is supply and demand of the dollar. There is more demand than supply of forex after Christmas. In addition, the US interest rate shot up and so more people are disinvesting their long-term bonds and the Bank of Ghana needs to find dollars to pay.
“And again, now that the banks are publishing their accounts and declaring dividends, they will also demand dollars to pay dividends to their shareholders outside the country. So, these are the factors causing cedi-depreciation and it has nothing to do with the interbank forex conduct,” he said.
Historically reflection on the BoG injecting more US dollars into the economy has never yielded a lasting solution, the approach has proven to be a mere cosmetic exercise over the years.
In July 2015, under the leadership of Dr. Kofi Wampah, the central bank pumped in some US$20million daily to stabilise the cedi when it was depreciating as fast as it is doing today.
Though, it resulted in the cedi appreciating about 2.4 percent in just two weeks against the US dollar, but returned to its declining state afterward, confirming it was just a ‘make-ups’.
The BoG today, under the leadership of Dr. Ernest Addison, is still contemplating use of the same cosmetic approach that has proved to be unsustainable in checking the cedi’s perennial slide.
The BoG knows for sure that this approach is just a knee-jerk reaction to a big problem that needs long-term measures to permanently control it. In fact, the central bank’s own research has shown that the cedi will continue to depreciate throughout the year due to some external factors that the country has no control over. So, injecting the US$800million will be a temporary measure that in the long-run it will be an exercise in futility.
This position is supported by some economists who argue that until fundamentals of the economy are strong, no amount of short-term measures will heal the cedi’s ill-health.
“While we utilise this short-term measure and we do not put in place the measures necessary to shore-up naturally through international trade transactions that increase foreign currency supply and reduce demand for foreign currency in the country, it doesn’t matter the number of times you inject foreign currency into the economy: it will reduce your reserves, and when they are reduced to a certain point it makes the country vulnerable.
“So, I don’t think that the purpose [of the US$800m] is to solve the depreciation problem, but rather to bring about short-term respite for the currency,” he said.
“The emphasis should be on how we are expanding our export base. Are we adding value to our domestic produce so that we produce domestic substitutes for goods that are imported? But so far as we don’t tackle those critical issues, they will continue to be cyclical; today the pressure comes and we ease it. But the bottom line is that the dollar is not for us, and the central bank does not have unlimited reserves. Whatever it is, the BoG will run out of reserves – and when that happens, you will have to allow your currency to depreciate,” she said.
A report by the Bank of Ghana that assesses the impact of external shocks on Ghana’s economy has revealed the cedi’s depreciation against the dollar is expected continue throughout the year, as global events show more external threats ahead.
The report, title
d ‘The Effect of External Conditions on the Economy of Ghana’, said an expected slowdown in the US and China economies, policy rate hike in the U.S, strengthening of the US dollar and higher crude oil prices will all impact Ghana’s economy negatively, leading to a “significant deterioration in the exchange rate”.
According to the report, a simultaneous slowdown in the world’s two largest economies will dampen GDP growth in Ghana, induce a significant deterioration in the exchange rate, and induce a marginal increase in the domestic inflation rate as well as a sharp rise in interest rates.
Again, the report adds that a surge in oil price leads to relatively stable GDP growth. Inflation declines initially but picks up marginally after three quarters, while the exchange rate depreciates sharply.
The report further shows that about 40 percent of the variation in Ghana’s real GDP growth is accounted for by external influences. What this essentially means is that any activity— be it positive or negative— that happens with Ghana’s trading-partner countries can affect economic growth by as much as 40 percent.