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Economists provide remedy for rapid cedi depreciation

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Adnan Adams Mohammed

The Ghana Cedi in recent times has depreciated marginally against major international currencies, especially the US ($) dollar causing fears within the business community.

The Ghana cedi trades on the interbank market at GH¢4.94 to US$1 and sells at GH¢5 on the black market eating away the capital of exporters, importers and automobile spare parts traders.

Some currency analysts are projecting that the cedi will continue its losing streak against major trading currencies until external factors influencing its performance stabilize.

The perennial issue has largely been blamed on Ghana’s economic model which is highly dependent on imports, a situation the Senior Dealer for Corporate and Forex at Republic Bank, Nana Yaw Kissi Nyame, says will require political commitment to reverse the trend.

“It is only when we come to a point where we build up our industries to the point where we are able to export our goods and get foreign currency which then balances out what we use for imports; at that point we can have some relative level of stability,” he noted.

However, a Senior Research Fellow at the Institute for Fiscal Studies (IFS), Dr Said Boakye, has expressed confidence in the managers of the economy, allaying fears the recent depreciation of the local currency will lead to economic meltdown.

Dr. Boakye submitted that the shocks are normal, urging the general public to have confidence in the Central Bank to manage the situation in no time.

“There is no cause for alarm,” the IFS fellow assured at a public dialogue on the local currency dubbed: “The Cedi Forum” last week.

But, Dr Eric Osei-Assibey has said the situation needs an everlasting solution. He recounted that, it is time the Central Bank controls the activities of black market operators to stem the depreciating cedi.

The senior economics lecturer with the University of Ghana has said, the parallel system where people are engaged in the foreign exchange business underground alongside the forex bureau and commercial banks does not augur well for the local currency.

“To the extent that this has created a parallel rate in the market where the Bank of Ghana is quoting GH¢4.7 to US$1 but the parallel market is giving about GH¢5 to US$1 is problematic,” he said at Joy FM’s first Cedi Forum, held at the Economics Department of the University of Ghana.

He explained that the phenomenon is challenging “because the Central Bank seems to be losing control over the informal activities of the forex management.
The local currency which has been depreciating fast in the last few months and there has been a lot of proposals on how to stem the tide.

Dr Boakye agreed to the remedy by the Dr Osei-Assibey that, Central Bank checks the management of forex system which he says is not tight enough and lacks transparency.

“This has gone on from time immemorial where we have left the black market to grow without any check…changing money from a forex bureau and not being asked for documentation like identity cards is not good enough,” he observed.

According to him, the lack of a mechanism to track such transactions begs the question having a control over the sector.

“If we don’t tighten the regulations and controls and bring more transparency to the transactions system, it will continue to plague the economy,” he said.

Again, Dr Osei-Asibey also blamed imbalance in trade relations, exporting less and importing more as bringing pressure on the cedi.

“We can also attribute the large per cent of it to microeconomics mismanagement. In the past if you look at the data, you will realise that in most times we have rapid depreciation of the currency, we seem to have high fiscal dominant, government overspending and very weak liquidity management from the Central Bank,” he noted.

According to him, with such drivers, a country is likely to have more demand-driven factors that will accelerate the depreciating rate of the currency.

Consequently, Chief Executive Officer of the Association of Ghana Industries (AGI), representing the business community, has warned that speculations against the downward trend of the cedi could further affect its performance in the future.

Seth Twum Akwaboah says the state of the cedi is just temporary hence the need to halt the speculations.

“The Cedi is depreciating and it’s of concern to our businesses. It’ a seasonal thing and happens once a while. It escalates when we speculate and we give up so soon and give up on the impression that it can’t be solved soon. In that case, people who don’t need the dollar start to buy and hoard foreign currencies. This negatively affects the cedi,” Mr Twum Akwaboah said.

He believes that the permanent and long-term solution to addressing the downward trend of the cedi will be to increase more exports to decrease demand for the dollar.

“So if the cedi is depreciating, why is it depreciating and what can government do? In the short term, the Bank of Ghana would have to pump in more dollars which they are doing currently. In the long term, we have to reduce our import volumes and increase our local production so that our demand for foreign currency comes down. Once there is pressure on the cedi for imports we tend to have this challenge,” he said.

An independent analysis show that, cumulatively, the cedi depreciated by 26.12 percent in 2017. The cedi cumulatively depreciated by 6.5 percent from January to June this year.

Opposing to the government measures put in place, the CEO of Dalex Finance, Ken Thompson has said, injecting more dollars to meet the daily demands of foreign exchange in the country may not be the best move in stabilising the cedi.

The financial expert says government seems to miss the most fundamental issues causing the cedi to depreciate and until those problems are addressed, pumping more dollars into the economy will yield no meaningful results.

He said, managing the decline of the cedi and using balance from it to support the productive sector is a more viable approach to tackling the fall than pumping more dollars.

“Don’t throw good money after bad, it is an absolute waste of time,” he said.

The steep decline of the cedi against major trading currencies like the US dollar and British pound in recent weeks has become a major source of concern for businesses.

Analysts have attributed the sharp fall to the exit of investors from emerging markets like Ghana.

The Bank of Ghana has
argued that external developments like a strong dollar, expected hikes in the interest of investment assets in the US, as well as an expected increase in the US Federal reserve rate, are impacting on the cedi.

This has seen some of the international investors who bought into the local bonds, exit to purchase US assets.

This has also led most of these Banks that purchased the bonds on behalf of the foreign investors to look for dollars and pay back these firms; a development that has brought some pressure on the local currency.

Meanwhile, commenting on how the international market developments have impacted the weak performance of the cedi, Nana Yaw Kissi Nyame said that the attractive interest rates will continue to repel investors from emerging markets which will impact heavily on supply of dollars.

“What’s happening is that, we have these investors pulling out or exiting their positions from Ghana and other investment markets so that they can take advantage of the hike in the US markets and so exiting their position now means that they would have to buy the dollars that they brought in which is the reverse when they initially bought into investments in such developing markets. They need to buy the dollars and go and invest it somewhere,” he further explained.

For now, it is anticipated that the yuletide may trigger another round of depreciation if the central bank fails to tame the situation with robust measures.

But, according to the Bank of Ghana, these breakdowns are temporary and it should be over soon.

Head of Financial Markets and Treasury at the Central Bank, Stephen Opata also said, “markets assistants are responding but we strongly believe that our fundamentals are strong right now so that we could be able to moderate the impact of its external factors”.

Mr Opata added that looking at the Bank of Ghana’s strong reserve position should also assure businesses that there is no need to panic.

“We are making sure there is adequate liquidity to the banks and we are actually doing that. We believe that this should lead to stabilizing the situation quickly”, he added.

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