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Keeping the cedi stable

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The major challenge for the government this year would be keeping the sharp depreciation of the Ghana cedi stable.

Every successive government has always depended largely on the inflows from the cocoa syndicated loan to improve on their gross international reserves. Currently, the country’s reserves have improved reaching a record high of US$8.70 billion as at November 15, 2019, providing cover for 4.2 months of imports. This compares with the end December 2018 position of US$7.02 billion equivalent to 3.6 months of import cover.

The foreign exchange market has continued to remain calm since the sharp depreciations in the first quarter of the year. As at November 21, 2019, the Ghana cedi has depreciated by 10.4 percent against the US dollar compared with an 8.1 percent depreciation for the corresponding period in 2018.

Against the British pound and euro, the Ghana cedi cumulatively depreciated by 11.2 percent and 7.4 percent respectively, compared with 2.6 percent and 2.8 percent over the corresponding period in 2018. In trade-weighted terms, the real effective exchange rate continued to be broadly aligned with the underlying fundamentals.

In the past, stability of the cedi depended largely on exogenous factors such as commodity price shocks, uncertainty in the financial markets, global financing conditions, energy shocks, crude oil imports, as well as other fiscal pressures.

The central bank has s far received US$1 billion of the cocoa syndicated loan. These should improve the Net Foreign Asset (NFA) of the central bank, and the foreign reserves position to support the forex market. The expected growth in the central bank’s NFA would have to be supported by monetization of the foreign currency inflows. This is projected, together with increased deposit mobilization, to instigate growth in Reserve Money and other monetary aggregates and exert upward pressure on inflation beyond the medium-term horizon.

The recently completed recapitalization exercise and the resultant improvements in the financial soundness indicators, as well as enhanced deposit mobilization which partly reflects innovations in the mobile money space, should guarantee a resilient banking sector positioned to supply credit without significant hikes in interest rates. Thus, the monetary sector is expected to expand with developments in the real sector, propelled by growth in both the NFA and the NDA. 

We expect the central bank to put in effective measures which would ensure investors and the business community of the stability of the cedi going forward. We should always not depend on our traditional source of shoring up our reserves. Let’s look at other options.

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