Trading at US$1 for GHC4.9 on January 27, 2019, the cedi hit GHC5.6 to a US dollar by March 17, 2019 triggering widespread panic by businesses, though gaining some strength last week with a dollar changing at GHC5.4 as at press time last week. Worst affected were traders and importers. With the Kumasi Central Market Importers and the Eastern Corridor Importers Association threatening to embark on demonstration against the government complaining that, the decline in the value of the cedi has had an adverse impact on their businesses.
Also, a former Deputy Finance Minister, Fifi Kwetey has said, the government’s capital injection into the economy as a means to stop the currency from depreciating, will not solve the challenges with the “economic fundamentals” responsible for the currency’s depreciation.
The cedi depreciates whenever the demand for foreign currencies, predominantly the dollar, outstrips supply.
However, Prof. Eric Osei Assibey conceded, the productive structure of the economy is still very weak and pointed to a popular fault in the cedi’s depreciation – strong imports base and weak export culture.
When the country exports less and imports more, it creates a trade deficit while the reverse creates a surplus.
But he noted that even with this weak economic structure, Ghana has been recording trade surplus over the past three years as seen in the value of merchandise exports.
“But when you bring in the income transfers you realise the current account exchange shows a deficit”, he said.
Understanding the exchange rate volatilities is identifying the long-run behavior and the short-run determination of the currency. The weak productive structure of the economy will fall under the long-term cause of the cedi, he said. But with the trade surplus over the recent years, the recent depreciation, the short-run causes ought to be responsible for the forex losses.
One of the short-run causes of depreciation is the economic decisions of multinational companies and foreigners. It is established fact that, foreign companies operating in the country repatriate their profits into their home country which allowable.
So at the beginning of every year we see these foreign companies and multinationals demanding high dollar and taking them out of the country which causes scarcity of the foreign currency and eventually resulting in depreciation of the cedi.
The factors of production for these multinational companies are in dollars but the revenue they make are in cedis and they therefore exchange their cedi for dollars to be sent back to their shareholders in foreign countries.
Observing the trend for the past 7 years, the cedi depreciates sharply between January to March each year.
“Why is it always the case? It is because of the structure of the economy. It is because we have so many multinationals”, Prof Assibey retorted and he tried to identify some causes and solutions to the phenomenon. “How do we talk to these people to at least retain some of the profits in this country particularly when they do not generate dollar-denominated revenue?” he added.
He also blamed the structure of Ghana’s debts, explaining about 60% of the country’s debts is owned to foreigners and explained that, international investors with interests in the country’s local bonds are likely to suddenly offload their interest in Ghana’s bonds and chase after American bonds offering attractive interest rates.
Despite his analysis pointing to high foreign interest in Ghana’s economy, the professor would not endorse government investing in local businesses.
He said as a free market economy, government ought to focus on creating an enabling environment for the private sector to thrive.
“Government cannot lead in the productive process. As we always say, government will also act as a facilitator”
By this, government should examine regulations and ensure they are pro-business while also investing in competitive infrastructure such as improved road network and reliable power supply that allows private sector growth.