The Ghana Cedi Bleeding…Who Will Save It?

The Ghana Cedi(GH¢) which hitherto was rated as one of the strongest currencies in Africa has taken a nosedive and if stringent and concrete measures are not put in place to halt it in its tracks, analysts say it may end the year at GH¢3 to a Dollar.

Only last year, the Cedi depreciated by almost 20% against the United States Dollar. Apart from the Dollar, the Cedi has depreciated continuously against other major foreign currencies.

The New Ghana Cedi was introduced on July 3, 2007 after four zeros were knocked off making it the highest-valued currency unit issued by any sovereign country in Africa in 2007.

The erosion in the purchasing power of the Ghana Cedi relative to other currencies such as the US Dollar, Euro or Pound Sterling is called DEPRECIATION. For instance, in 2007, US$1.00 was sold at GH¢0.91, in December 2008, US$1.00 was sold at GH¢1.10. In June 2009, US$1.00 was selling at GH¢1.40, in December, 2010 US$1 sold at GH¢1.47 and then in December 2011, US$1.00 sold at GH¢1.64.

Any economic activity such as exports, imports, flows of foreign direct investment, foreign loans, and grants, payment of foreign debt, that is, every transaction involving the use of foreign exchange that will affect the supply and demand for foreign currency will affect the price of the nation's currency.

The rapid depreciation of the Cedi has serious effects on all key economic actors namely businesses, households and government and Ghanaians are feeling the impact of the rapidly depreciating Cedi on daily basis.

Although the month of January is barely ended, the Cedi has already depreciated by close to three percent, a situation which can derail all economic gains.

Indeed an Ecobank Research conducted and released last November saw the Ghana Cedi overtake the South African Rand as the worst performing currency in Africa in 2013.

Latest statistics released by the Ghana Stock Exchange (GSE) has revealed that the Ghana Cedi traded at US$1 to GH¢1.8800 at the beginning of 2013 but ended the year at US$1 to GH¢2.1616, a 15.0 percent decline.

On Friday at Tudu, the hub of foreign exchange business in Accra, the US$ was buying at GH¢2.40 and selling at GH¢2.48, a further depreciation.

It is instructive to note that when some economic analysts and a section of the media last year projected that a massive depreciation of the Cedi against the Dollar, the Governor of the Bank of Ghana vehemently debunked those claims and assured the nation that it had put in place mechanisms to avert that.

“We have a policy that aims at broad stability in the exchange rate. We don't know the basis of the current projections in the media but we will still continue to ensure that the tight monetary policies we have put in place since the second quarter would continue. But these interventions would still be supported by the policies that would try and place a restriction on demand” Dr. Wampah stated last year May.

However, the prevailing exchange rates would make the Governor revise his notes as the purported BOG interventions could not hold sway. In fact the $1 billion Eurobond issued by the Ghana government which was reportedly over-subscribed could not save the Cedi from bleeding.

Owing to the worrying downward trend, both the Vice President, Paa Kwesi Amissah-Arthur and the Finance Minister Seth Terkper, recently hinted of government's intention to strengthen existing foreign exchange laws to help halt the free fall of the Cedi.

The Vice-President has to that effect directed the Finance Ministry and the Bank of Ghana (BoG) to quickly stall further depreciation of the Cedi against major currencies.

If the level of depreciation is not halted, its consequences on the economy such as import, consumer and the government would be grave.

EFFECTS ON IMPORT OPERATIONS:
Businesses that import goods into the country are suffering tremendously from the depreciation of the Cedi in several ways. First, traders who import are realizing that the goods that they purchased and sold 2 months ago cannot be purchased with the sales that they made on the same goods. This will mean that their working capital will disappear leaving them bankrupt. For instance, the used car and spare parts dealers at 'Abossey Okai' and 'Suame Magazine' are always running helter-skelter in such of extra funds to enable them exchange for US Dollars.

EFFECTS ON CONSUMER:
The effect of the cedi deterioration is eventually borne by the consumer. This is because businesses that are facing foreign exchange losses and increases in taxes are passing all these additional cost increases to the consumer to make up for the losses they made in previous consignments and also to add enough margin to new consignments to ensure that their working capital is protected. The effect of this is that prices of food such as imported rice, sugar, cooking oil, and other imported goods have all gone up. Furthermore, prices of goods that are produced locally including local foods that need imported raw-materials such as fertilizers, cement have all gone up Even the price of sachet water is gone up because the prices of imported plastic granules are all up.

EFFECTS ON GOVERNMENT:
Government operations are also negatively affected. First, government will have to find additional monies to pay for its dollar denominated statutory obligations such as payment of principal and interest on loans. This additional unbudgeted expenditure will have to be financed through domestic borrowing which crowds out the private sector.

Surely, the Finance Minister is not oblivious of the adverse effects of the bleeding Ghana Cedi on the economy but one is not certain of the feasible and practical measures currently in place to halt the downward trend.