Business News of 2014-04-03

Comment: Weaning Ghana off its addiction to the dollar (Part 2)

Clearly, Bank of Ghana’s new restrictions on foreign currency-denominated loans, repatriation of export proceeds, margin accounts for import bills and revised operating procedures for forex bureaus will take some time to work their way through the system.
Still, more needs to be done. In Israel, for instance, a conscious effort was made to deepen the market for local-currency denominated bonds. Ghana could do the same by creating and promoting new domestic financial markets that trade predominantly in cedis.
External factors beyond the central bank’s control
In February, the central bank of Ghana said it was motivated to take action, not only to stabilise the cedi, but also stem the inflationary consequences of the depreciating currency on the economy. At least, in the short term, it appears the central bank’s actions succeeded in stabilising the cedi, which had been in free fall since the last quarter of 2013. But it remains to be seen if the measures are sustainable.
While it admits it could do more, the Bank of Ghana believes there are external factors that could further influence the fate of the cedi going forward, chief among them, the ongoing tapering in asset purchases in the United States and fallen commodity prices.
In a recent bulletin, the BoG noted that many emerging and developing economies had suffered a reversal of capital flows and volatility in currencies and equity markets due to the U.S. tapering measures. It cited the Turkish Lira and the Argentina Peso among the hardest hit currencies.
Without question, the tapering in the United States has had an impact on the cedi’s depreciation against the dollar because the process has resulted in shrinking the supply of dollars around the world. Specifically, the U.S. Federal Reserve has curtailed its bond purchases, resulting in a surge in U.S. rates and yields. According to experts, the rising rates make U.S. bond investments more attractive, which helps strengthen the dollar.
Ghana has limited control over such measures. The same might be true for global commodity prices. According to the Bank of Ghana, the fall in commodity prices for gold, crude oil and cocoa is also having a significant impact on economic growth.
While all of these are driving factors, it is also a fact that developing economies often experience high and unstable inflation rates when their governments embark on unrestrained spending activities.
Conclusion
The fact is that business is easier to conduct when a stable currency is used, and that is the primary reason many investors and local businesses in Ghana prefer the U.S. dollar the cedi.
The measures the BOG is pursuing to stabilise the cedi need to be implemented in a systematic and holistic manner and must increasingly involve engagement with the local business and investment communities. It must not be forced or abrupt.
A good example of this is the complications created by the government’s increasing wage bill. While it is true that public sector compensation drives both local and foreign investment, the apparent fiscal imbalance created also makes it imperative for the government to fully understand and be able to quantify the pass-through effects of policies before they are implemented.
By: Research desk, City Investments Company
Source: graphic.com
« Previous | Next »
Sponsor Links
News Categories
Site Menu