Cedi set for record depreciation

The dismal performance of the local currency against the US dollar in 2014 has resurfaced yet again, as data from the interbank forex market shows that the cedi has lost about 12.05 percent of its value since beginning of the year.

This year’s depreciation, as at March 23, compares to a similar decline of 16.37 percent within the same period last year -- at which time the central bank had had to issue stringent forex control among other measures to stem the pernicious slide.

The local currency started the year trading at GH¢3.2001 to the dollar before ending January at 3.2401, a loss of 1.235 percent in value as against 7.8 percent within the same period of last year. But the biggest slide in the cedi value took place last month when it slid 6.64 percent against the greenback.

The cedi is yet to recover from February’s fall, and as at March 23 has lost a further 4.53 percent against the dollar.

Most analysts view the cedi’s weakness as a product of macroeconomic instability underlined by high fiscal and current account deficits.

A record depreciation of 7.8 percent in January, in addition to rising inflation last year, was instrumental in the Monetary Policy Committee’s (MPC) decision to increase its policy rate from 16 to 18 percent; while pushing the central bank to limit transactions done in the dollar.

The measures consist of revisions on the rules for operating foreign exchange and foreign currency accounts; restrictions on foreign currency denominated loans; repatriation of export proceeds; margin accounts for import bills; and revised operating procedures for forex bureaux.

Central bank Governor Kofi Wampah argued that these measures will ensure transparency, streamline activity and reduce leakages in the foreign exchange markets, and address anti-money laundering issues as well as promote use of the cedi as the sole legal tender.

The measures however proved unpopular with businesses and individuals; and though the central bank eventually backtracked on most of its directives, it maintained that they had served the purpose for which they were introduced.

It took the combined proceeds of US$3billion from the Eurobond and the cocoa syndicated loan to breathe a new lease of life into the cedi in the second half of 2014. The central bank, which at its MPC meeting last month said it is monitoring closely events on the exchange market, is yet to react to the local currency ‘s dismal performance.

Revisiting last year’s forex measures is still not outside the options on the table, as government awaits the first tranche of the US$940million pact with the International Monetary Fund (IMF) to provide an additional cushion for the weak local currency.

The IMF programme is further expected to among other things strengthen effectiveness of the central bank’s monetary policy, and that should benefit the cedi, too, in the medium to long-term. But ratings agency Fitch, in its latest report, said the news of a potential IMF programme has done little to support the currency.

“With 55% of the debt stock denominated in foreign currency, this external vulnerability could be quickly transmitted to the public finances. Ghana's growth prospects have been undermined by its fiscal and external imbalances,” Fitch added.

But Fitch’s report, which affirmed the country’s “B” rating, stated that a commitment to the IMF programme will result in Ghana recovering donor inflows which ceased for a greater part of 2014; foreign investment in the domestic bond market; and reduced domestic funding costs over time.

New York-based rating agency Moody’s however cut the country’s rating from B2 to B3 -- putting the country on a negative outlook to reflect the cedi’s sharp decline as well as an increasing debt burden and large fiscal imbalances.

“The negative outlook reflects further downside risk to the country's debt dynamics and liquidity pressure in the short-term if the country's policies fail to successfully contain its fiscal deficit, stabilise its currency and address current impediments to higher economic growth," it said last week.

Preventing the perennial depreciation, Mr. Wampah admonished that government must seek to broaden the tax base further, diversify and broaden the export base, reduce imports -- especially of consumption goods that have local substitutes, and intensify efforts to block foreign exchange leakages, such as transfer pricing.