Cedi signals first-quarter resilience

The year-to-date performance of the local currency against the US dollar should give the central bank enough to be hopeful about as the cedi depreciated 2.49 percent as against a dip of 7.6 percent within the same period last year.

The cedi’s performance on the interbank market as at February 26, demonstrated a rare resilience coming after a year where the local currency lost as much as 26.2 percent of its value against the greenback in the first half of the year.

Despite the central bank intervening by increasing its daily sale of the US dollar on the forex market, it could not totally reverse the dismal performance although some gains were made, the cedi closed the year at a 15.7 percent less than it begun.

However, the strong performance of the cedi comes in the first two months of the year is remarkable considering the cyclical poor performance of the cedi in the first quarter when demand for the greenback by importers and other businesses to settle commitments to partners outside the country peaks.

The issuance of Eurobonds and the cocoa syndicated loans have played significant role in stabilising the cedi and with government declaring its intent of issuing yet another Eurobond sometime this year, the cedi’s fortunes appear bright.

But the strong performance of the cedi has come at a cost. Last November, 2015, the Monetary Policy Committee (MPC) of the central bank increased the policy rate from by 100 basis points to 26 percent to fend off pressure on the perennial weak currency.

“Going forward, maintaining a tight monetary policy stance will reinforce the relative stability in the foreign exchange market and dampen risks related to the external financial conditions,” the Governor of the Bank of Ghana, Dr. Kofi Wampah said.

The Governor followed up its tight monetary stance to keep the cedi stable with another measure which he announced to journalists when he addressed a press conference last month to announce the policy rate – which was maintained at 26 percent.

“Maintaining the tight policy stance, smoothening the supply of foreign exchange and enforcing the repatriation of export proceeds into the banking system, in line with the Foreign Exchange Act, are expected to moderate the seasonal volatilities usually experienced in the first half of the year,” he stated.

The cedi’s performance which is a spillover from the relative strong performance of the cedi in the second half of last year, could not prevent inflation from rising to 19 percent in January as announced by the Ghana Statistical Service.

That notwithstanding, the International Monetary Fund (IMF) in its second review of the country’s Extended Credit Facility (ECF) warned of the dire consequences the cedi, if it depreciates, could have on inflation.

“A recurrence of currency depreciation could further increase inflationary pressures, increase domestic interest rate, and raise the cost of debt service,” the Washington-based lender said in its report.