Business News of Wed, 20 Mar 201940

Recent cedi depreciation 'nothing to do with fundamentals' - Economist

A Professor in Economics, Prof. Eric Osei Assibey, has ruled out the fundamentals of Ghana’s economy as the cause of the recent round of currency depreciation.

“If the fundamentals of the economy are anything to go by, we shouldn’t be seeing the things we are seeing”, the University of Ghana lecturer said on the Joy FM Super Morning Show Wednesday.

He explained, popular suspects during cedi depreciation bouts such as inflation, interest rates, fiscal deficit and even trade surplus are all doing well.

The cedi depreciates whenever the demand for foreign currencies, predominantly the dollar, outstrips supply.

Trading 1 cedis for $4.9 on January 27, 2019, the dollar hit 5.6 to a cedi by March 17, 2019 triggering widespread panic by businesses.

The cedi has in the past few days rebounded strongly. A dollar now goes for 5.4 cedis.

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The recurring depreciation did not go without another recurring debate about government’s economic policies and promises targeted at improving the exchange rate.

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 told host Daniel Dadzie.

Prof. Assibey explained understanding the exchange rate volatilities is identifying the long-run behaviour and the short-run determination of the currency.

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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.

According to him, one of the short-run causes of depreciation is the economic decisions of multinational companies and foreigners.

He observed, foreign companies operating in the country repatriate their profits into their home country.

“At the beginning of every year you see these corporations demanding high dollar and taking them out of the country”, he said noting it creates a scarcity of dollars.

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.

The Professor of Economics observed that for the past 7 years, the cedi depreciates sharply between January to March.

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“Why is it always the case? It is because of the structure of the economy. It is because we have so many multinationals”, he said.

“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 explained the challenge facing government.

Prof. Osei Assibey also blamed the structure of Ghana’s debts, explaining about 60% of the country’s debts is owned to foreigners.

He further explained 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.

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“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.

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