Rising oil imports threaten cedi's recent stability

The cedi faced renewed downward pressure last week, attributed to heightened corporate demand for foreign currency – particularly crude oil imports.

The local currency depreciated by 1.48 percent against the US dollar, closing the week at a bid/offer rate of 15.75/16 on the retail market. It also fell by 2.80 percent against the British pound and 2.18 percent against the euro.

A significant contributor to this decline is the rising cost of refined oil imports. In June 2024, refined oil imports increased to US$428.3million, up from US$422.6million in May.

Despite Bank of Ghana (BoG) efforts to support the currency by selling US$40million to oil importers through the Bulk Distribution Companies (BDCs) FX auction, demand for foreign exchange from oil importers remained high – continuing to strain the cedi.

This surge in oil import costs and corresponding rise in foreign exchange demand led to a 4.46 percent month-on-month depreciation of the cedi against the US dollar in June.

Analysts at Databank Research view this as a considerable risk to Ghana’s net foreign reserves, forecasting continued pressure on the cedi in the near-term.

“We deem the higher oil import bill and resultant increase in FX demand as a downside risk to net foreign reserves with near-term pressure on the cedi. As a result, we expect the local unit to remain on a weakening path this week as corporate demand pressures ramp up,” Databank said in a note.

This development threatens to reverse some of the gains made in first-half of the year.

During that period trade balance recorded a surplus of US$1.81billion, up from US$1.60billion in the same period of 2023. This was driven by a 46.4 percent increase in gold exports to US$5.04billion and a rise in crude oil exports to US$2billion.

Conversely, cocoa exports fell by 47.4 percent to US$760million and the import bill increased by 13.5 percent to US$7.42billion.

The current account balance improved significantly by recording a surplus of US$1.28billion, up from US$863 million in the same period of 2023.

The capital and financial account saw net outflows decrease from US$1.04billion in 2023 to US$367.5million in 2024, due to higher government loan disbursements, reduced amortisations and lower portfolio outflows.

The cedi’s future appears uncertain as corporate demand for foreign exchange shows no signs of abating. With no immediate solution in sight, the local currency is expected to weaken further in coming weeks – exacerbating the country’s economic challenges, analysts have suggested.