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The Depreciating Ghanaian Cedi, Incompetence, Or Global Impact?

Thu, 19 Jan 2023 Source: Kwesi Asante

Since the beginning of this year, the Ghanaian cedi has seen a dramatic loss in value. While some have attributed it to global shocks like the pandemic, global food insecurities, and the Russia-Ukraine war, others have held the government responsible for unpopular policies and gross incompetence. However, there is something that is of certainty which is, "A resilient, well-established export basis, industrialization, and job creation are all characteristics of an economy with strong fundamentals. With little reliance on outside assistance, that type of economy is capable of mobilizing resources at home and even borrowing money more cheaply. Competent roads, efficient transit, good health care, and effective educational institutions are all available to its residents. Their resources are adequate, and there is no turmoil on their soil."( Established by Dr. Adu Owusu Sarkodie in his article on the depreciation of the cedi) Funnily enough, this quote by the Vice President; Dr. Mahamudu Bawumia seems to be very much reflective, “if the fundamentals are weak, the exchange rate will expose you”. For Ghana, it is not just a matter of a depreciating currency but also a rising cost of living with inflation figures skyrocketing daily. But the genuine question is, what wrong is the Ghanaian and African economy doing that is affecting them so much? The U.S, the UK, and other developed countries have also been hit with inflation greatly with the U.S recording an inflation rate of 8.2% for September as published by the United States Labor Department on October 13, 2022, and likewise, the UK with that of 9.9% Ghana has an inflation rate of 37.2% for September and still partly thinks the Russia-Ukraine war is a contributing factor. Meanwhile, Russia’s inflation rate is 13.7% and that of Ukraine is 24.6% and this is partly better than Ghana’s even though they are engaged in a war.

The nature of the Ghanaian Economy

The Ghanaian economy is characterized by a high dependency on imports, and export of relatively raw materials very cheaply on the global front. Ghana is a major exporter of cocoa and gold. Ghana is Africa’s top gold exporter at 138.7 tonnes. According to the Economic Complexity Index, Ghana made an export worth $13.1 billion in terms of products and imports of $16.1 billion in 20222. In the same year, Ghana is ranked the highest importer of used clothing worth 182 million. And this gives an apt snippet of the scope of the economy of Ghana in terms of trade. In simple terms, a highly import-driven nation.

Indeed, Ghana may be doing well in its exports, but the reality on the grounds is that these are mainly raw materials and do not add much revenue as it was domestically adding value to them before exporting.

Even with the export revenue, some are repatriated by foreign investors into their home countries making it just on paper revenue.

What is causing the astronomical depreciation of the cedi?

Demand and taste for foreign goods. One of the major woes of our economy is that we rely heavily on the importation of goods. From basic products to confiscated ones are all imported. Records show that Ghana is one of the largest importers of second-hand clothing, consumable goods, and even to the extent of importing toothpicks. Although Ghana drills oil, it still does import petroleum and this is a result of the nation not having the ability to refine its crude oil, gold, bauxite, and cocoa among several others. Adding value to some of these items before trading them on the global front would have done us better. As an import-driven economy, this adversely affects our trade balance as our net export figures will be trickling down in the negatives since exports are low. This further induces that, since we have a high taste and preference for foreign goods, more of the cedi would be chasing the dollar so that we can make purchases on the global market. As a result, the value of the cedi depreciates. From January 2022 to September 2022, it has been estimated that the cedi has depreciated close to 40 percent and could go beyond.

Quoting prices in foreign currencies has been one of our battling woes. Private and government contracts, real estate, and capital equipment are mostly quoted in foreign currencies, especially with the dollar. And so, people who are engaged in trades like these need to purchase foreign currencies to be able to patronize them. For instance, a two-bedroom apartment has its price quoted at 200,000 dollars, and so anyone in Ghana who would like to purchase that would need to acquire some dollars. Also, note that the dollars available to us are scarce and it will be a matter of a higher demand battling to grab the few supplies of the dollar available. This conversely puts pressure on the dollar and makes it more expensive to purchase while the value of the cedi deteriorates. Although the Bank of Ghana has issued a directive against price quotations in foreign currencies, people still do otherwise. The urge to do otherwise may be a result of the rising levels of inflation daily and so quoting in foreign currencies tend to make businesses more sustainable. However, the dire effects on the cedi are very much unprofound.

The government borrows both internally and externally to supplement its budget and also to undertake developmental projects like building educational and health facilities and also infrastructural projects. Euro bond loans obtained by the government are expected to be repaid in foreign currencies. These kinds of loans borrowed by the government are huge sums of money and so upon maturity, there is the need to obtain such huge sums of foreign currencies to settle those debts. This greatly affects the domestic currency.

Black market operation and speculation are also a cause of the cedi depreciation. Players in the black market buy huge sums of foreign currencies like the dollar and euro and as it were hoard them. This creates an artificial shortage of foreign currency. Persons who will then demand foreign currencies to transact economic activities will need to buy from the black market at unreasonably higher rates. This means that the fewer foreign currencies that are going to be traded in that market will have more cedi chasing them since there is an artificial shortage. And in all of this, the cedi bears the brunt of the effects. Speculation by the market players can also be a major cause of the cedi failure. Persons will deliberately keep the foreign currencies or even purchase more of them to store in anticipation of a future rise in the value of such currencies. This also has dire consequences on the cedi.

What are its rippling effects on individuals, businesses, and the economy

There is an unprecedented impact of the depreciating cedi on our economy. Right from individuals to businesses and the economy in aggregate terms.

Depreciation in actual terms makes imports expensive and exports cheaper. Some countries deliberately devaluate their currencies and can use a fixed exchange rate regime. A fixed exchange rate regime is a monetary authority by a state to peg its currencies against foreign ones. This means that there is an incentive to export than to import. However, in the case of Ghana, we are not exporting as much and we also cannot add value to our raw materials before exporting them. Traders are hit adversely by the depreciating value of the cedi and become poorer daily. The dollar-to-cedi rate currently stands at GHC12.20 to 1 dollar. This means that if traders bought items in January this year at 20,000 dollars at the rate of 1 dollar to GHC 6, in October of the same year to buy items worth 20,000 dollars, they will need to double up and purchase since the exchange rate now is 1 dollar to GHC 12. Traders who cannot double up will then have to import less thereby creating a shortage and I guess you would not want to know what follows next.

Some possible measures to curb the situation

A long-term solution to curb this situation will be government being able to industrialize the economy. It has been long overdue since we took a critical look at developing industries in Ghana, especially manufacturing industries. Developing industries make it possible for the economy to produce on a large scale and this help close the gap between exports and imports. In the long run, the government will gain substantial foreign exchange as a result of exporting products from various industries and this leads to an appreciation of the cedi.

For a short-term solution as well the government can also borrow externally from international markets to manage the foreign exchange rate. However, this can only be achieved when the government can demonstrate its ability to mobilize revenue to service such debt. In recent times, rating agencies like fitch, moody, and others have downgraded Ghana to a junk status which questions the credibility of the country to re-service its debt. Hence making it a bit challenging to acquire foreign loans like the Euro bond.

Implementing strict trade policies. Government can restrict trade by putting tariffs, embargoes, taxes, and quotas on its trade with other nations on the international market. This can be done when trade terms become unfavorable and so doing that reduces unnecessary imports and also protects domestic and infant industries.





First published in October 2022

Source: Kwesi Asante