An insight into the cedi’s volatilities

Recently, most Ghanaian economic and political discussions circulates around the cedi depreciation and its effects on both long and short term. The Ghana cedi as against the dollar has experienced massive depreciation from GH₵ 0.9 in July 2007 to GH₵4.52 in December 2017[1]. The cedi’s cumulated depreciation in the first six months of 2018 was 2.4 percent and recorded a further depreciation of 4.95 percent in early October of 2018. According to Trading Economists, the cedi will be maintained at 4.83 by December 2018[2].

 

Source:   Trading Economics

The causes of the depreciated cedi.

A possible reason for the depreciation of the cedi since 2007 could be the timing of the redenomination of the Ghana cedi[3]. Prior to the devaluation of the cedi, there were traces of weakness in government finances and reserves. The aggregate index of economic activity was showing significant negative growth. The weakness in fundamentals, surging monetary growth, rising inflation, and declining foreign reserves, may have contributed to keeping the cedi depreciated since 2007.  Another possible reason behind the cedi’s fall is the immense strength of the Dollar Index. Since global prices are normally fixed using the US Dollar, it can be concluded that it is the world’s default currency. The dollar is performing very well, in 2017 it had an index of 85 and then recorded a very high index of 101.1 as at September 2018[4]. Ghana sometimes takes advantage of low U.S. interest rates to borrow for the country’s growth and budgetary needs. With the rise in the value of the dollar, the strategy of borrowing in dollars is haunting the country as it has increased the country’s debts. Also, the recession in the Eurozone could be another reason for the cedi fall. Reports show that the European Central bank has adopted the unconventional approach of buying government securities from the market to increase the supply of money whiles interest rate will be kept at the minimum. The quantitative easing program adopted by the European central bank is evident that the Euro is still in crises. This is causing most investors to trade off their Euros in exchange of dollars thereby increasing the strength of the dollar. The cedi exchange rate is thereby feeling the pressure of the outward flow of the Euro. Another reason could be market speculations.  With the increasing rate of the dollars, importers seek more dollars to hedge their position while exporters keep on holding their dollar reserves, anticipating that the cedi will fall further in future. This phenomenon keeps increasing the strength of the dollar at the expense of the cedi.

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Effects of the depreciated cedi on the Ghanaian Economy

The disadvantages associated with the depreciated cedi has been well examined by both academic researchers and economists[5].  First, the depreciated cedi is likely to increase the price of goods and services for imported goods[6]. Imported goods have contributed to Ghana’s economic activity since it serves as a source of capital formation and also it’s depended by manufacturing industries for its raw and intermediate materials. As the cedi depreciates, more of it will be needed for importation of foreign goods. This will increase the price of such goods. With increases in the price of imported goods, there is the likelihood of increase in cost of living in the life of citizen.

Another effect of the cedi depreciation is the possibility of higher financing costs in both domestic and external markets.  As the cedi depreciates in its value, servicing and repaying of foreign debt of the Ghanaian Government will increase and most of the foreign loans which are denominated in dollars will create a burden in the short term. This will increase the country’s total debt.

Lastly, the depreciated cedi can lead to brain drain, as expatriates and technocrats will not be motivated to work in the country. According to the 2014 Ghana Statistical Service records, the number of permanent residents, foreign workers and students in Ghana were 375,000. With the depreciated cedi, it is likely these expatriates who are paid in the local currency might look for jobs in other countries. This is not only peculiar to foreign workers as some technocrats might also attempt to leave the country for greener pastures. The long-term effect is the possibility of brain drain as skilled workers will seek to leave the country.

Despite the disadvantages outlined, cedi depreciation has been found to have a positive impact on Ghanaians export[7]. With Ghana being a major exporter of gold, cocoa beans, Crude oil, Petroleum, Coconuts, and Cashews, the depreciated cedi implies local industries are likely to gain a competitive advantage in the international markets as prices of exporting these goods will become relatively cheaper than other country’s price.  Furthermore, there is the possibility of growth in local industries. Ghanaian local industries can expand their businesses. Companies like Kantanka, Ghana Cement etc stand the chance of increasing sales as their goods are likely to be relatively cheaper than prices of external competitors. With the increase in demand for domestic goods, growth in the local industry can reduce the unemployment rate in the country as most domestic firms might employ more workers to meet the growing demand. Again, the increment in Ghana trade balance from -3.8 in 2013, to 1.1 in December 2017 could be an advantage of the depreciated cedi. In times of depreciation of a currency, fewer goods are imported into the country as compared to exports. These results in surplus balance. Another gain from the depreciated cedi is a possibility of boosting activities in the local tourist industry. Ghana has lots of tourist sites and enjoys massive benefits from this industry. In 2016, the tourists’ sector was the fourth income earner for the country and contributed about 6.2% to the Ghanaian GDP in 2017[8]. The depreciated cedi can increase the sector as tourists with less amount of money can travel to lots of tourist scenes in the country.

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Conclusion  

The above discussion shows that the depreciated cedi will have both positive and negative effects on the Ghanaian economy. The disadvantages include the possibility of imported goods price surge, higher financing cost and the possibility of brain drain. Available data from the World Bank shows that Ghana has experienced a reduction in inflation since 2014. The inflation rate has decreased from 17.0 in 2014 to 11.8 in 2017. With the decrease in inflation, the economy is likely to be competitive again and this will increase demand for the currency causing it to rise. The increment in the country’s trade balance an indication that local companies are likely to expand in the nearby future and are likely to employ more people which will reduce unemployment. As China benefited from the depreciated yuan in 2015, Ghana can benefit from the depreciating cedi and hence the Ghanaian government should take advantage of the falling cedi to move the country from its recession state

 

EVANS OPOKU-MENSAH is a researcher at the University of Electronic Science and Technology of China. He specializes in research and development investments, stock price and merger and acquisition. You may contact him through: Email: evans@std.uestc.educn/ evamens89@gmail.com.

[1] https://tradingeconomics.com/ghana/currency

[2] https://tradingeconomics.com/ghana/currency/forecast

[3] http://godhand4wise.blogspot.com/2016/04/causes-and-effects-of-current-cedi.html

[4] https://www.macrotrends.net/1329/us-dollar-index-historical-chart

[5] Palić, I., Banić, F., & Matić, L. (2018). The Analysis of the Impact of Depreciation on External Debt in Long Run: Evidence from Croatia. Interdisciplinary Description of Complex Systems: INDECS, 16(1), 186-193.

[6] www.ijsrp.org/research-paper-0115/ijsrp-p3717.pdf

 

[7] Mwinlaaru, P. Y., & Ofori, I. K. (2017). Real exchange rate and economic growth in Ghana.

[8] https://www.wttc.org/-/media/files/reports/economic-impact-research/countries-2018/ghana2018.pdf

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