Cedi performed poorly against other currencies GN Research reveals

The ‘cedi politics’ have been intensified in recent weeks, due to the performance of the cedi and lectures by the ruling administration’s Economic Management Team (EMT) and the largest opposition party, the National Democratic Congress (NDC).  This underlines the needless prominence assumed by the cedi within the context of politics instead of economics in the country. The EMT, NPP and NDC have made comparisons using historical data to justify why they believe they managed depreciation of the cedi better.

While the comparisons and historical facts are important, it mostly ignores the substance of the issue – which is what the real causes of the problem are and how to ensure a stable cedi in the long run. It also turns to shadow the fact that the most suitable state of a currency to effectively support growth is stability, not disruptive movements.

A study by GN Research, revealed that the cedi is the worst-performing currency, especially against the US$ in Africa – recording a depreciation rate of 5.52% against the US$ as at Friday 12th April 2019. Between 2012 and 2018 the cedi depreciated cumulatively by about 204%, relative to about 20%, 46%, 78% and 96% for the Kenyan Shilling, the Rwandan franc, the South African rand and Nigerian naira respectively. Therefore, between 2012 and 2018, irrespective of the political party in power, the cedi was outperformed by the currencies of Ghana’s neighbours (see Table 1 & Fig 1).

Table 1: The performance of the cedi against selected African currencies

Yr/country Ghana Kenya Nigeria Rwanda South Africa
2012 (Beginning) 1.58 85.07 156.20 604.14 8.10
2013 2.16 86.31 155.20 670.08 10.53
2014 3.20 90.60 167.50 694.37 11.55
2015 3.80 102.31 196.50 747.41 15.59
2016 4.20 102.49 304.50 819.79 13.72
2017 4.15 103.23 305.50 845.00 12.31
2018 4.82 101.85 306.50 879.10 14.38
Period Change 204.28% 19.72% 96.22% 45.51% 77.59%
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The most stable of the selected currencies within the period was the Rwandan franc, followed by the Kenya shilling. This was on the back of a concerted effort to increase exchange rate supply through export and tourism. Rwanda’s export revenues increased by 148% between 2012 and 2018, while its import expenditure increased by 61% over the same period. Also, revenues from international tourism grew by about 108% and averaged 30% of total export within the period.

Similarly, international tourism receipts for Kenya averaged 16% of total export between 2012 and 2018. In addition, the central banks of Rwanda and Kenya have grown their net international reserves by about 30% and 29% respectively between 2012 and 2017. The analysis also showed that the Rwandan central bank recorded the least distortion in growth of its reserves. This suggests less participation in the foreign exchange market or depletion of reserves.

However, Ghana did not outperform Rwanda and Kenya on any of the variables discussed above. It is therefore not surprising that their respective currencies have outperformed the Ghana cedi. Ghana’s receipts from international tourism continue to lack behind it peers. It averaged only 6% of total exports. Also, total export revenues and import expenditures decreased by almost 6% and 4% respectively, while the Bank of Ghana’s net international reserve grew by nearly 24%.

What is clear from the experience of Rwanda and Kenya is that while there were improvements in the macroeconomic fundamentals, it was done alongside improvements in the structural fundamentals too. In this regard, domestic production and exports were deliberately promoted. According to the World Bank, the performance of the non-traditional export sector was behind the export revolution in Rwanda. This is because in the last 7 years Rwanda grew its non–traditional export by over 160%.

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Hence, Ghana needs to diversify its exports with policies which seek to improve the production and export of non-traditional exports. Like Rwanda, Ghana must identify the various farmer groups and support them with finance, logistics, and market and trade facilitation. Another lesson to be learnt from the Rwandan export revolution is the participation of the youth, graduates and research institutions, especially of universities, to provide services for the identified farmer groups.

As a result of the consistent inflow of foreign exchange, the Rwandan central bank rarely conducts foreign exchange market operations. This has helped to ensure that the Rwandan franc trades at almost its market value – leading to a minimal speculation on the market. Therefore, to achieve a stable currency the central bank must limit its participation in the foreign exchange market to ensure that the exchange rate reflects the true market value of the cedi.

In addition, unnecessary intervention may create the impression that the Bank of Ghana (BoG) is targetting the exchange rate instead of inflation. Also, it is important to recognise that foreign exchange interventions do not affect exchange rates independently of the country’s monetary policy. Therefore, a monetary policy aimed at an exchange rate goal can potentially be at variance to price stability (inflation).

In conclusion, though the historical performances may have varied from government to government, the reality is that the cedi was and still is behind its peers on the continent – at least in the past 7 years. Therefore, the juggling to gain supremacy is not the way forward. Rather, Ghana must learn from its peers like Rwanda and Kenya in order to achieve a stable currency.

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