Cedi holds off dollar and pound…performs better than pre-pandemic period

Phillip Abradu-Otoo,Director of Research at the Bank of Ghana

Even though the coronavirus impact has ruined many gains of the economy, leading to a contraction in the second quarter, one thing that has been able to ride through the storm is the local currency – cedi, as its rate of depreciation has been slower than what was experienced when there was no pandemic globally.

The latest data on the performance of the cedi –published in the Bank of Ghana’s Summary of Economic and Financial data– against major trading currencies such as the US dollar and pounds sterling, shows that, as of September 2019, the local currency had depreciated against the former by as much as 9.3 percent and the latter by 5.7 percent.

However, during the same period in 2020, a time where currencies across the globe have weakened due to pressures introduced by the pandemic on trade and investment, the cedi’s depreciation has surprisingly been slower.

It has depreciated only by 2.9 percent as at the end of September 2020. Even more impressive is when the data is analysed from the beginning of the year.

The cedi appreciated against the dollar by 1.2 percent, 4.5 percent, and 1.7 percent in the first three months of the year.

Then, it appreciated against the pounds by 1.7 percent, 7.8 percent, and the 8.3 percent in the same period. In fact, the cedi has depreciated only twice this year – 1.2 percent and 3.7 percent respectively in July and August. The rest of the months have seen an appreciation, with September recording 0.9 percent gain.

Commenting on the cedi’s performance against the major trading currencies, Director of Research at the Bank of Ghana, Phillip Abradu-Otoo, speaking to the B&FT in an interview, said a multiplicity of factors have contributed to the relative stability of the currency in these torrential times where the worst was rather expected to happen.

First is the central bank’s significant build-up of reserves in 2019, amounting to some US$1.3 billion provided us with enough support to meet the seasonal high demand for foreign exchange normally in the first quarter of each year.

Second is the fact that the government decided to go to the Eurobond market earlier than envisaged and this helped to improve the supply of forex in the foreign exchange market. The Eurobond was originally planned for the second quarter. Then, third is the inflow from the Rapid Credit Facility resource from the IMF to countries to help deal with the effect of the pandemic on their economies. Ghana availed itself to the facility and in April received US$1 billion,” he said.

Another factor he mentioned is the impact of the border closure which he said created a closed economy where the country was cut off from international trade and that also reduced demand for forex as imports were not coming in.

He added that, despite the pandemic, remittance level has also gone up and even surpassed trends that were observed a year earlier. Half year results for 2020 showed that remittances totaled US$1.3 billion compared with similar remittance inflows of US$1.2 billion in 2019.

He further explained that the reduction in net investment income outflows, especially by mining firms, has also been a major factor for the performance of the currency.

“As a result of the rise in gold prices, profits made by these mining companies were being retained in the domestic economy for operation expansion and this has reduced repatriation and reduced demand for foreign exchange. All these factors together with sound macroeconomic fundamentals had served to provide reasonable solid anchor for the cedi, hence, the stability,” he said.

Granted, the major reasons that have contributed to the relative stability of the cedi are coming from external factors, meaning these factors are not directly controlled by the central bank. However, their happenings have impacted positively on the local currency. This raises some concerns and suggests that if these external factors experience an unexpected turn of events, the cedi may fall into a free fall mode as it has historically been.

But Mr. Abradu-Otoo says the Bank of Ghana is ever ready to deal with any unexpected events which could impact negatively on the local currency and ensure it continues to remain stable even to the first quarter of 2021 when demand for forex increases again.

“The central bank is well-positioned to deal with the pressures that will come. We are also expecting US$1.3 billion from COCOBOD; we are building up in reserves for this year which will provide some buffer to deal with unexpected eventualities; and the US$1billion dollar line insurance from America’s Federal Reserve, which has not been utilized will go a long way to provide calm in the markets in 2021

So I expect us to start 2021 with some sizeable build up in reserves to be able to deal with the pressures that will likely come around in the first quarter of 2021. So our outlook is that the currency will continue to be stable even going into 2021. The outlook is positive and the cedi will hold firm going forward,” he said.

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