The cedi has fallen into an unprecedented depreciation against its major trading counterparts, particularly the United States dollar, as analysis of the data shows it has seen its worst performance in the past seven years.
According to daily interbank FX rates (the day’s weighted average) published by the Bank of Ghana, as of March 15, 2022, the cedi has plunged 17.1 percent against the US dollar, selling at GH¢7.03 to a dollar: making it the worst performance of the currency since August 2015, when it depreciated against the American greenback by 18.4 percent.
The situation is even more alarming when calculated with data from commercial banks on how much the dollar is sold on the market. Data gathered from the market on the aforementioned date show banks sold the dollar on average at GH¢7.3 – indicating 21.5 percent depreciation.
In fact, some market watchers have predicted more doom for the local currency, with some projecting it will hit more than GH¢8 by end of the year.
For example, the corporate and investment division of FirstRand Bank, RMB, is projecting the cedi to depreciate more than 20 percent in the next 12 months.
The free-fall of the cedi, Director of the Institute of Statistics, Social and Economic Research (ISSER) at the University of Ghana, Professor Peter Quartey said, has to do with a multiplicity of factors which include: the first quarter cycle of high forex demand; global increase in oil prices; the current Russia-Ukraine war; rise in inflation; and speculation, among others.
“In the first quarter of every year we have multinational corporations which try to repatriate their profit, so that puts demand pressure on the exchange rate. Then, you will also find the Chinese New Year, for instance, when their nationals go back home; and that can also put some demand pressure on the exchange rate. We also tend to import more, so importers will certainly demand foreign currency to buy new stock after Christmas.
“Also, recent happenings in the global community – talking about the oil price increases, especially the Russia-Ukraine war – have led to about more than double or three times increase in the price of crude oil. All these put demand pressure on the currency,” he said in an interview with the B&FT.
“In addition, the rating by Fitch and the other rating agencies also has contributed to it; because quite a good proportion of foreign investors hold our bonds. So, when there is such a rating some will sell-off and exit the market.
“Then, also, there is the issue of speculation; when we create so much anxiety, it fuels further depreciation of the cedi. If every now and then you hear noise about the exchange rate depreciation, it creates so much anxiety and speculation; and that also puts a lot of demand pressure on the foreign currency,” he added.
Asked what can be done to ameliorate the situation and keep the currency stable, the professor said given what is causing the currency to lose value, not much can now be done by the Bank of Ghana to stop the depreciation; it can only be managed for now until the second quarter – when government is able to raise more revenue and increase supply of forex.
“In the past government has tried to resolve this by going to the bond market to borrow, and when the Eurobonds and Cocoa syndicated loans come in, the cedi begins to stabilise or even appreciate. But now we have hit a threshold and our debt to GDP ratio is quite high.
“And also, considering the ratings that came, we cannot go to the capital markets now, so we are not getting the inflow from Eurobonds and other bonds. Donor support, in terms of aid, doesn’t usually flow in the first quarter; it comes after the first quarter.
“So, I think we should manage it now. In the second quarter or thereabouts, you will see some stabilisation when government is able to raise more revenue domestically; and also, supply of foreign exchange will increase. If we are able to grow our economy, the revenue base will increase and debt to GDP ratio will come down. Then we can reach out to the international community for additional funding,” he said.