By Ebenezer Chike Adjei NJOKU
Economist Professor Charles Ackah has called for strong measures to curb the cedi’s decline. He proposes using more local contractors to keep money circulating within the local economy, as opposed to being used to purchase foreign exchange (FX) to repatriate profit.
This follows analyses citing payments to foreign contractors and Independent Power Producers (IPPs) as a major factor in the outflow of FX and the cedi’s depreciation.
“The point, if it’s valid, is that because they’ve paid contractors and IPPs, then it means that most of the contractors and IPPs are foreign-owned and therefore change the payments into FX. If that is the case, then we have to address it on two fronts. We have to indigenise the contracts to ensure that most of them are executed by local players. Then, if you pay them, the cedi will stay in the economy,” he stated.
These payments, combined with seasonal factors such as increased corporate demand and a sharper rise in the import bill during first quarter of the year, have enhanced cedi liquidity levels and continue to drive speculative tendencies.
Additionally, general macroeconomic uncertainties, a history of election-induced fiscal slippages and prolonged negotiations around external debt exchange continue to generate negative sentiments about the cedi’s outlook in the near-term, highlighting the significant speculative demand pressure on the FX market.
Consequently, the relatively stable start to the year has given way to periods of pronounced depreciation from late February through May 2024, with the indicative US$/GH¢ retail rate surpassing the GH¢15/US$ mark.
He stressed the importance of the central bank implementing policies to control the amount of money converted and repatriated by foreign entities. “Since it’s known that we have a lot of foreign contractors, then the central bank should have a policy – some controls of how much can be changed and repatriated. We cannot have such a liberal economy that people can send any amount of money from the country at will. We need the GIPC and BoG to enforce some of the existing rules. At the moment, I don’t think it is being done,” Ackah emphasised.
Beyond the issue of payments to contractors and IPPs, Professor Ackah identified a deeper structural problem: the inadequacy of FX reserves. “I think the problem isn’t just payment to contractors and IPPs, but that we have a structural problem. We do not have enough FX in the country. Even if you pay contractors and they want to change it, there isn’t enough to meet their demands. I don’t think we have adequate FX. The supply side needs to be fixed, and it’s normally from exports; so, if we don’t have enough local companies producing at scale, we will not have enough FX,” he explained.
The economist also underscored the need to boost local production and export capacity. “Increasing local production at scale, particularly in export-oriented industries, is vital. This could involve incentives for local businesses, support for small and medium enterprises (SMEs) and investment in infrastructure to boost production capabilities,” he noted.
Prof. Ackah highlighted the impact of an unfavourable business environment on foreign direct investment (FDI). “We are hearing that some foreign-owned businesses are exiting, and this is often a sign that the business environment is not conducive. Taxes are high; which means that for us to attract more FDIs, we need to look at the cost of doing business,” Ackah said.
He also called for renewed support from development partners, which has historically been a crucial source of economic stability. Additionally, Ackah pointed out the country’s heavy reliance on imports due to underinvestment in agriculture. “On the demand side, how do we use the FX? It’s mostly imports. We need to address imports. Because of underinvestment in agriculture, we are importing almost every basic thing,” he remarked.
