By Abdallah ABDUL-MUMUNI(Dr)
The Ghana cedi has recently experienced significant depreciation, raising concerns among policymakers, investors, and the public.
Currency depreciation can have widespread economic implications, including increased inflation, higher import costs, and reduced purchasing power. Understanding the causes of this depreciation is crucial for developing effective measures to stabilize the currency and promote sustainable economic growth. This article, therefore, examines the primary factors contributing to the recent depreciation of the Ghana cedi.
High Inflation Rates
One of the primary causes of the Cedi’s depreciation is high inflation. High inflation leads to a decrease in the real value of the cedi, causing it to depreciate against more stable foreign currencies. In Ghana, the inflation rate as of February 2025 stood at 23.1% and this has been driven by several factors. These include:
- Increased Consumer Price Index (CPI): Rising prices of essential commodities, such as food and fuel, have significantly contributed to overall inflation. This increase in consumer prices creates a higher demand for foreign currencies, as businesses and individuals seek to import goods at relatively cheaper rates from abroad.
- Cost-Push Inflation: Factors such as increased production costs (e.g., higher energy prices) and supply chain disruptions have pushed up the prices of goods and services. As production costs rise, businesses pass these costs on to consumers, further driving inflation.
Fiscal Deficits and Rising Public Debt
Another significant factor contributing to the depreciation of the cedi is the country’s fiscal deficit and rising public debt:
- Persistent Fiscal Deficits: The Ghanaian government has been running large budget deficits, necessitating increased borrowing. Fiscal deficits occur when government expenditures exceed revenues, leading to a reliance on borrowing to finance the gap. In 2023 for instance, Ghana’s fiscal deficit was GH¢61,475 million, equivalent to 7.7 percent of GDP.
- Increased Borrowing: To finance these deficits, the government has borrowed heavily from both domestic and international sources. This borrowing increases the national debt and the cost of debt servicing, which often involves payments in foreign currencies.
Trade Imbalance
Ghana’s trade imbalance is another critical factor in the Cedi’s depreciation. This trade imbalance is a result of:
- High Import Dependency: Ghana relies heavily on imports for essential goods such as fuel, machinery, and foodstuffs. This high import demand increases the need for foreign currencies, especially the US dollar, to pay for these imports.
- Export Challenges: Although Ghana is a significant exporter of commodities like gold, cocoa, and oil, it faces several challenges. These include fluctuating global commodity prices, lower-than-expected export volumes, and structural issues in the export sector. These challenges reduce foreign exchange earnings, contributing to a trade deficit.
Low Foreign Exchange Reserves
The level of foreign exchange reserves held by the Bank of Ghana plays a crucial role in stabilizing the currency:
- Depleted Reserves: Ghana’s foreign exchange reserves have been insufficient to support the cedi effectively. Low reserves limit the central bank’s ability to intervene in the forex market to stabilize the currency and this reduces confidence in the cedi among investors and traders, leading to its depreciation.
Speculative Activities
Speculative activities in the foreign exchange market have exacerbated the depreciation of the cedi:
- Market Speculation: Traders and investors often speculate on the future value of currencies. If they expect the cedi to depreciate further, they may engage in selling off the cedi in favor of more stable currencies, such as the US dollar.
- Self-Fulfilling Prophecy: Speculative selling can create a self-fulfilling prophecy, where the anticipated depreciation leads to actual depreciation due to increased supply of the cedi in the forex market.
External Economic Shocks
Global economic conditions and external shocks have significantly impacted the value of the cedi. These conditions include:
- Global Economic Uncertainties: International economic events, such as geopolitical tensions, changes in US Federal Reserve policies, and the economic performance of key trading partners, can influence investor confidence and capital flows. These external factors can lead to reduced investment inflows and increased capital outflows, weakening the cedi.
- Commodity Price Volatility: Ghana’s economy is heavily reliant on the export of a few key commodities. Persistent fluctuations in global prices for gold, cocoa, and oil have significantly impacted Ghana’s foreign exchange earnings, thereby affecting the country’s trade balance and currency stability.
COVID-19 Pandemic Aftereffects
The aftereffects of the COVID-19 pandemic continue to affect the Ghanaian economy and the cedi:
- Economic Disruptions: The pandemic caused widespread disruptions to global supply chains, trade, and investment flows. These disruptions have had lasting impacts on Ghana’s export revenues and have increased government spending to mitigate the pandemic’s effects.
- Increased Public Spending: To combat the economic fallout from the pandemic, the government increased spending on health and social services. This increased spending has contributed to fiscal deficits and public debt, further weakening the cedi.
Conclusion
The recent depreciation of the Ghanaian cedi is the result of a complex interplay of domestic and international factors. High inflation, fiscal deficits, rising public debt, trade imbalances, low foreign exchange reserves, speculative activities, external economic shocks and the aftereffects of the COVID-19 pandemic, have all contributed to the weakening of the cedi.
Addressing these issues requires a multifaceted approach, including enhancing fiscal discipline, managing inflation, bolstering foreign exchange reserves, improving export competitiveness, and ensuring political and economic stability. Consistent and transparent economic policies, along with efforts to boost investor confidence, will be crucial in stabilizing the cedi and promoting sustainable economic growth.
The government and relevant stakeholders must work collaboratively to implement these measures and foster a resilient economic environment that can withstand both domestic and global challenges.
The writer is the Head of the Department of Economics and Actuarial Science, UPSA
