- Analyst says outlook still positive
It would have ordinarily been expected that at this moment the local currency would be fast depreciating against the US dollar, considering the current politically-tense atmosphere following the December 7 general election; however, an analysis of the two currencies shows the cedi has remained relatively strong even in the current situation and ahead of the festive season.
Using the Bank of Ghana’s mid-rate figures, it is observed that as of December 18, 2020, the cedi had depreciated against its major trading currency – the US dollar – by just 3.2 percent with a monetary value of GH¢5.71 per US$1, compared to 3.1 depreciation in November 2020.
This is quite impressive, considering the current political situation wherein the opposition National Democratic Congress (NDC) has rejected the December polls’ outcome – which was declared in favour of the incumbent, President Nana Addo Dankwa Akufo-Addo.
The NDC’s stance has sparked a series of protests by its supporters in various parts of the country, including the capital – a situation that usually puts investors on a red alert and sometimes triggers unplanned capital flight, thereby putting extra pressure on the cedi and weakening its strength.
Besides this characteristic ahead of every Christmas season, the cedi again comes under severe pressure as there is high demand for forex by importers – leading to sharp depreciation. For example, the cedi depreciated against the dollar by 12.8 percent and 12.9 percent respectively in November and December 2019. But despite all the odds against it, the local currency has come out strong; experiencing only a .08 percent depreciation against the dollar from beginning of December to date.
Commenting on this, an analyst with Databank Research, Courage Martey, credited the Bank of Ghana’s FX measures as the main contributing factor to the currency’s relative stability. He said the central bank’s bi-weekly FX auctions, strong reserve position, improved regulatory oversight and keeping the policy rate stable, are all responsible for the cedi’s relative stability.
The economy’s gross international reserves as of October this year was GH¢8.6billion, which represents four months of import cover according to data from the Bank of Ghana.
“A number of things have contributed to stability of the cedi during the course of this year. First is the bi-weekly forex forward auction introduced by the Bank of Ghana. Basically, what the FX auction does is ensure the cedi is sold forward without an exchange of dollars. So, a price is agreed without any physical exchange of dollars. This has drastically reduced speculation and hoarding of the dollar.
And during the course of the year, the central bank has built enough reserves despite difficulties in the global financial market,” he said in an interview with the B&FT.
He added: “What we have also seen is that there is increased regulatory oversight. So, if you are a multinational, your profit repatriation is now being monitored. All these have contributed to stability of the cedi during the course of the year.
“Then, also, the Bank of Ghana has learned to use interest rates as a means to attract capital away from demand for dollars. So, now, investors consider how much they will earn from Treasury bills compared to how much they will earn as a result of the cedi depreciating against the dollar.”
Asked whether he thinks the current political stand-off could negatively affect the cedi’s stability, Mr. Martey said: “We cannot completely rule that possibility out, but I don’t see it affecting stability of the currency that much.
“My reasoning is that despite the misunderstanding, Ghana has proven to be a state governed by rule of law – and the investors understand that. They know that in the worst-case scenario the matter will be taken to court and it will be resolved. The worst I expect is that capital may not flow in as expected, but I don’t expect any massive outflow of foreign capital,” he said.