Not only does the ongoing rapid cedi depreciation constitute Ghana’s biggest economic challenge, but the trend could also become a threat to national stability if not checked.
The exchange rate is the price of foreign currency in terms of domestic currency. It can be rigidly fixed or freely determined by the market forces. Thus, a rise in the exchange rate means that foreign currency has become more expensive and therefore corresponds to a weakening or depreciation of a domestic currency like the cedi. Similarly, a fall in the exchange rate corresponds to an appreciation of the domestic currency. Sadly, the last time the cedi appreciated against the dollar was in 2008.
Since Ghana moved from the fixed exchange rate regime to the floating exchange system in 1983, the cedi has significantly depreciated over the years. In 2016, the US$1 sold for GH¢3.992. As of February 2017, US$1 was exchanged for GH¢4.552. However, since September 2017, the cedi has been on a steady decline.
During the peak COVID-19 period (2020-2021), the exchange rate was quite stable because imports dropped due to border closures across the world. But as of February 2022, the cedi has been the worst-performing currency among the top-15 currencies in Africa, depreciating by 7.6% within the first two months of 2022. At the time of writing this report, speculators are forecasting the dollar to sell for GH¢10.
The implication is that more cedis are needed to exchange for a dollar, and this is not good for our economy which is import-dependent. Ghana imports more than 50% of its goods and services from other dollarised nations. Economists say the cedi’s rapid depreciation leads to a significantly higher cost of living, erodes national income and creates massive unemployment. Besides, the cedi’s rapid depreciation against the dollar not only undermines confidence in the Ghanaian economy but can also, over time, constitute a national security threat as more people lose their livelihoods.
Standard theory
All over the world, the exchange rate has become very important in economic management because of the increasing interdependence of countries. Based on the standard trade theory, the frequent depreciation of a local currency is expected to promote exports and discourage imports. Some experts have argued that a unit depreciation of the Ghana cedi, for instance, may cause a 0.3109 improvement in Ghana’s trade balance.
The reason is that Ghana’s imports have always exceeded exports over the years. Similarly, a unit increase in Ghana’s GDP (income), (all things being equal) approximately worsens Ghana’s trade balance by 0.5333. This is an indication that Ghana imports more than it exports.
As argued earlier, the cedi’s frequent depreciation cedi is a very worrying issue in Ghana. This is because the trend negatively affects prices, wages, interest rate, production levels, employment opportunities and other macroeconomic phenomena. Through increased cedi costs of imported inputs, production costs are raised – and are transferred to domestic consumers. Logically, the increase in domestic prices without a corresponding rise in nominal wage rate of Ghanaians reduces the real wage, compelling households to spend extra to maintain their living standard.
This creates room for labour agitation for wages and benefits increases. When teachers recently embarked on a strike to demand cost of living adjustments (COLA), I was one of the people who descended heavily on them; describing their conduct as a blackmail and disingenuous, as Ghana was just emerging from COVID-19. But if workers cannot spend their salaries on basic needs because of the cedi’s rapid depreciation and high inflation, it gives cause for worry. And the earlier the Bank of Ghana and economic management authorities find solutions to the cedi’s plight, the better it will be for the economy.
Reasons for depreciation
For a start, Ghana’s retention and investment laws are not effective to restrain foreigners from repatriating all their profits. Depreciation of the cedi always worsens between February and March each year. This is the period during which Ghana-based multinationals repatriate profits. Also, local businesses which imported goods on credit ahead of the Christmas season settle their debts. Undoubtedly, the massive repatriation of profits in dollars and other major foreign currencies is one of the key reasons why the cedi continues to perform badly.
The second reason is the increased demand for foreign currencies, since most businesses in Ghana and across the world are now recovering from the COVID-19 shock. Most important is the country’s inability to borrow from the international capital market in 2022. Because Ghana is unable to generate enough foreign exchange through exports, successive governments have tried to manage depreciation of the cedi through borrowing from the international capital market, issuing dollar-denominated domestic bonds, and drawing from the country’s foreign exchange reserves.
Indications are that Ghana’s sovereign bond is no longer profitable, perhaps because of the recent credit rate downgrades and dwindling of foreign reserves to shore-up the cedi. Other global factors may have had a more damning impact on the cedi. In March 2019 the US Federal Reserve increased its interest rate, making it more profitable to attract investors who would otherwise have invested in Ghana’s bonds.
Effects of Depreciation
Depreciation of any country’s currency makes its imports more expensive and exports cheaper. As a result, some countries occasionally devalue their currencies to make their exports cheaper. However, Ghana’s export sector is not competitive enough – making it difficult for the country to export more and earn more foreign exchange. Significantly, the effect of currency depreciation often results in an increase of cost for imported goods. In our context, most of these imported goods are often used for local production; thus increasing inflation.
A classic example is crude oil imports. The ex-pump prices of fuel largely depend on the exchange rate because Ghana is a net importer of refined oil. Currently, there is increased global demand for crude oil as most industries are now recovering from the effects of COVID-19. At the same time, the supply of crude oil has slowed down after the Russian invasion of Ukraine.
Experts have forecast that the international crude oil price is expected to continue increasing for some time. Therefore, the combined effect of cedi depreciation and increases in international crude oil prices indicates that the ex-pump price of fuel in Ghana will continue rising to end of 2022, and perhaps into the first quarter of 2023.
Policy response
Sometimes, in response to high inflation, the Bank of Ghana (BoG) may increase its policy rate to control the growth of credit. Experts say this policy may lead to an increase in the cost of borrowing. We all know that higher borrowing costs will eventually lead to increased costs of production, which will further increase inflation. Depreciation of a national currency generally leads to inflation; and if inflation gets out of control it becomes the foundation for political and economic instability. In this era of COVID-era economic resuscitation, the last thing Ghana needs is instability.
I am saddened by the fact that Ghana is the only country where foreign currency is repatriated wholesale without regulation. To ease pressure off the cedi, the BoG – and by extension the Economic Management Team – should consider regulating repatriation of profits to 70-30, with 30 percent of foreign companies’ profit compulsorily retained in the country for reinvestment.
Furthermore, it appears the BoG is simply allowing market forces to determine the rate, irrespective of the fact some interest groups – especially foreigners – are manipulating the exchange rate for their own benefit. The foreign exchange market, popularly called the ‘black market’ is dominated by non-Ghanaians – especially Togolese, Nigeriens, Nigerians, Burkinabes, Malians and Lebanese among others. Arguably, Ghana is the only country where foreigners have such dominance and controlling stake in the foreign exchange sector.
At press time, I heard a news item on the arrest of a Lebanese man for attempting to export thousands of dollars, if not millions, outside the country by stuffing them in lorry tyres. The questions which came to mind when I heard the news were: (1) How did he obtain the dollars?; (2) What work is he doing in Ghana?; (3) What is his tax compliance status?; (4) Why should commercial banks be allowed to trade in foreign currency outside the banking system?; (5) And why is the black market thriving in Ghana after several attempts to eradicate it?
The unbridled involvement of foreigners in Ghana’s foreign exchange market is a recipe for chaos and a national security threat. If we allow foreigners to control our foreign exchange regime, it undermines national stability and economic development. For this reason, the Ministries of Interior and National Security must begin to show an interest in what is happening on the foreign exchange market.
Moving forward
The long-term solution is for the country to industrialise, add value to its exports, increase local production and reduce imports to preserve foreign exchange in the country. Moreover, government’s policy of modernising agriculture and the One District-One Factory programme should be improved to speed up the process of industrialisation and export substitution.
The medium-term solution is for government to raise more domestic revenue, to be able to service its debts and finance its development without overly-depending on foreign borrowing. In the short-term, government should demonstrate its ability to mobilise domestic revenue by paying attention to other sources of income; such as property tax, tax exemptions and natural resources.
Above all, the BoG and government’s economic management team should prove to Ghanaians that they are in control of Ghana’s exchange rate regime. The extent to which foreigners are manipulating our local currency gives an indication that our policy implementers have lost control. If left unchecked, the situation could threaten the long-term economic prospects of Ghana.
References
Nimoha, SA & Addai-Asante, J. 2018. Exchange Rate Policy and GDP growth in Ghana. American Scientific Research Journal for Engineering, Technology, and Sciences.
Enui, P. 2017. The key drivers of the exchange rate depreciation in Ghana. Journal of Basic and Applied Research International, 22(4): 132-147
