The rapid depreciation of the cedi against other major currencies destabilized the Ghanaian economy in the first eight months of 2014 and raised the economic consciousness of every Ghanaian regardless of one\u2019s level of understanding of economic issues. Exchange rate depreciation in price quotation terms implies an increase in the volume of local currency for a unit of foreign currency which is a measure used in Ghana\u2019s foreign exchange market.<\/p>\n
Depreciation under a volume quotation measure, which expresses the quantity of foreign currency in terms of a unit of domestic currency, is indicated by a fall in the exchange rate.<\/p>\n
On an annual basis, there has not been a single year when the cedi has not lost value since the country moved from the fixed exchange rate regime to the current floating exchange rate system as part of economic reform program embarked on in April 1983. Over the last three decades, the cedi has lost about 99.9841 percent of its value against the US dollar.<\/p>\n
The effects of exchange rate depreciation are known not only by intellectuals, the business community or policy makers, but also the ordinary man or woman on the street has some level of appreciation of the effects of rapid exchange rate depreciation. One expects exchange rate depreciation to shift local demand from imported goods to locally produced ones due to higher prices of imported goods relative to prices of locally produced goods on the domestic market and importantly promote exports which eventually exert expansionary effect on national output.<\/p>\n
However, supply inelasticity of Ghana\u2019s export and Ghanaians\u2019 insatiable demand for imports for various reasons do not make the country reap such positive effects associated with the constantly and sometimes rapid depreciation of the exchange rate. Ghana\u2019s exports are dominated by primary commodities which do not readily respond to any changes in the exchange rate market.<\/p>\n
Even if the benefits from output expansion are realized, it could be eroded by the high dollar denominated liability of the country. Cedi depreciation raises the domestic currency value of foreign currency debt and debt service burden in view of the fact that domestic revenues are in domestic currency. The inflationary effect of rapid exchange rate depreciation, particularly if the country\u2019s spending on imports constitutes a considerable proportion of total national expenditure, cannot be ignored.<\/p>\n
Cedi depreciation against major currencies does not only raise the cedi prices of final goods through imports of such goods but also through increased cedi costs of imported inputs as has been alluded to in the 2015 Budget Statement. Indeed, economic agents are often caught in the crossfire of speculation in a rapidly depreciating exchange rate period with adverse effect on economic growth.<\/p>\n
2 The underlying cause of exchange rate depreciation in Ghana is directly linked to the demand for and supply of foreign exchange. Most often, heavy dependence on imports and reliance on exports of primary commodities are cited as the sources of exchange rate problem in the country.<\/p>\n
However, the recent exchange rate concern is directly traced to the high\u00a0fiscal deficit, which\u00a0peaked at about 12 percent of GDP in 2012 and the apparent indecision by — or perhaps inability\u00a0of — the Central Bank to ignite its intervention measures when necessary. The \u201cdollarization\u201d of
\nlocal transactions including government\u2019s own policy of indexing import duties to the dollar also\u00a0tends to put pressure on demand for dollars by economic agents to avoid potential losses for\u00a0holding domestic currency to pay import duties at the port.<\/p>\n
Additionally, some Ghanaians have\u00a0found foreign currency as a profitable financial instrument particularly during a period of rapid\u00a0exchange rate depreciation and thus demand dollars in an effort to diversify their portfolio and\u00a0protect the value of their wealth. This exerts further pressure on the exchange rate and\u00a0exacerbates instability in the exchange rate market, thus creating a vicious cycle in the exchange\u00a0rate depreciation problem.<\/p>\n
The exchange rate control measures introduced by the central bank in February 2014 in a\u00a0desperate attempt to halt the rapid depreciation of the cedi worsened the problem, as many\u00a0people decided to hold onto their foreign currency rather than sending it to the bank as usual or
\ndivert it to foreign banks. Furthermore, the regulation and monitoring mechanisms in the\u00a0exchange rate market particularly in the Forex Bureaux are very relaxed and porous, to say the\u00a0least, to the extent that an individual buying from or selling foreign currency to a Bureau may not
\nbe required to produce any identification. This makes it difficult to capture the records of\u00a0individuals and also trace transactions to facilitate effective monitoring of foreign exchange\u00a0transactions in the economy.<\/p>\n
As the structure of Ghana\u2019s international trade remains unchanged with the dominance of\u00a0primary commodities in export and high imports, culminating in constant trade deficit, the\u00a0exchange rate problem will continue to be a problem in the economy. The slowdown of the
\ncedi\u2019s depreciation in the last quarter of 2014 has triggered debate about whether this is\u00a0just a\u00a0flash in the pan after the turbulence of the first nine months of the year.<\/p>\n
It is important to note\u00a0that the $1 billion EURO bond and $1.7 billion COCOBOD trade finance facility for the 2014\/15
\ncocoa purchases, coupled with the slowdown of imports in August\u2013September, largely explain\u00a0the temporary halt in the declining value of the cedi. In the medium-to-long-term however, the\u00a0redemption of these facilities could put a downward pressure on the cedi against other foreign
\ncurrencies if these facilities are not prudently invested in economic sectors that would yield better returns in the future.<\/p>\n
A long period of stability of Ghana\u2019s exchange rate market in the current structure of the\u00a0economy is difficult to predict. What one can envisage is a possible slowdown of the rate of\u00a0depreciation if pragmatic fiscal and monetary measures are adopted in addition to the adoption of 3\u00a0better regulatory and monitoring mechanisms in the exchange rate market.<\/p>\n
Rather than repeating\u00a0the unpopular exchange rate control measures introduced in February 2014, the Bank of Ghana\u00a0could introduce measures (or activate those that already exist) that would ensure that transactions\u00a0at forex bureaux in particular require proper identification to facilitate movement of foreign\u00a0currency in the system and reduce potential involvement of some of these bureaux in the parallel\u00a0market. Monitoring systems in the banking sector also need to be strengthened to minimize\u00a0loopholes that could facilitate unorthodox exchange rate transactions.<\/p>\n
To boost regular supply of\u00a0foreign currency in the banking sector, measures to encourage Ghanaians in the diaspora to\u00a0operate accounts in foreign currency at a marginal rate above what they would have obtained in\u00a0their country of residence could be explored. In the USA, Canada and Europe, interest rates on\u00a0savings and other deposits are very low to the extent that a 2 percent rate above the rates in these\u00a0countries could entice Ghanaians abroad who have surplus income to invest elsewhere to direct\u00a0them home, a better alternative than the issuance of EURO Bond at 8 percent.<\/p>\n
Finally and more\u00a0appropriately, the use of financial and other monetary instruments to combat rapid depreciation\u00a0of the cedi as against the adoption of rigid exchange rate control measures that have the effect of\u00a0weakening public confidence in the financial and the exchange rate system should be explored.<\/p>\n
<\/p>\n
By: Dr. Baah Boateng<\/p>\n
Senior Fellow: \u00a0International Institute for the Advanced Study of Cultures, Institutions, and Economic Enterprise<\/p>\n
Email: info.interias@gmail.com<\/p>\n
Website: www.interias.org.gh<\/p>\n
Office: +233-28-107-4256<\/p>\n","protected":false},"excerpt":{"rendered":"
The rapid depreciation of the cedi against other major currencies destabilized the Ghanaian economy in the first eight months of 2014 and raised the economic consciousness of every Ghanaian regardless of one\u2019s level of understanding of economic issues. Exchange rate depreciation in price quotation terms implies an increase in the volume of local currency for […]<\/p>\n","protected":false},"author":25,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"jnews-multi-image_gallery":[],"jnews_single_post":[],"jnews_primary_category":[],"jnews_social_meta":[],"jnews_override_counter":[],"footnotes":""},"categories":[],"tags":[8,21,4],"class_list":["post-83727","post","type-post","status-publish","format-standard","hentry","tag-akufo-addo","tag-psychiatric","tag-st-augustines-college"],"_links":{"self":[{"href":"https:\/\/citifmonline.com\/index.php?rest_route=\/wp\/v2\/posts\/83727","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/citifmonline.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/citifmonline.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/citifmonline.com\/index.php?rest_route=\/wp\/v2\/users\/25"}],"replies":[{"embeddable":true,"href":"https:\/\/citifmonline.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=83727"}],"version-history":[{"count":0,"href":"https:\/\/citifmonline.com\/index.php?rest_route=\/wp\/v2\/posts\/83727\/revisions"}],"wp:attachment":[{"href":"https:\/\/citifmonline.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=83727"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/citifmonline.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=83727"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/citifmonline.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=83727"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}