Cedi Depreciation, No Longer Economics; Consider Psychological and Administrative Factors | Peter Bismark

It has become a herculean task for government to play the defensive role in preventing its national currency from falling into the net.  The free fall of the Cedi to the US Dollar is a worry to Ghana’s Central Bank – Bank of Ghana (BoG). The usual analysis of cedi depreciation is always attributed to indiscriminate higher imports.

It is well known that Ghana’s economy is an import driven one thus, import most of it goods and services into the country. As a result of these, the demand of other national currency mainly the Dollar is high. The depreciation and appreciation of the cedi compared to other currencies is as a result of demand and supply analysis. The more we demand more cedi compared to the dollar the exchange rate of the cedi will appreciate and the opposite is true. On that tangent, the more we import, the more we need dollar as compared to the cedi to make the payment of our imports.

Against the fluctuating national currency exchange rate, the balance of payments, one of the critical components is the balance of trade of goods and services – is always very important for the stability of any currency and for that matter the cedi. For the solidness of a national currency, the proportion between the nation's export and import is basic, since the previous carries outside cash into the nation and the last requires the cash to leave the nation. The harmony between the two makes the financial reason for the security of the national currency.

According to the Bank of Ghana, trade deficit kept increasing between 2003 – 2013; from 647.8 to – 3848.1 respectively. This denote, the increase of merchandise exports from  $2,562.4 million in 2003 to $13,752 million in 2013, representing export to GDP ratios of 32% and 31%, respectively, and an average growth rate of 22% over the same period.

 In the same period, imports increased from US$3,210 million in 2003 to US$17,600 in 2013, representing an import to GDP ratio of 40%. This resulted in a considerable widening of the trade deficit in that period.

Within this period saw the Cedi to Dollar move from GH¢0.87 in 2003 to GH¢2.08 in 2013. The theory is clear that, a high import driven economy has a trickling down effect on it currency depreciation especially on high trade deficit.  Sixteen years from 2003, the Cedi to Dollar exchange rate is GH¢ 5.32 to a Dollar.

In 2017 a trade surplus of $494.3 million was recorded and 2018 saw a provisional trade surplus of $584.5 million for the first two months. However, Ghana recorded a trade surplus of 193.39 USD Million in November of 2018.

To simplify the analysis for every Ghanaian to understand, trade deficit would require more dollars to enhance imports, putting more pressure on the demand for dollar. However, trade surplus requires less demand for dollar since the country export more than import. But there’s surplus in terms of balance of payment, yet, there is depreciation of the cedi. Worrying right? Let us look at this case.

Assuming 100 units of cocoa bags are exported by a farmer taking into account low money in circulation and low productivity of goods. Here, the farmer exports 100 units of cocoa to receive foreign exchange. Due to low productivity, the foreign currency is again used to import, say a standing fan (where the commodity used is not produced in the country). In this scenario, only one unit of fan is imported as against 100 units of cocoa bags exported. In this regard, the surplus however, money (foreign exchange) acquired is in return used to purchase only a unit item which cost almost all dividends acquired from the exportation of cocoa. In this case, more is exported and less is imported but currency would still depreciate because of less supply of money from the central bank in the name of checking inflation.

Away from the simple balance of payment analysis, administrative errors from the Central Bank have a huge impact on currency depreciation. Errors of the central bank partly led to the collapse of seven (7) indigenous Banks. Because of the expected consequences, the banking sector cleaning cost the State and taxpayers GH¢ 9.9 Billion according to the 2019 budget. The collapses were attributed to a number of factors, which include; poor corporate governance, irresponsible risk management, non-performing loans and BoG’s negligence to ensure forensic auditing of Banks report.

The huge cost of saving the financial sector of Ghana’s economy with bailouts cost the nation much more than ever. Now government need to supply more Dollars to meet the demand to safe the Cedi. However, the government may be cash strapped and that must tread cauciously.

We do not need to think too far anymore. This is because, almost all the interventions to safe the Cedi from depreciating had not worked in favour of the economists. Good economic fundamentals should be able to withstand international financial uncertainties with a marginal effect on a country’s currency of exchange. It’s time for the economic managers to consider psychological and administrative factors in their quest to finding solutions to help appreciate the Cedi.

What are the administrative errors made in investments and sales of Bonds? How do we address these mistakes for administrative purposes? Who is responsible is not a problem but the how to solve, is key. Consider shadow governments in all your dealings and ensure transparency of the tax system to enhance production within. Government must also try subsidizing the economy to enable productivity and reconsider the methods employed in checking inflation. The State and its ecenomic managers must eqaully reoganize the industrialization policies and encourage manufacturing to augment productivity through fair tax proposals.

 

 

 

Peter Bismark

ILAPI

Source: ILAPI