For the second time in less than a decade, the cedi has entered into free-fall. Over the past three months or so, the value of the national currency against that of the US dollar has depreciated by some 40% and this has virtually nothing to do with any strengthening of the dollar around the world. What is happening is simply the result of the cedi’s fall, not the dollar’s rise.
Curiously, Ghanaians, caught up in the throes of political change, are basically ignoring all this. Issues such as the controversial end of service benefits approved for ex-government functionaries, and the vetting of potential new ones, have consigned the cedi’s travails to the back burner. Besides, the cedi had been relatively stable for about six years before the ongoing sharp depreciation set in, so Ghanaians seem to have forgotten just how debilitating a steep fall in the local currency’s external value can be with regard to living standards and the general well-being of the economy.
None of which removes the fact that the cedi’s current sharp depreciation will, sooner than later have serious repercussions. Most importantly for the average Ghanaian current projections that consumer inflation will remain more or less flat in 2009 at between 17% and 18%, are very optimistic. The cedi’s depreciation will feed through into inflationary pressures in several ways.
For instance, hopes of significant petrol pump price slashes, in the face of falling international crude oil prices are unlikely to come to pass. Ghana imports crude oil in dollar denominated prices, but after refining it, sells it locally at cedi denominated prices. Which means, the cedi’s depreciation would necessarily mean higher cedi pump prices rather than loeer ones, if international crude oil prices hold steady at their current lows. Unless of course the new government, attempting to fulfill its election promise opts to re-introduce petroleum price subsidies or reduce petroleum taxes, either of which would be problematic for a government seeking to eliminate a fiscal deficit which last year amounted to a record high 13.7% of Gross Domestic Product.
Another instance: importers are already implementing replacement costing which means that when setting a shelf price on their imported goods they are doing so based on the expected cost of buying increasingly expensive foreign exchange to replace their inventory, rather than simply seeking to make a profit margin on the cost at which they imported their current inventory.
To be sure, Ghana’s macro-economic fundamentals do not give reason for good cheer. The country’s balance of payments is deteriorating as the merchandise trade deficit rises and both donor inflows and inward remittances decline in the face of the deepening global economic recession.
But perhaps even more damaging is the seeming aloofness of Ghana’s financial authorities about the cedi’s worsening fortunes. Neither the Bank of Ghana nor the Ministry of Finance have commented on the cedi’s travails recently and this is lowering confidence in the local currency, since it gives the impression that the state is not perturbed by the cedi’s accelerating fall.
Here, neighbouring Nigeria is instructive. Faced, very recently with a similar sharp depreciation of the naira, the Central Bank of Nigeria announced that it was deliberately allowing a measured, targeted fall just to cut back imports and encourage non-traditional exports in the face of falling crude oil export revenues. Nigeria’s central bank further assured (boasted) that the country had lots of international reserves, which it would bring into play when the targeted lower external value of the naira was achieved. Therefore, speculators taking positions on a continued depreciation of the naira would likely lose out when this happened and the naira began appreciating amid the release of some of those foreign reserves into the economy. The result, since then has been psychological renewed confidence in the naira, and consequently, appreciation against the US dollar.
Admittedly Ghana’s situation is not quite as easily solved considering that its foreign reserves are at their lowest in over five years, while Nigeria’s are at their highest in nearly three decades. Nevertheless serious efforts to reassure the market about government’s intention to stem the cedi’s freefall would still do some good, no matter how little.
Obviously, the problem here though is that neither the Bank of Ghana nor the Ministry of Finance are effectively being headed by anyone currently. The tenure of the Governor of the BOG is at an end, and the Minister of Finance nominee is only now being vetted by Parliament.
The current dire fortunes of the cedi make it all the more imperative that both institutions are quickly given effective leadership that can quell the misgivings of the financial markets in particular and economic operators in general. If this does not happen, the cedi will keep falling, and well beyond what economic fundamentals would ordinarily dictate too, because of sheer uncertainty and lack of confidence, for which all Ghanaians would have to pay a heavy price which is thoroughly undeserved.
Curiously, Ghanaians, caught up in the throes of political change, are basically ignoring all this. Issues such as the controversial end of service benefits approved for ex-government functionaries, and the vetting of potential new ones, have consigned the cedi’s travails to the back burner. Besides, the cedi had been relatively stable for about six years before the ongoing sharp depreciation set in, so Ghanaians seem to have forgotten just how debilitating a steep fall in the local currency’s external value can be with regard to living standards and the general well-being of the economy.
None of which removes the fact that the cedi’s current sharp depreciation will, sooner than later have serious repercussions. Most importantly for the average Ghanaian current projections that consumer inflation will remain more or less flat in 2009 at between 17% and 18%, are very optimistic. The cedi’s depreciation will feed through into inflationary pressures in several ways.
For instance, hopes of significant petrol pump price slashes, in the face of falling international crude oil prices are unlikely to come to pass. Ghana imports crude oil in dollar denominated prices, but after refining it, sells it locally at cedi denominated prices. Which means, the cedi’s depreciation would necessarily mean higher cedi pump prices rather than loeer ones, if international crude oil prices hold steady at their current lows. Unless of course the new government, attempting to fulfill its election promise opts to re-introduce petroleum price subsidies or reduce petroleum taxes, either of which would be problematic for a government seeking to eliminate a fiscal deficit which last year amounted to a record high 13.7% of Gross Domestic Product.
Another instance: importers are already implementing replacement costing which means that when setting a shelf price on their imported goods they are doing so based on the expected cost of buying increasingly expensive foreign exchange to replace their inventory, rather than simply seeking to make a profit margin on the cost at which they imported their current inventory.
To be sure, Ghana’s macro-economic fundamentals do not give reason for good cheer. The country’s balance of payments is deteriorating as the merchandise trade deficit rises and both donor inflows and inward remittances decline in the face of the deepening global economic recession.
But perhaps even more damaging is the seeming aloofness of Ghana’s financial authorities about the cedi’s worsening fortunes. Neither the Bank of Ghana nor the Ministry of Finance have commented on the cedi’s travails recently and this is lowering confidence in the local currency, since it gives the impression that the state is not perturbed by the cedi’s accelerating fall.
Here, neighbouring Nigeria is instructive. Faced, very recently with a similar sharp depreciation of the naira, the Central Bank of Nigeria announced that it was deliberately allowing a measured, targeted fall just to cut back imports and encourage non-traditional exports in the face of falling crude oil export revenues. Nigeria’s central bank further assured (boasted) that the country had lots of international reserves, which it would bring into play when the targeted lower external value of the naira was achieved. Therefore, speculators taking positions on a continued depreciation of the naira would likely lose out when this happened and the naira began appreciating amid the release of some of those foreign reserves into the economy. The result, since then has been psychological renewed confidence in the naira, and consequently, appreciation against the US dollar.
Admittedly Ghana’s situation is not quite as easily solved considering that its foreign reserves are at their lowest in over five years, while Nigeria’s are at their highest in nearly three decades. Nevertheless serious efforts to reassure the market about government’s intention to stem the cedi’s freefall would still do some good, no matter how little.
Obviously, the problem here though is that neither the Bank of Ghana nor the Ministry of Finance are effectively being headed by anyone currently. The tenure of the Governor of the BOG is at an end, and the Minister of Finance nominee is only now being vetted by Parliament.
The current dire fortunes of the cedi make it all the more imperative that both institutions are quickly given effective leadership that can quell the misgivings of the financial markets in particular and economic operators in general. If this does not happen, the cedi will keep falling, and well beyond what economic fundamentals would ordinarily dictate too, because of sheer uncertainty and lack of confidence, for which all Ghanaians would have to pay a heavy price which is thoroughly undeserved.
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