Cedi to fall further, economists doubt workability of BoG rescue plans

Adnan Adams Mohammed

Renowned economists have cast doubt on the workability of the new Ghana Interbank Forex Market Conduct outlined by the Bank of Ghana (BoG) to  rescue the fastest depreciating currency in the year from further deteriorating.

They unanimously argued that, until fundamentals of the economy are strong, no amount of short-term measures will heal the cedi’s ill-health. “…until we get the fundamentals of the economy right to generate foreign income, the pressure will always be there”, Dr. Priscilla Twumasi, an economist at the University of Ghana has expressed.

The Ghana Cedi which always suffer bullying by the major international trading currencies, has declined close to 13% since December against the US Dollar and currently sells at about GHC5.56 to the Dollar after starting the year at GHC4.92.

The Bank of Ghana (BoG) in attempt to halt the cedi from further sharp decline fortnight ago announced the new Ghana Interbank Forex Market Conduct directives, which among other things, spells out who is eligible to trade in forex in the country, how records should be kept and reported to the Bank of Ghana, and some general rules on the trading of forex. Also, the central bank has declared intention of pumping about US$800 million into the economy to meet demand from the market.

“Injecting US$800 million will be the same old story because it is just a very short-term measure to stabilise the currency. Even the US$800million’s potency to stabilise the currency depends on the strength of demand factors. We have multiple demand factors now; people are settling their bills in terms of the imports they have made”, Professor John Gatsi, Head of Economic Department, at the University of Cape Coast has said. 

“Then we have also come to a point where the foreign currency is not only a medium of exchange in terms of international trade, but also an investment asset of people. So, the demand factors have become multiplied; and the ability of that US$800million depends on the strength of those demand factors,” he added.

Also, a financial analyst Dr. Richmond Akwasi Atuahene has debunked the idea that the new Ghana Interbank Forex Market Conduct outlined by the Bank of Ghana (BoG) will stabilise the cedi against the US dollar.

Dr. Atuahene said in an interview that, the directive is just to regulate conduct and keep accurate data in forex trading, something which has nothing to do with the factors causing rapid depreciation of the cedi against the US dollar.

“The reality on the ground regarding cedi-depreciation is supply and demand of the dollar. There is more demand than supply of forex after Christmas. In addition, the US interest rate shot up and so more people are disinvesting their long-term bonds and the Bank of Ghana needs to find dollars to pay.

“And again, now that the banks are publishing their accounts and declaring dividends, they will also demand dollars to pay dividends to their shareholders outside the country. So, these are the factors causing cedi-depreciation and it has nothing to do with the interbank forex conduct,” he said.

Historically reflection on the BoG injecting more US dollars into the economy has never yielded a lasting solution, the approach has proven to be a mere cosmetic exercise over the years.

In July 2015, under the leadership of Dr. Kofi Wampah, the central bank pumped in some US$20million daily to stabilise the cedi when it was depreciating as fast as it is doing today.

Though, it resulted in the cedi appreciating about 2.4 percent in just two weeks against the US dollar, but returned to its declining state afterward, confirming it was just a ‘make-ups’.

The BoG today, under the leadership of Dr. Ernest Addison, is still contemplating use of the same cosmetic approach that has proved to be unsustainable in checking the cedi’s perennial slide.

The BoG knows for sure that this approach is just a knee-jerk reaction to a big problem that needs long-term measures to permanently control it. In fact, the central bank’s own research has shown that the cedi will continue to depreciate throughout the year due to some external factors that the country has no control over. So, injecting the US$800million will be a temporary measure that in the long-run it will be an exercise in futility.

This position is supported by some economists who argue that until fundamentals of the economy are strong, no amount of short-term measures will heal the cedi’s ill-health.

Prof Gatsi further expressed concerns that, the continuous practice of injecting foreign currency will further deplete the country’s foreign reserves – a situation he says will make the economy vulnerable.

“While we utilise this short-term measure and we do not put in place the measures necessary to shore-up naturally through international trade transactions that increase foreign currency supply and reduce demand for foreign currency in the country, it doesn’t matter the number of times you inject foreign currency into the economy: it will reduce your reserves, and when they are reduced to a certain point it makes the country vulnerable.

“So, I don’t think that the purpose [of the US$800m] is to solve the depreciation problem, but rather to bring about short-term respite for the currency,” he said.

Dr. Priscilla Twumasi believes that the most effective measure to permanently address this problem is to work at being a productive economy that exports more than it imports.

“The emphasis should be on how we are expanding our export base. Are we adding value to our domestic produce so that we produce domestic substitutes for goods that are imported? But so far as we don’t tackle those critical issues, they will continue to be cyclical; today the pressure comes and we ease it. But the bottom line is that the dollar is not for us, and the central bank does not have unlimited reserves. Whatever it is, the BoG will run out of reserves – and when that happens, you will have to allow your currency to depreciate,” she said.