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Feature Article of Thursday, 14 May 2009

Columnist: Egu, Francis Kwaku

Depreciation of the Cedi and its impact on small businesses

Introduction

The cedi in the past few years is depreciating against major foreign currencies on the foreign exchange market in a very alarming rate. It is true that the financial turbulence in the world is having knock on effects on major economies but the rate at which the currency is depreciating is quite disturbing so attempts need to be made to curb the situation. Allowing the cedi to fall freely at the current rate has serious financial ramifications for the business community particularly small businesses.

Some analysts argue that the current depreciation level is just a matter of the chicken coming to roost because the cedi had shown symptoms of weakness several months ago. The only thing that has kept the cedi afloat was the central bank injecting massive amount of money to prop it up. For instance the Central Bank was reported to have released $288 million in 2007 to serve that purpose. In 2008 a further $918 million was used by the bank to prop up the falling cedi. The central bank is known to have spent over $1.2 billion to prop up the cedi between July 2007 and December 2008.

The coffers have dried up and there is not enough money to prop the cedi up any longer so it is noose diving. The currency has depreciated twice six months running. It depreciated by 25.3% against the dollar in December 2008 and again depreciated by 13.6% in the first quarter of 2009. A lot of reasons have been put forward to explain the reasons why the cedi has been so weakened.

Causes of the depreciation

One line of thought is that the timing of the redenomination of the cedi was not the best. According to this line of thought this was done at the time when the country was experiencing double digit headline inflation, negative balance of government finances and declining foreign reserves.

The other school of thought is that there is too much excess demand for the dollar in the local economy. Apart from that falling cocoa and gold prices on the international markets have also played significant roles in the depreciation. The fall in the prices of these major exports meant a reduction in the inflow of foreign exchange to the economy.

Economic Advisory Council (EAC),

The government needs to take the necessary actions to bring the problem under control. The setting up of the Economic Advisory Council (EAC) by the government is a step in the right direction. This 10 member team made up of some renowned economic and financial experts will be able to deal with the situation. There may be other pressing issues they may have to tackle but stabilizing the cedi should be a high priority. This is because as we are all aware prices of goods and services in the country are tied to the dollar, pounds etc. Consequently a fall in the cedi has ripple effects on everything on the market. Prices of food stuffs will shoot up and that of transportation spiral. A hike in prices will spell a doom for the ordinary Ghanaian some of whom struggle to get three square meals a day.

On the other hand if the EAC have other pressing things to tackle they could assemble a team of experts to handle this job. These experts could be drawn from within the government or from without. This is a serious national crisis so politics must be put aside for the common good of the country. Playing politics with the problem will hit hard at small businesses.

Dubai and China trade routes

One group of people who will be hit is the traders who ply the Dubai and China trade routes. These trade routes have become busy and vital routes for Ghanaian traders who deal in assorted ranges of wares like mobile handsets, dresses, and children wares which are purchased in hard currencies (e.g. US dollars). The traders buy these hard currencies from the foreign exchange market. A strong cedi will therefore give them more dollars and thus more goods and vice versa. This will increase their profit margin as they will be able to buy more goods. The current currency situation will affect their working capital because many of them will run at a loss. They may try passing the extra cost to consumers which will price many consumers out of the market.

Small Businesses

Small businesses that will be most hit will be those in the building sector. Most of the businesses involved in this sector import their wares from outside the country. For instance most of the modern roofing sheets used to roof houses in the posh areas of Accra is imported from countries such as Australia, South Africa, and Canada. Prices of these sheets are tied to the dollar. A change in the rate of the dollar often results in upward adjustment to the prices of these sheets. Surprisingly most Ghanaians have a high appetite for these imported sheets than the locally manufactured ones like those produced by ACP and others.

Apart from the roofing sheets prices of other building materials such as door locks, floor tiles and interior decorations will be affected. Looking at the acute accommodation problem in the country the last thing to do is to disrupt this sector. This is because this could aggravate an already precarious situation.

Those in the textile industry will not be spared either. This industry is already in tatters with most of their production lines shut down. Attempts by government to revamp the industry will be jeopardized.

Second hand goods dealers

Another group of small businesses which will not be spared the brunt is the second hand spare parts dealers in Abossey Okine in Accra and Suame Magazine in Kumasi. Even though some of these second hand spare parts dealers can be very dubious, they have contributed positively to the economy in so many ways. For instance they have kept the transport industry alive and kept the commuting public going. The collapse of this will not auger well for the country particularly since our leaders have huge appetite for BMW 7 Series, Chryslers, Jeeps etc cars which need to be serviced regularly with parts we do not produce ourselves but are sold by these dealers.

Closely tied to this industry is the secondhand car dealing industry. Ghanaian middle income earners who can not cough up $70 million for BMW 7 Series depend on this industry. The same applies to some of the industrious Ghanaians who have spent the best part of their youth abroad struggling to get the hard earned cash most people strive for. They also rely on these second hand cars because they cannot afford the brand new expensive ones some of our politicians can through deceit and lies.

The second hand clothing sellers at Tema Station, Makola in Accra and Kejetia will not be spared either and so is the new shopping malls like Shoprite at Spinters Road and Maximart at East Legon. One most important thing is these small businesses employ quite a sizeable number of our youth and school leavers. They have at least taken a few of them from the ‘Dog Chain’, and ‘Shoeshine industries’ and street hawking (at the traffic lights of Airport, Dzorwolo etc) and given them jobs that they can be proud of doing.

Conclusion

I do not believe in the ‘nothing can be done to save the situation’ theories put forward by some experts. The task of remedying the situation should be given to experts with the capability to do the job; experts who can clearly identify the problem and accurately prescribe solutions. These experts are abundant in the country and it is up to those at the helm of affairs to fish them out and tap on their expertise. In this precarious time we should fervently avoid self styled experts that know next to nothing but spend precious time hopping from one radio station to the other blabbing. These blabbers are developing the country from the radio and television stations whiles the ordinary people are starving.

Francis Kwaku Egu (Finance & Investment Analyst), UK

Research Associate- Licensed International Financial Analyst (LIFA) –USA

kwakuhull@yahoo.com

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