Cedi In Free Fall Against The Dollar

The relative suitably of the cedi is dwindling. Over the past two weeks the exchange rate of the cedi to the dollar has risen to 7600 cedis.

A survey by B&FT revealed that the dollar is being sold at a rate higher than what is quoted by the forex bureaux.

Despite the government's policies aimed at stabilising the cedi against the major currencies especially the dollar, the cedi for the past two weeks has witnessed a significant depreciation against the dollar.

The free fall of the cedi is being attributed to the introduction of the euro which until recently was only available at Barclays Bank Ghana.

Despite the fact that other banks are dealing in the Euro, its supply is still limited against demand since importers who otherwise would go for say the German mark or Dutch guilder are now going for the Euro.

This has resulted in an increase in the demand pressure for the dollars hence causing the recent rise in the value of the dollar against the cedi.

Additionally government policies aimed at reducing government spending and hence government domestic borrowing has led to reduction in interest rates.

Considering the very few avenues for investment available to the average Ghanaian, and even if there are, they are not exploited hence people have resorted to buying and holding foreign currencies, which can be said to account for the recent depreciation of the cedi against the US dollar.

The ability of the government to keep the cedi stable has been the subject of intense speculation for the past one year.

Government prides itself on having kept the cedi's depreciation down to 4% during the first year of its administration. However critics insist that this was achieved at the expense of economic growth since the current administration has sharply cut back public spending which also affected the demand for foreign exchange.

It has been widely argued that increased government spending will destroy the cedi's fragile stability especially in the face of the widening trade deficit.

However government since it accessed the HIPC initiative anticipated that relatively little foreign debt servicing will be made thereby reducing government's demand for foreign exchange that will in turn reduce the pressure on the demand for the dollar.

The government likewise through its private sector initiative hopes to boost the private sector to enable it compete favourably with its foreign counterparts.

This it expects would lead to a reduction in the demand for foreign exchange for the importation of goods and services, which will in turn reduce the demand for foreign exchange importation.

Since the cedi's sharp depreciation between the second half of 1999 and mid 2000 the currency's external value has been perhaps the most important macro-economic indicator for companies and the individuals alike, due to the impact on business and living costs.

Over the space of less than a year, between September 1999 and July 2000, the cedi depreciated from about 2500 cedis to the dollar to about 7000 cedis to the dollar leading to a serious economic dislocation.