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Opinions of Friday, 28 August 2015

Columnist: Bonus Williams

BOG’s raising bar to hamper Cedi fall

The emerging trend of the free fall of cedi, amidst others factors, attracted Bank of Ghana’s decision to supply $20 million to stabilize the free fall of the cedi.

However, this development has bred mixed opinions of financial experts from the financial sector. It was generally perceived that the decision is laudable, but there are many factors to be considered in order to establish a viable and stable fiscal programme, to sustain the currency value.

Within the context of this new development, the ability to sustain this initiative would only depend on how far Ghana’s primary export commodities such as gold, cocoa and oil could regain more economic value as their prices become unstable and treading downwards.

However, as implementation of aid deals with the International Monetary Fund, Eurobond and a cocoa loan have shown an optimism that would place a brake on the falling cedi value, but for how long could it sustain the country’s economic productivity?

With fiscal deficits, debts remain one of the major factors that have contributed to the hyper depreciation of cedi (31.3 percent as at end of 2014) and rising inflation (increased from 13.5 percent at the end of 2013 to 17.0 at the end of 2014), a 60.9 percent increase in petroleum products in 2014 from 16.7 percent in 2013, 28.36 percent increase in utility tariffs in 2014 from 12.9 percent in 2013 and a 30 percent in transportation cost.

According to figures provided by Bank of Ghana and Finance Ministry, Ghana’s total debt of 51.9 billion cedi was recorded in 2013 and increased to 79.6 billion cedi by close of 2014. At the end of March 2015, total government’s public debt stock stood at 88.2 billion cedi, edging above 70% of the country’s Gross Domestic Product (GDP).

The translation of this trend indicates that between 2014 and March 2015, government has borrowed 39.7 billion cedi.

In the face of these prevailing economic challenges, the government has initiated a number of drastic measures to reduce Ghana’s myriad of economic factors that contributed to the challenges.

According to Bank of Ghana’s Governor, Dr. Henry Wampah, “the dollar inflows from donors and expectation of US$500 million, by the end of the third quarter, Eurobond and cocoa loan are expected to boost the central bank’s foreign exchange reserves to ease pressure on the cedi”.

To chart a new path of economic development, some economy observers advised that the only way to repel the persistent fall of the cedi is to focus more on exports than imports.

The PWC report highlighted that the overall Budget Statement reflects the constraints of balancing the national budget, reducing the deficit while sustaining growth amidst a sluggish global economy.

PWC suggested that “for growth to be inclusive and to unlock value addition, the macro-economic aspects include the stabilising the Cedi, lowering of interest rates and reduction of the budget deficit will have to be tackled with a long term perspective”.

According to analysts, as the debts retirement matures in 2017, and with the recent IMF programme, Ghana will have to rely on the Fund’s programme of US$1billion to service the debts and fund infrastructure projects.

Alhassan Andani, Managing Director of Stanbic Bank, opined that the ongoing efforts to stabilize the falling cedi may yield positive outcome, but a true remedy for the local currency’s woes is an overhaul of the economy.

Reduction in the imports of goods and services, especially if they can easily be produced in Ghana, took a dominant part in his conservations with the media.

“Our imports exceed exports and the fall of cedi is a structural trend. Ghana has to think about. For this trend to change, Ghana needs to focus more on restructuring its economy because of the imbedded imports cost in foreign currency that simply exceeds export revenue,” Mr Andani stressed”.

Andani further disclosed that donor support, as well as fiscal support from the International Monetary Fund (IMF) may keep the cedi steady. These options are not likely to last.
Another financial guru, Kwesi Livingstone gave similar insights regarding to this development.

He expressed that the scarcity of dollars makes the demand far exceeding the supply. This is causing the cedi to depreciate at a very fast rate. So, injecting $20 million into the system will help to reduce the heavy pressure on the cedi.”

He further added that “it will definitely make some impact, but this is just a firefighting approach, short term solution, in my opinion.”

In 2008, the exchange rate for $1 was 1 GH Cedi, but as at June 30th 2015, the exchange rate has escalated to 4.46 GH Cedi for $1.
Relatively, within 5 years, year-on-year, the decline in cedi value against US dollar went up from 1.431(2010) to 4.36 (June, 2015).

Kwesi Livingstone further stressed, “Just like the Bank of Ghana’s previous approaches to stabilize the cedi may not have yielded sustainable solution the same way this will not provide a long-term solution, unless it is combined with industrialization and domestication”.