Feature Article of Monday, 20 August 2012

Columnist: Debrah, Frank S.

Why the cedi’s free fall is a big deal

to some but not all Ghanaians

As expected from the good sons and daughters of Ghanaians educated and making a decent living in the West, I contribute a quota to Ghana’s foreign exchange acquisition through regular remittance to family in Ghana. Lately I have noticed that my mother is happier than usual when she claims the dollars that I remit her. She is getting more and more cedis. Her thinking is that I have been increasing the amount of dollars that I normally send her but the truth is she owes her new found fortune to the depreciating Ghanaian cedi.

Next I talk to an old classmate in Accra who is in the business of importing office equipments from the United States which he sells to clients in Ghana. Unlike my mother, my friend is in a state of melancholy. His business has taking a nose dive and is falling off a cliff. He says it is because his import bill is heading into the stratosphere and his once loyal clients are fleeing in droves. He blames the cedi for his misfortune.

Following oil production in 2010, the cedi – Ghana’s currency - has been on a continuous free fall. According to data compiled by Bloomberg – a financial news and data service titan – and presented by Dzawu and Dontoh in June 2012, the cedi depreciated 14% to the dollar at 1.90.98 from January to June 2012, making it the fourth largest depreciated currency in the world and one of the worse performing in Africa. The downward slump continues, reaching 20% at 1.9400 in August.

You might ask, what is causing the cedi to fall so sharply? The answer to this important question is currently the subject of a political boxing contest between Ghana’s opposition New Patriotic Party (NPP) and the governing National Democratic Congress (NDC). Leading the attack on the opposition side is the vice-presidential candidate of the NPP, Dr. Mahamudu Bawumia, who accuses the ruling government of fiscal profligacy and the central bank of policy incompetence. On the defense is the recently appointed vice-president, Mr. Kwesi Bekoe Amissah-Arthur who happens to be the immediate past governor of the central bank. Mr. Amissah-Arthur has been arguing that the cedi’s free fall is not out of character and that he will prefer that Ghanaians rather focus on the upside of a weakened currency (positive effect on the nation’s balance of trade).

My take is, at the most basic level currency markets are not dissimilar from any other type of market; they react to the fundamental principles of demand and supply. Whether you’re a dog chain seller in the rowdy streets of Kumasi with a stack of bills in your pocket, a business mogul or an X5-driven trader in one of the shiny glass buildings in Accra, anyone can generally walk into any Forex Bureau in Ghana and convert their cedis into dollars. Why will they do that? They will do so for two basic reasons: lack of confidence in the cedi and/or demand for foreign exchange for international transactions. Any of this market behaviour will have some effect on the value of the cedi.

Nevertheless, the biggest mover of the cedi is a result of large scale economic trends. Ghana is an economy that stubbornly depends heavily on imports, and this trend has been exacerbated by recent upsurge in economic growth due to oil production. At a growth rate of 14% in 2011 and perhaps 9.5% in 2012, the country’s manufacturing base is woefully inadequate to sustain the requirements of such a hefty growth. Without the complementary manufacturing capacity to produce, imports have naturally substituted the country’s production base. Imports (machinery, oil, food etc) surged to $4 billion in the first quarter of 2012, a 20% increase from the previous year according to Bank of Ghana. It is this growth in imports that is driving up demand for foreign currency and weakening the cedi in the process.

How is the cedi’s weakness affecting Ghanaians? One of the downsides of a depreciating cedi is rising inflation, which currently stands at 9.5%. Relative to the previous months, consumers are now paying more for things like rice, clothes, television etc. How come? Say you’re my friend who imports office equipments from the United States. In order to lock in a low price for those goods – you need some stability in your cost given that you’ve signed a contract with your American suppliers. It is a calamity for you when the cedi looses value against the dollar because at the new exchange rate you have to stump up more cedis to convert into dollars in order to purchase the same amount of goods. You will probably run at a loss unless you adjust the price at which you sell your goods in Ghana. Basic economics dictates that all things being equal, a rise in the price of a product will result to a lower quantity demanded. That is the reason why my friend’s clients are fleeing.

On the other hand, if you’re my mother or one of the tens of thousands of Ghanaians who are beneficiaries of remittances from abroad, a falling cedi may seem like a bonanza to you. After all, while for example USD 200 only earned you the equivalent of GHS 200 when the redenomination occurred, the same USD 200 can fetch you nearly GHS 400 today. The same mechanism applies to the earnings of Ghanaian exporters. They are also able to sell more because their products become relatively cheaper to foreigners (foreigners need fewer dollars to buy Ghanaian exports). The biggest losers of a weakening cedi are those ordinary Ghanaians with stagnant income since they will bear the greater burden of inflation.

At the macro level, a weakening cedi does not bode well for the economy as a whole. Sure, it presents an opportunity for the nation to boost exports and improve its balance of trade positioning as Mr. Amissah-Arthur has reiterated. Nonetheless, with only about 4.4 billion dollars of foreign reserves (three months of import cover), it is likely that the Bank of Ghana will continue to struggle as it intervenes to defend the cedi from its violent free fall. Already, two bouts of interest rate hikes this year has had limited success as the cedi continues to slump. Further interest rate hikes will likely be negative for credit growth and ante up the cost of government debt.

Any Ghanaian with an interest in their own lives and the Ghanaian economy ignores the exchange rate of the cedi at his or her own risk. Want to know what the price of milk will be in three months? Pay attention to the currency markets. If you want to understand why some shops and schools are charging in dollars even though you live in Ghana, pay attention to the value of the cedi. Think you know why your uncle’s spare parts business in Abossey Okai is on a slump? It might just be because the cedi is weaker, not because your uncle is doing anything right or wrong. Think you know how much the Treasury bill that you just bought will be worth in five years? It will be worth something else depending on the exchange rate of the cedi at the time. It is certainly worth your while to pay attention to the cedi debate, even if it’s not as exciting as the insults that have become synonymous with Ghana’s politics.

Frank S. Debrah

Simon Fraser University Vancouver, Canada