You are here: HomeWallOpinionsArticles2014 02 08Article 299943

The free fall of the Ghana cedi-one side of the die

Comment: Comparing an ant to the elephant

Author:
Ken Ntiamoa
Date:
2014-02-07 22:41:12
Comment to:
An Analysis Indeed


Ghana has a very small economy relative to that of the US. It is like comparing an ant to an elephant.

The strength of one country's currency relative to the other is largely a measure of the relative strength's of the two countries.

In 2007,when Ghana re-denominated their worthless paper and artificially made the new cedi worth more than the US dollar, I was just laughing. I knew that it was just a matter of time for a major correction to take place and it just must have started. Indeed, I must commend the administrators of the Ghanaian economy for being able to hold the cedi relatively stable since July 2007 until. But, every serious analyst should have known that those earlier rates were artificial. We haven't seen the end yet.

If we are not careful and we hit the panic button, the fall will be so sharp that we will all feel very dizzy.

Currency rate is neither here nor there. Whether the rate is C5 to $1 or
C2 to $1 is immaterial. What is material is the rate of change of the exchange rate. If the exchange rate changes rapidly up or down,planning difficult for different sectors of the economy.

The measures so far proposed taken by BOG to avert a sharp decline are good measures that must be supported by all. Notably, the dollarisation of the Ghanaian economy. Ghana's legal tender is the cedi, not the dollar. When rent, hotel bills, house prices and fees at international fees are not only quoted in dollars but are actually paid in dollars, it puts enormous demand for dollars within Ghana. But Ghana does not "manufacture" dollars. That kind of demand will definitely put a downward pressure on the cedi.

There are however two things mentioned by BOG that I disagree with.

1. The 200 Pip spread on the Cedi/dollar Bid and Ask prices. This policy will surely put a downward pressure on the cedi. There is not enough time for me to explain why in detail

2. The ad-hoc nature of the measures taken so far and publicly those measures were taken. That is a sure way of sending the panic signal to the people. Let everybody calm down until the cedi finds its own equilibrium.


Ken

This article is closed for comments.

02-07 21:38
 
 
 
 
Comparing an ant to the elephant
Ken Ntiamoa
02-07 22:41