IFS pins cedi’s fortunes on mid-year fiscal data

Fiscal policy think-tank, the Institute for Fiscal Studies (IFS), says the sustainability of the current stability in the foreign exchange (FX) market will be tested in June, when data on the performance of the economy in the first half of the year begins to trickle in.

The data will cover outcomes of the economy’s performance in the first six months of the year and will include outturns for fiscal deficit, current account deficit, primary balance, growth, the ratio of debt to total economic output – gross domestic product (GDP) – and gross foreign assets.

Should the data reveal a positive performance and strict adherence to targets, the stability in the FX market will be sustained and could be expected to run into the end of the year, an economist and a Senior Research Fellow at the institute, Dr Said Boakye, said in an interview.

However, should the fiscal numbers reveal a blurred picture through missed targets and some deterioration, speculative buying of FX will kick in and that could easily reverse the fortunes of the currency, he told a group of journalists on April 24.

Confidence issue

Dr Boakye was speaking on a range of issues on the economy, including the cedi’s performance.

After losing five per cent and eight per cent of its value to the US dollar and the euro respectively in the first three months of the year, the local currency rebounded in value against its major trading partners in the dying days of March through to April.

 This was after the government successfully raised US$2.25 billion through the issuance of four separate bonds within that period.

The issuance of the five, seven, 10 and 15-year bonds increased the country’s FX buffers and that subsequently strengthened the Bank of Ghana’s ability to intervene in the market to smoothen out the various irregularities.

This led to the cedi regaining its strength against the dollar, the British pound and the euro.

In the week ending April 21, the local currency gained 0.89 per cent of its value against the dollar to trade at GH¢4.16. On April 26, it eased to GH¢4.16 to a dollar.

Against the euro and the pound, the cedi’s strength has also been bolstered albeit on a slower pace.

While this is commendable, Dr Boakye noted that it was too early to tell how long the stability would last.

Given that speculation has long been the bane of the currency’s performance, the researcher said the government’s posture in the first six months of the year would help determine the attitude people would adopt in the FX market and that will ultimately decide the fate of the cedi in the remaining half of the year.

“It all depends upon government’s actions,” he said in reference to the fortunes of the cedi.

“If people expect that the government will be able to keep a good policy environment, then they will not be demanding so much FX to keep. But if people feel that the government is not going by its word --  the deficit will not be brought down and things like that; then people will be feeling that the problem will arise along the way.

“Because of that, they will start demanding FX not necessarily to import but to keep and that will impact negatively on the cedi,” he explained.

Avoid appreciation

Meanwhile, the Head of Research at the IFS, Dr John Kwakye, has cautioned against “too much appreciation” in the value of the cedi to ensure that the country does not lose international competitiveness.

“I am sure that exporters are probably crying that the exchange rate is coming down. For importers, they are happy,” he said.

“So, I will never advise that you cause too much appreciation, in order that you do not lose international competitiveness,” he added.