Cedi slide sends signals
In the last few days, the issues surrounding the depreciating currency has become topical again. And it is not that the problem was once resolved and therefore did not merit further media attention. No.
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Rather, it is the case that the growing resentment against the erratic power supply lately has all but drowned most of the other economic problems that had bedevilled the country for most part of 2014.
So, that is how the story of the cedi lost topicality; and that is how the cedi became "strong" in the eyes of many.
In fact, l strongly believe that for more than two years (2012 to 2014), currency market speculation played a big part in the cedi’s slide. From the pulpits to the main streets, everyone turned into an economist, predicting possibly, with placebo effect, a downward trend for the cedi. How sad.
Of course, as markets move on information, the message from the "financial evangelists" found meaning with the real sector market players, causing a rush for foreign currencies.
As the demand for foreign currencies increased, and the supply was not in tandem with it, of course, more cedis had to change hands for the limited supply of the foreign currencies.
That is the power of speculation.
Now, consider also the Bank of Ghana's reaction to address the increased demand for foreign currencies caused by the speculation. Simply, the bank attempted to reduce transactions in foreign currencies with measures that even included a ban on operating a foreign currency denominated bank account fully.
Yet again, the dictates of the market punished the economic planners hard. Whereas the measures introduced were meant to strengthen the currency market in cedi’s favour, they rather caused a further decline in its value.
In the end, the measures had to be withdrawn and replaced with an action plan, this time directly targeted at the supply side of the forex market. That worked- stabilised the cedi but did not directly cause a major shift in the currency's value against the other major currencies.
Current reports that the cedi has declined by a little over 12 per cent since the beginning of the year should, therefore, be a worry for all- consumers and producers alike.
For instance, the Association of Ghanaian Industries has expressed worry over the recent drop in value of the cedi against the major currencies, calling on the government to not "sacrifice" the cedi’s stabilisation efforts in its attempt to solve the energy crisis.
Whereas the concerns are widespread, however, the economic managers are of the view that it is a temporary blip and should not be of worry to many.
A Deputy Minister of Finance, Mona Quartey, has reportedly downplayed the currency’s decline, declaring boldly that she was not worried.
She explains: “Because l have seen a lot of trading, l understand volatility, l understand that no market is stagnant; it must be dynamic so exchange rate will move up and down as commodity prices will do same, it is just that in Ghana when you see the cedi move up ….it does not come down when the exchange rate comes down but at least if we can stabilise it and l can see it stabilise in the near future if we all remain calm and use the cedi in transactions, things will normalise”.
On the literature side of things, yes, this is a very nice way to describe the situation. However, real market movements are dictated by sentiments and therefore words such as “remain calm” and “use the cedi in transactions” will not necessarily normalise the situation.
The currency market can be unforgiving as it is one market where economic law is painfully enforced and the ordinary traders who are dependent on the movement in that market become financial vigilantes- they force movements, as it was experienced during the government’s attempt to artificially force demand and supply conditions with that directive limiting foreign exchange use in the country.
Where governments have been unable to provide financial law and order, traders have taken the law into their own hands; they become serious vandals and indulge in all kinds of creative destruction activities.
For instance, they can forge invoices when you ask for them before foreign currency can be bought; they can just about provide you with everything. And for this reason, issues bordering on the foreign exchange market should never be taken lightly.
Most of the market traders — from the second hand clothing dealer to the spare parts dealer — are very quick with figures but less so in abstract ideas beyond figures.
So the suggestion by the Deputy Finance Minister that enjoying or appreciating the use of made-in-Ghana goods could help address the currency’s slide would look long-term to most of the currency market traders, meanwhile it is the short-term shocks that have become of interest now.
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To date, the cedi’s decline by a little over 12 per cent since the beginning of the year is four per cent shy of the 16 per cent dip for the corresponding period last year.
However, if the cedi keeps falling at this rate, then by the end of the year, it would have achieved a record cumulative fall over a 10-year period.
So the signals are clear: Macroeconomic instability must be addressed to solve the currency decline, otherwise the knock-on effects on budget deficit, interest payment and inflation could all but derail the growth prospects for the year.