Improve productivity to stem cedi depreciation

BY: Getrude Ankah Nyavi

The Ghana cedi has been going through some swings in the last few months, depreciating against the United States (US) dollar by 6.9 per cent year to date on the interbank market.

The cedi, which was trading at GH¢4.42 to the dollar in January this year, is now valued at GH¢4.78 to the dollar at the interbank rates but trading at GH¢4.94 at some forex breaux in Accra.

The central bank has significantly increased its daily dollar sales to banks in support of the local currency.

This is to stem the growing depreciation of the cedi, which had dropped by 6.9 per cent this year, more than the cumulative depreciation of 4.7 per cent for the whole of 2017.   

The woes of the cedi are due mainly to global pressures as investors continue to exit emerging market assets.

The recent interest rate hikes by the Federal Reserve Bank of the US has signalled the end of monetary easing introduced at the turn of the decade to reverse the global economic recession of that time.

Higher US interest rates have made America more attractive to international investors and consequently have strengthened the US dollar tremendously against virtually every other currency in the world.

Indeed, most other emerging market currencies are currently suffering the same problems as the cedi.

But we are faced with a situation where the bulk of economic activity is either in trade and commerce or engaging in non-tradable economic activity.

Indeed  an analysis of the loan portfolio of commercial banks in the country shows that a significant portion of the loans goes into financing trade and commerce, which is predominantly import of merchandise for domestic sale.

We rarely have strategic business sectors that add value to domestic raw materials for export.

Consequently, we have so many businesses demanding forex for imports but very few contributing to the forex inflows by way of export earnings.

This defective structure of the economy has to change in favour of strategic exports if the country is going to stem the cedi's sudden depreciation.

We cannot put our hope that in time the cedi would regain its strength.  It would not work because short-term exchange rate policies such as monetary tightening, borrowing in foreign currency and currency swaps to pump into the market are all unsustainable approaches.

They are only supposed to be short-term anchors to allow the economy to adjust to the sweeping structural reforms needed to boost foreign exchange earnings.

For the Daily Graphic, reforms and only reforms are the way to go. Reforms are non-negotiable in our quest to sustain the cedi's stability.

The view of the newspaper is that the government is missing the opportunity to aggressively pursue a programme to link its major flagship agenda of Planting for Food and Jobs with the One-district, One-factory (1D1F) programme.

It appears to us that there is too much energy being expended on the recurrent expenditures supporting Free SHS rather than the value-added policy of 1D1F.

This annual pace of depreciation against the major trading currencies emphasises the structural defects within our economy.
But the simple economic truth is that short-term exchange rate policies cannot substitute for economic reforms.

This is because we are not seeing the reforms that will improve the country’s productive capacity and enhance our competitive advantage on the world market.

To stem this annual ritual of cedi depreciation, the government must institute reforms that encourage capital retention within the domestic economy and move the economy up the global value chain.

This is what fiscal and monetary policies of both the government and the Bank of Ghana should seek to achieve within a well-defined time frame in the medium term.