How to deal with a depreciating currency
The first three quarters of 2014 witnessed one of the hard times in the history of the country, as far as the performance of the Ghanaian currency is concerned.
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The cedi, which had in previous years managed to hold its own, albeit with some difficulties, against the currency of the major trading partners of Ghana found itself dropping an average of 50 per cent in value.
The ripple effect was that as the country is largely import dependent, most other economic fundamentals gave way: prices of goods and services had to go up to accommodate the huge sums traders now had to fetch to import goods, causing inflationary pressures; general macro- economic fundamentals weakened because of the effects of foreign currency linked transactions, particularly mortgages and other credit advances.
Put it this way: Individuals on fixed salaries in cedis but had to service loans and other credit advances in foreign currency soon found that they could hardly cope because they had to find extra resources to keep running.
Their real incomes had reduced significantly as a result of the reduction in their disposable income from the excess expenses.
Indeed, the most common examples l found were those who were paying school fees in foreign currency in the country; they suffered much the same way as those who had taken loans in foreign currency.
Consider the following email that l received from an ardent reader of this column during the height of the currency crises, to enhance the discussions further:
“Dear Bernard, thank you for your relentless efforts to ensure that we are abreast of financial literacy issues. I have been educated extensively since l started reading this column.
In fact, in the past l wouldn’t have even felt confident discussing financial issues with people who are more knowledgeable than me, but thanks to your efforts, l can do that today, just that l can’t use the financial jargons most people use so freely!
“Bernard, my interest in getting to you today is about the currency depreciation that we are experiencing now. I have two children in schools that charge fees based on the prevailing exchange rate. Since the beginning of the year, l have had to really struggle to pay fees because of the carry-over effects of the currency depreciation that started some time in 2013. It has not been easy at all.
“ As l write to you today, l have written a letter to send to the school, serving notice that l intend taking the kids from the school, starting next academic year. What indeed is going on and what do you think people like us, l mean ordinary consumers, will need to do in order to avoid this situation in the future.
“The government has offered reasons to that effect, but the reality is that coping with the depreciating currency at this time is really difficult. I am sure, as always, your kind words will soothe my pain, somehow”.
Well, this email has been “heavily” edited for meaning and clarity.
First of all, with the background and email given above, l am pretty sure that you can make your own mind up, as to what needs to be done. The basic consideration here is that in planning your finances, ensure that factors you have no control over are mitigated somehow.
For instance, insurance can give you peace of mind to carry on, knowing that those events that could occur, and yet cannot be estimated with a degree of certainty are taken care of by an insurance company.
So too is the situation with your loan, fees and other credit advances.
In the email above, clearly the reader had done nothing wrong. There is nothing wrong with aspiring to have the best at all times. And indeed, she couldn’t have also anticipated that the currency was going to behave the way that it did at the time.
However, the only “problem” is that the risk assessment was not properly done. Risk pervades finance much the same way as gravity pervades physics so every decision in finance must involve some risk assessment. And the most important point is that it doesn’t need to be done in a complex way.
You can build your own what-if scenarios by asking yourself the right questions: What-if the currency depreciates; what-if l lose my job; what-if the school fees increases beyond my means, and so on.
As you sit down to ponder over these simple questions, you will realise that the solution will unravel.
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It is this mental exercise that will exert pressure on your creative juices to release the answers to you.
But, indeed, the bottom-line is that you should try, as much as possible, to avoid loans and fees that are denominated in foreign currency when you are certain that you cannot keep up when the cedi falls in value.
For instance, last week, money market dealers reported that the cedi registered its biggest weekly loss against the Swiss Franc because the Swiss National Bank (SNB) had removed a cap that had been in place since 2011. You see, this was a global problem so you cannot have any control over it.
“The cedi gave up 0.23 per cent against the Swiss Franc as the removal of the three-year cap of the Franc to the Euro sent the export-dependent economy’s currency ascending”, a market analyst reported.
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Elsewhere, it was reported that the cedi also lost 0.65 per cent and 2.15 per cent in trading against the British Pound Sterling and the South African Rand.
Even though it wasn’t all gloom in the market as, for instance, the cedi strengthened against the Euro, generally, the unpredictable nature of the currency market means that you can hedge your position as a consumer by driving a hard bargain with your finances by avoiding foreign currency-denominated transactions.
A word to the wise.....