The 10-year bumpy journey of Ghana Cedi

BY: Suleiman Mustapha
Ghana cedis


The Ghana cedi has lost 77.9 per cent of its value to the US dollar from July 1, 2007, when it was redominated to July 1, 2017. At the close of 2007, the dollar/ cedi exchange rate was GH¢0.9599 per the dollar compared to the present exchange rate of GH¢4.3640 per the dollar as at June 30, 2017. This is equivalent to a depreciation of 77.9 per cent over the period under review.

For the lay person, the cedi had depreciated by more than 300 per cent at face value. But economists and analysts are united that a currency cannot lose more than 100 per cent of its value unless it becomes garbage that you need to pay someone to haul away.

This drop in value was not part of the game plan 10 years ago when the cedi was redenominated by knocking off four zeros from the currency.

But today, the country appears to be enduring what it did not bargain for in that fiscal transaction in 2007, sharp depreciation of the Ghana cedi to the point of being once counted among the worst performing currencies in the world.

A Senior Economist at Databank, Mr Courage Kingsley Martey, attributes the sharp depreciation of the cedi to a combination of uncertainties in the global financial system and the “boom and bust” cycle of the global commodities market. Such challenges have exposed the Cedi’s vulnerability through shocks to the current account balance.

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He said the structure of Ghana’s real GDP growth had also been tilted towards the non-tradable sectors at the expense of the tradable sectors, thereby restricting the country’s ability to earn foreign exchange sufficiently to match the rising aggregate demand for imports.

“I have observed that in the last 10 years, tradable sectors such as cocoa and fishing had contracted for four years while manufacturing and forestry and logging also contracted for three years”, he said.

Mining and quarrying

The mining and quarrying sub-sectors contracted in the last two consecutive years and also resulted in the shrinking of the country’s industrial sector in 2015 and 2016.

“These are what we term the tradable sectors of an economy because the output can be exchanged with the rest of the world for foreign exchange to support the local currency”.

“The less resilient nature of these tradable sectors consequently exposed the local currency to external shocks through the high current account imbalance”, Mr Martey said in an interview with the Daily Graphic.

Since the beginning of 2014, the cedi’s exchange rate against the major international currencies, particularly the United States dollar, which is its primary intervention currency, has been the single biggest concern for the nation’s economy.

During the first half of this three-year period, the cedi was rated as one of the worst performing currencies in the world, suffering depreciation of some 30 per cent during the first halves of both 2014 and 2015, before recovering some of the lost ground during the second half of each of those years.

But at the time of the redenomination, the idea was to make the new Ghana cedi a strong currency in people’s minds and that the renewed confidence in the currency would forestall its depreciation going forward.

It didn’t happen

Ten years on, this has not happened and the dollar has risen against the cedi more than four-fold with one dollar trading at close to GH¢4.3640 by June 30, 2017.

The main purpose of the 2007 redenomination was to make the currency less bulky to carry and less expensive to print. Another key objective was to boost public confidence in a currency that had suffered steep depreciation since it was floated in the mid-1980s, by making it appear stronger than the US dollar.

But Mr Daniel Amartey Anim of the Policy Initiative for Economic Development thinks the strength of the local currency has been hampered by the weak performance of the economy.

“The cedi has been weakened by spiraling inflation and the other macroeconomic fundamentals”, Mr Amartey said.
“Another major concern is that our economy is largely import driven, which sparks a cost push inflation that further hampers the strength of our currency”, he said.

The situation has become so worrying that the relative stability of the cedi between mid-2015 and late 2016 was seen as a Herculean macro-economic achievement. And the resumption of sharp cedi depreciation between December last year and mid-March this year created panic and then sheer resignation among depreciation-weary households and businesses alike in the country.

Indeed, the initial stability of the newly denominated currency was very short-lived. In 2008, a general election year, the traditional macro-economic instability that tended to accompany polls (brought about by each incumbent government’s efforts to use fiscal deficit spending to woo voters) again took hold and a 12.2 per cent fiscal deficit, accompanied by a 14 per cent external current account deficit, helped fuel a 36 per cent depreciation in the cedi which closed the year at GH¢1.265 to one dollar.

However, with no elections approaching, the Atta Mills administration had the confidence to reel in the fiscal deficit and was able to cut the rate of cedi depreciation back to 13 per cent in 2009, although the currency still closed the year at GH¢1.430 to one dollar.

Oil production year

This was followed by the currency’s best year in 2010 when the cedi depreciation was a mere 3.9 per cent, as confidence rose in line with the impending commencement of oil production at the end of the year.
In the following year, 2011, crude oil production had commenced, translating into higher foreign exchange earnings even as gold prices reached a peak of $1,600 an ounce, and confidence in Ghana’s economic prospects ballooned.

Instructively, that year, Ghana achieved a record Gross Domestic Product growth of 14.4 per cent, the highest in the world in 2011. That achievement was driven by investment in the oil and gas industry. However, the improving prospects translated into sharply rising imports, causing the cedi’s depreciation to accelerate again to 10.3 per cent.

In 2012, the inevitable election-motivated fiscal spending overruns again occurred in the run-up to the polls. This was the beginning of three consecutive years of double digit fiscal deficits.

The resultant 16.2 per cent cedi depreciation in 2012 of GHc1.905 to $1 was just the tip of the iceberg.
In 2013, both gold and cocoa prices fell sharply on the international markets, leaving Ghana with steep declines in both public tax revenues and more importantly, foreign exchange earnings which dropped by some $1.3 billion below the previous year’s level. The result was acceleration in the cedi’s depreciation to 23.5 per cent which closed out the year at GHc2.353.

Worst performing currency

Then came 2014, a year in which the cedi had the indignity of being identified as one of the worst performing currencies in the world, especially during the first half of the year, before recovering a little towards the end of the year, having been buoyed by foreign exchange inflows from a Eurobond issues and the annual cocoa purchases loan syndication. The cedi fell by 36.6 per cent to close the year at GH¢3.215 to $1.

The start of 2015 followed the trend in the previous year with the cedi racing downwards. However, the Bank of Ghana had learnt its lessons from its mistake of 2014 when it tried to stem the fall by introducing an array of administrative measures which sought to stem demand for, and access to, foreign exchange, but which only succeeded in further damaging confidence in the currency.

Pumping forex

This time around, the central bank pumped forex into the local market, restoring shattered confidence by ensuring that the market was more than adequately supplied.

The result was the longest-running period of relative stability of the cedi since it was floated in the mid-1980s.

The cedi’s over 30 per cent fall during the first half of the year had already taken a harsh toll before the central bank began its direct market supply intervention strategy, but it still enabled an impressive recovery during the second half of the year with the currency’s depreciation cut back to 18.5 per cent by the end of 2015 and an exchange rate of GH¢3.809.

This stability continued well into 2016, despite a short period of depreciation between May and August when a delay in the scheduled third endorsement by the International Monetary Fund’s executive board of its three-year Extended Credit Facility programme, pending the implementation of some remedial policy measures by the government, caused some temporary jitters on the local forex market.

However, the cedi more or less held its own until late 2016 when the seemingly inevitable election-motivated spending overruns and economic uncertainties helped fuel renewed depreciation which took the cedi’s depreciation for the year to 7.2 per cent and an end-of-year exchange rate of GH¢3.879 to $1.

This renewed depreciation continued into 2017 and indeed accelerated during the first two months of the year, propelled by revelations that the 2016 fiscal deficit was considerably higher than the previous government had announced, as well as by concerns that the focus of newly installed President Nana Akufo-Addo’s administration on growth, replete with significant tax cuts, would increase the import bill and consequently the trade deficit.

Worrying lessons

During the first two months of the year alone, the cedi depreciated by 6.2 per cent against the dollar, with the exchange rate reaching over GH¢4.6 to $1 at one point.

However, the BoG, having learnt from recent experience, quickly responded with renewed direct market intervention, in the form of increased supply of forex from its own coffers and this has resulted in a partial recovery since mid-March.

By the third week of March, the cedi had recovered to GH¢4.42 and year-on-year depreciation had slowed to 5.0 per cent.

However, experience over the past decade since the cedi’s redenomination has taught two worrying lessons:
One is that strong economic growth tends to accelerate cedi depreciation rather than dampen it. This is because Ghana is a heavily import dependent country and faster growth tends to fuel more importation of both production inputs – raw materials, machinery and spare parts – and finished goods.

However, because the country’s exports are primarily commodities whose revenues are not tied to the economic growth rate, foreign exchange revenues tend to grow more slowly than the import bill when economic growth accelerates. A good example, perhaps, was the situation that followed Ghana’s record high 14.4 per cent GDP growth rate in 2011.

In 2012, the cedi depreciation rate rose to 16.2 per cent up from 10.3 per cent in the previous year.
Curbing the cedi depreciation rate, therefore, requires monetary tightening to stifle demand for forex but this also stifles economic growth. Therefore, Ghana has to either swing between rapid growth and consequent rapid cedi depreciation and slow growth and a relatively stable cedi; or in the alternative, strive for a balance between growth and cedi depreciation. But until Ghana’s economy becomes less import-dependent and more export-driven, it cannot have it both ways.

Exports and imports

The challenge here is to find a way to ensure that economic growth is driven by exports rather than from imports, but this requires a fundamental restructuring of the economy itself, something every successive government has extensively harped on but none has been able to make much headway in that respect.

However, the cedi’s bout of renewed depreciation since late 2016 was accompanied by rare merchandise trade surpluses which also run contrary to established economic theory. This illustrates the other worrying challenge facing the cedi – the inordinate actions of currency speculators.

The problem here is that professional currency traders, businesses and individuals alike tend to stock up forex whenever the cedi is depreciating, with a view to making a profit in cedi terms whenever they sell the forex.

It is instructive to note that anyone who bought dollars at the beginning of the year and sold them at the beginning of March, thereby making 6.2 per cent profit (translating into 37.2 per cent per annum) would have been better off than investors in financial portfolio assets such as treasury bills, fixed deposits and equities.

Fortunately though, the BoG now has a handle on this problem. By flooding the local forex market with forex from its own coffers, it has restored confidence in the market and once the exchange rate’s movement is reversed, even for a short time, speculators move to sell their holdings.

But the cedi is not yet out of troubled waters. The renewed emphasis on economic growth by the new government, through improved liquidity, lower taxes on imports and increased credit, will feed into renewed pressure on the cedi, even as overall economic growth accelerates.

This results in renewed cedi depreciation, the consequent inevitable increases in utility tariffs, petrol prices and the general price level of fuel, higher business costs and ultimately slower economic growth again in real (inflation-adjusted) terms.

The cedi is still a fragile currency. And it will remain so unless Ghana’s economic growth can be weaned off its inordinate dependence on imports and made more export-driven.