Cedi Still Struggling

President John Dramani Mahama has to stem free-fall of the Cedi.

Posted on: www.dailyguideghana.com


By William Yaw Owusu

Accra, Wednesday August 1, 2012.


A week after the sudden death of President John Evans Atta Mills, the Cedi, which has depreciated in value in recent months, continues to struggle against major foreign currencies.

Reuters said analysts had expressed worry about a weakening cedi due to rising imports for the oil industry and added that inflation had trended upwards, making life difficult for the locals even though economic growth is on the rise due to oil production.

Statistics show that the cedi has lost over a third of its value since Ghana began producing oil in November 2010, trading currently at around 1.95 per dollar.

Reuters said locals blamed the currency weakness on trade with China, as many traders are accumulating actual paper cash in dollars due to the lack of effective transfer channels for the Yuan in Ghana.

To stem the situation, the central bank raised interest rates by 250 basis points starting from February to halt the currency from further weakening.

But Reuters quotes Lisa Lewin, head of sub-Saharan research at Business Monitor International as saying the central bank’s stop-gap measure was to the detriment of growth.

It said the government had asked Parliament to increase the fiscal deficit target in 2012 to 6.7 percent of GDP to finance an 18 percent pay rise offered to public sector workers this year and to reform wage structures for state employees.

According to Bright Simons, president of Mpedigree and lead researcher at IMANI Centre for Policy & Education, the cedi’s fall is a supply management rather than a demand management problem.

“The central bank is treating it like a demand problem by trying to regulate how actors in the economy access forex. Businesses are noticing an increasing level of regulatory interference in their ability to access forex at the banks and elsewhere.”

Touching on the challenges to be face by President Mahama, he said given that the central bank is empowered to deal with monetary affairs independent of the government, there is not much the new President could do to alter what he called “this largely futile exercise.”

“However, since the real problem is supply-related, it behoves the administration to put a brake on signals that weaken investor confidence and encourage forex hoarding and speculative activities because these disrupt the flow of forex into the economy to balance against natural growing demand.” 

“The truth of the matter is that actual Foreign Direct Investment (as opposed to pledges) flows have slowed. The expected CDB facility will be disbursed later than anticipated.” 

Mr. Simons said oil revenues are way short of what was budgeted and all such developments had affected the supply of forex in the economy, adding “activities that interfere with availability of forex merely compounds the problem.”

“Government must in the short term rein in expenditure and in the long term boost non-traditional exports. These are the only ways to stem acute spikes in forex imbalances.”

He urged the new President to persuade the Central Bank to coordinate with his government to fix the supply side of things.