Cedi Depreciation: Speculation, declining faith in currency major contributory factors
Recent depreciation of the local currency (cedi) against its anchor currency (dollar) has been unprecedented.
From a value of GHS 13.25 to GHS 15.27 at the close trading activities on the retail market, on Thursday, October 20, 2022, the cedi lost a little over GHS 2 in value to the greenback in a single day.
The cedi’s depreciation rate against the dollar is quite alarming and needs to be urgently curbed to avoid the cedi “being irretrievably destroyed” as said by the Executive Director of the Institute for Economic Affairs (IEA), Dr John Kwakye.
At the moment, there are a number of factors accounting for the fast depreciation of the dollar with some of the factors being the scarcity of dollars in the economy given the BoG’s almost depleted foreign reserves coupled with the huge demand for the greenback by importers to import goods for the Christmas festivities.
The struggle by government to secure an IMF bailout programme at the moment to restore investor confidence in the economy and halt continuing capital outflows from the economy is another reason.
That notwithstanding, the major reasons or factors for the fast depreciation of the cedi, one can argue, given the rate of decline in the value of the cedi is due to activities of speculators in the market as well as a growing loss of faith in the cedi.
Speculations about the cedi falling in value to the dollar are rife on the market – probably on the basis that the already strong dollar will continue to grow stronger – eventually contributing to the cedi’s decline against the dollar.
A currency’s value is usually determined by the faith the citizens and investors have in the currency.
Take the dollar for instance, investors have strong faith in the dollar that it is a store of value and that its value is unlikely to decline significantly even amid recessions or turbulent economic periods – so much so that the dollar is considered a safe haven asset.
For the cedi, such faith is being gradually lost by investors and even Ghanaian citizens.
For investors (particularly foreign investors) they are dumping their cedi-denominated bonds for dollars whereas Ghanaians are dumping the cedi to go in for the dollar to hold in further anticipation that the cedi will fall in value and hence benefit from holding the dollar.
Speculative activities on the market regarding the cedi and a loss of faith in the cedi only worsens the country’s already dire economic situation and comes back to hurt us as a people.
