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Home Economy

Cedi depreciation temporary; gov’t resolved to pursue fiscal consolidation – Economist

3 years ago
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Cedi depreciation temporary; gov’t resolved to pursue fiscal consolidation – Economist

A currency analyst, Courage Martey, has indicated that the current depreciation of the cedi will not last long given government’s resolve to pursue fiscal consolidation to address the volatility of the local currency.

To him, the Bank of Ghana is limited by its reserves to address the volatility of the local currency despite its regular interventions on the spot and forward auctioning market.

He added that government must restore the confidence in the economy by way of demonstrating that fiscal targets will be met.

“We do not expect any significant boost to the reason beyond the trade flows that are coming in. Now you do not want to deplete your reserves to the level where you are externally vulnerable, what that means is that if there are shops that demand that of FX obligation, sizable ones, and you need to meet them and you are handicapped, you may not be able to do that, so that will limit how much they can deplete the reserves of $9.9 billion to support the cedi at the moment. 

“And so yes at best, I think Bank of Ghana is doing what is possible within the resource limitations on them. And then we might have to hope that government demonstrates by how we will able to meet our fiscal targets. If we do that, that will would win investors’ confidence and we can begin to see some portfolio inflows again into local issuances and gradually that will open up to the external market for it. Which might pave way for the cedi to have some breather,” he said. 

Meanwhile, the cedi has crossed the GHS 7 and GHS 9 to the dollar and pound mark respectively on the retail market in less than two months into the year.

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With regards to the euro, the cedi is trading at GHS 7.80 almost hitting the GHS 8 mark.

Read: Enterprise Group gains 10% in share price as GSE-CI returns -3.30 for investors

This is per checks at some forex bureaus and commercial banks in the country.

The cedi’s depreciation has been largely attributed to the uncertainty about Ghana’s fiscal outlook despite interventions by the Bank of Ghana.

Lack of confidence in the Ghanaian economy by some investors has fueled the selling of some of the country’s international bonds, while demand for the dollar for imports keeps rising.  

Due to this, the cedi has depreciated by a little over 5% to the dollar and still ranks as the second worst performing currency on the African continent so far this year.

The situation could compel the Central Bank to introduce additional measures to contain the rapid fall of the local currency, though much work needs to be done by managers of the fiscal economy to reassure investors that revenue will be boosted, while the rising debt will be tamed.

Databank Research had said in its 2022 Quarterly Outlook Report that, conditions that triggered the depreciation of the cedi in the last quarter of last year will persist until the first half of this year.

“The heightened uncertainty around Ghana’s fiscal outlook worsened the cedi’s woes in late-2021 after a hawkish policy tone in the US triggered a flight-to-safety by foreign portfolio investors in 3rd quarter of 2021. We expect these conditions to persist in half-year 2022 in addition to corporate import demand as Ghana’s economy rebounds. The low prospect of an early-2022 Treasury issuance on the international capital market also exposes the cedi to depreciation pressure in first-half of 2022,” it said.

If the value of the cedi does not improve, then businesses particularly manufacturers that depend on imports for production will have to revise their budget while prices of some goods on the market will go up because of import inflation. 

Tags: Bank of Ghana (BoG)Cedi depreciation temporary; gov't resolved to pursue fiscal consolidation - Economistghanalocal currency.
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