Cedi faces reversal of gains amidst surge in hard currency demand
In a tumultuous turn of events, the Ghanaian cedi has encountered a significant reversal of its recent gains, as it lost 1.48 percent against the United States (US) dollar. Closing at GH¢10.98 to the greenback at the end of last week, the cedi’s depreciation reflects the mounting pressure arising from heightened demand for hard currency, even in the face of limited supply conditions.
Initially, the Ghanaian market exuded optimism, largely attributable to the approval of the US$3 billion International Monetary Fund (IMF) bailout program. However, this positive sentiment has been overshadowed by a surge in demand for foreign currency, particularly the US dollar, which has outweighed the initial market positivity, thereby causing the cedi to depreciate.
During a recent meeting of the Monetary Policy Committee, the Bank of Ghana opted to maintain its policy rate at 29.5 percent. This decision took into account several factors, including the observed easing of inflationary pressure in April, which stood at 41.2 percent, down from 45 percent in March and 52.8 percent in February. Additionally, relative stability in foreign exchange rates in recent weeks was considered. Nevertheless, projections indicate sustained pressure on the cedi due to a sharp increase in foreign currency demand, primarily driven by the appetite for the US dollar.
Kofi Busia Kyei, the esteemed Executive Director of the Young Investors’ Network (YIN), has emphasized the crucial impact of the ongoing discussions in the United States surrounding the debt ceiling. The attendant uncertainty surrounding these negotiations has swiftly eroded the gains achieved by the Ghanaian cedi within a remarkably short span of time.
The recent developments in the United States, where top officials have reached a tentative deal to suspend the federal government’s towering US$31.4 trillion debt ceiling, have exerted a direct influence on the performance of the cedi. Analysts anticipate that the cedi’s depreciation may exacerbate should the US Congress reach and successfully pass an agreement on the matter.
Kyei underscored the imperative for the Ghanaian government to implement effective measures to address the issue promptly and curb any further depreciation. Absent such interventions, the cedi is likely to persist on its downward trajectory. While the impending second tranche of the IMF loan inflows, expected in November, could potentially provide some temporary relief for the local currency, its stability is contingent upon the maintenance of other crucial factors.
At the close of the last trading week, the cedi witnessed a rather bearish performance against major currencies. Notably, the US$/GH¢ currency pair concluded the week at GH¢10.98 per US dollar, thus signifying a considerable 1.48 percent loss in the cedi’s value vis-à-vis the dollar, according to the official rate. Moreover, on the retail side, the cedi had dipped even further to GH¢11.4 to a dollar. Conversely, the GB£/GH¢ currency pair recorded a rate of GH¢13.54 per pound sterling, indicating a gain in the pound’s value, while the cedi suffered a 0.29 percent slump relative to the pound.
Market analysts project that the cedi will continue to face sustained pressure in the coming days due to the ongoing surge in demand for hard currency. Although the second tranche of the IMF loan inflows holds the potential to temporarily alleviate the strain on the local currency, the cedi’s vulnerability to external shocks remains a worrisome concern.
The tentative agreement on the US debt ceiling, which would suspend the limit through January 2025, comes with additional provisions such as the retrieval of unused COVID-19 funds and the introduction of work requirements for food aid programs aimed at impoverished Americans. However, the ultimate success of this agreement hinges on its successful passage through the US Congress, given the closely divided political landscape. In light of the impending deadline of June 5, the Treasury department has issued a warning regarding a potential shortage of funds to meet various obligations if the debt ceiling issue remains unresolved.
As the Ghanaian cedi grapples with the challenges posed by surging hard currency demand and the potential ramifications of the US debt ceiling debate, it is imperative for the government to proactively adopt effective measures to address these pressing concerns. The stability of the cedi is not only crucial for the domestic economy but also serves as a barometer of the country’s overall financial well-being.
