Government urged to increase interest rate to stop cedi depreciation
Chief Finance Officer of the Valley View University, Dr. Williams Peprah, has urged the Bank of Ghana to increase interest rates in the country to help stop the recent continuous depreciation of the cedi.
The local currency begun the year trading at about ¢6.40 to the dollar but with just two months into the year it has reached ¢7.15.
He noted that the increasing interest yield will entice investors to purchase more government securities and help slowdown the depreciation of the cedi, despite the difficulty it will bring to the economy.
“When a country’s currency is suffering from devaluation, as we have experienced in Ghana in the first 2 months of the year, where we have the worst performing currency, the only alternative to stop the devaluation is from increasing interest rates in the country”.
“What it means is that instead of investors or citizenry not having confidence in the currency but to purchase dollars or foreign currency for savings, government will entice them with an increase in interest rates, so that they will purchase government bonds and government securities”, Dr. Peprah pointed out.
According to him, it is a strategic move to save the cedi.
Already, interest rates have been going up as yield on the 91-day bill crossed the 13% mark for the first time since 2017.
Dr. Peprah said increasing interest rates at this time is inevitable to save the cedi from further depreciation, adding “it is a major principle of controlling a situation where a country is having exchange rate devaluation.”
However, he said, “the implication is that cost of living, or cost of borrowing will become expensive in the country, and it will slow down the economy for a while, but this is in the best interest to control the wide spread of margin between the forex market and the Bank of Ghana’s exchange rate”.
Meanwhile, the Finance Lecturer at the University of Ghana Business School, Dr. Benjamin Amoah, has indicated that Bank of Ghana in the short term, should inject more dollars into the economy to address the depreciating cedi.
According to him, that is the immediate solution to the current pressure on the cedi.
With just two months into the year, the cedi has lost more than 7% in value against the dollar and is the worst of African currencies with “Worst Sport Returns” by Bloomberg.
Speaking in an interview, Dr. Amoah who expressed shocked at the performance of the cedi said the structure of the economy must be critically looked at, whilst fiscal managers of the economy must live up to expectation.
“I must say that the cedi’s performance in the first two months has been a bit of a shock to us although we anticipated that 2022 will be a difficult year for the Ghana cedi. We never thought that it will be quick.”
“What is happening to the Ghana cedi is because of the nature of the current condition of the economy. If you had observed from last year, especially last quarter of last year, the Governor of the Bank of Ghana [Dr. Ernest Addison] made some statements at the Annual Banking Dinner, and if you read and analyse his report, the statement that he made in there shows that the economy was really really having some difficulties. So that is one”, the Executive Director of the Center for Economics, Finance and Inequality Studies explained.
“Two is also the fact that our managers of the economy have also not been able to help us push across the confidence of the Ghana cedi. I’m saying this with reference to the statement made by the Minister of Finance [Ken Ofori-Atta] in Koforidua concerning the need that we have to pass the E-Levy if not the economy will be in shambles.
“He was being truthfully, but then if you want to rally around confidence you have to preach some level of hope to get investors to buy into your economy. Nonetheless, the fundamentals of the economy speaks volume of what we finally find ourselves; inflation is on the high, interest rates is on the high”, he added.
Furthermore, Dr. Amoah said, “In the short term, there is a speculative attack on the currency and so the only way to deal with the short term is to again call on the Bank of Ghana to do the injection of dollars into the system [circulation]. So that in the short term, the excessive pressure on the currency can be controlled”.
“Then to the medium to long term, we can look at what we can do in terms of some of the structural things we need to do. If we are importing a lot, we need to look at that importation, so we can reduce the pressure on our currency”, he stressed.
Cedi now the worst among Africa’s top currencies; depreciates 7.6% to dollar
The Ghana cedi over took the Zambian kwach as the worst-performing currency among Africa’s top currencies just two months into 2022.
This is because it has depreciated by about 7.6% to the dollar from January 1, to February 25, 2022.
Bloomberg also classified the cedi as the worst of African currencies with the “Worst Spot Returns”.
It pegged the depreciation of the cedi to the dollar at 8.86% between January 1, 2022 and February 25, 2022.
