Cedi appreciation and reasons for the recent gains
The local currency (Cedi) has witnessed some significant gains beginning the month of December 2022. The gains are rapid and encouraging. The outlook going forward looks good as the stability is likely to be sustained.
There are both domestic and external factors responsible for the gains the cedi is having against some major trading currencies.
Domestic causes
First, government’s faster than expected International Monetary Fund (IMF) staff level agreement on a $3 billion loan has bolstered investor confidence.
The confidence build-up has slowed speculative behavior, causing speculators to offload forex as a store of value. There are high expectations of further cedi recovery. This has caused significant drop in forex demand.
Secondly, the announcement and news effect of government’s “Gold-for-Oil swap transactions” has also brought some renewed confidence in the system and calmed the waters.
The market’s reading into that announcement is that, should the policy kick-start, dollar supply will increase and cause the cedi to further rise; reason why a lot of forex holders are offloading now to avoid future loses.
Additionally, because of the “Gold-for-Oil” announcement, the BDC’s demand for forex has dramatically declined (60% decline at the last auction) and that is obviously influencing the appreciation trend of the Ghana cedi.
Thirdly, the tightening of the country’s monetary policy has reduced the cedi’s liquidity in the system and that is playing a significant role in the trend that is being experienced currently.
Global factors
At the global front, the US dollar is losing grounds on softer-than-expected US inflation. This has brought renewed hope that the Federal Reserve, the central bank of the United States, might slow the pace of rate hikes.
Additionally, the decision by China to ease its COVID-19 restrictions is also improving risk sentiments at the global level and by extension, influencing the cedi’s appreciation.
Another possible avenue contributing to the recent appreciation of the cedi is the “Month of Return”, which is December. The month sees a lot of foreign exchange flowing to Ghana, as tens of thousands of people from the Diaspora come to Ghana for our special Christmas experience.
This has been a growing new tradition since President Akufo-Addo launched “The Year of Return” in 2019. Although disturbed by the COVID-19 pandemic, the economy experienced a slight pick up in Christmas tourism in 2021.
This year is certainly bigger, and could rake in over $300 million in foreign exchange between now and early January 2023.
