Ghana’s currency, the Cedi is likely to record high levels of depreciation during the year if the government does not clearly come out with a policy to manage the situation. In January the Cedi depreciated on average against the dollar 0.08% and 0.24% in February.
During the first weeks in March 2017, the cedi has recorded a significant year to date depreciation of 7.36% against the dollar and 7.31% against the Euro. This makes the Ghana Cedi the worst performing currency on the African continent for the period under review- 2017.
GN Research analysis relates the situation to the low supply and the high demand for these currencies. There seems to be some growth in business confidence within the business community that is driving high level of imports after the sector slowed in 2016. The market seems to be reactivated pushing high demand for the greenback, urging speculators within the foreign exchange market to reignite their business.
The challenge for Government
The 2017 budget statement either reduced or abolished some twelve taxes in order to boost economic growth, giving the private sector lead role. These tax reforms include abolishing the 1 percent Special Import Levy; the 17.5 percent VAT/NHIL on selected imported medicines and the duty on the importation of spare parts. Even though the tax cuts generally came as good news, especially to the business community, it has the potential of enforcing the rate of depreciation of the Cedi.
The execution of these measures can lead to a reduction in the domestic prices of imported items resulting in high demand. Such opportunities offered to importers might lead to abuse and exploitation, as their desire to enlarge their jobs to meet the rising need for the goods can increase the need for the major trading currencies.
If nothing is done to improve the supply of foreign exchange, the cedi will depreciate further providing a lot of uncertainties for the business community.
Unfortunately, the 2017 budget did not provide any specific policy aimed at stabilising the cedi. This is astonishing; because the Ghanaian economy is a known import dependent one and an unstable currency can erode all the gains that would have been made in a given period. Therefore the budget should have outlined policies which will help ensure the stability of the cedi.
In this regard, government must institute measures to diversify the country’s exports and reduce imports especially agricultural produce since our agricultural sector has the potential of producing them locally.
Also, government policies should attract foreign direct investment (FDI) inflows to increase the supply of foreign exchange. In addition, there must be a deliberate effort aimed at reducing foreign currency expenditure in the economy. Government should immediately deal with the ills of dollarization in the country to save the currency within its first year in office.
Government should begin immediately working towards providing a long term solution to this problem. In this regard, GN Research strongly recommends that the central bank continues the zero financing of government budget even after the expiration of the IMF program to help reduce liquidity, inflation, interest rate and stabilise the cedi.