The cedi’s dismal depreciation shows little sign of abating, with the currency tumbling to record lows day after day in the interbank market and deepening the pain of households.
Tagged as Africa’s worst-performing currency in 2014, the cedi’s 20.6 percent decline against the dollar in less than five months is the worst since 2000, when the currency lost almost 50 percent to the greenback.
At its current rate of depreciation -- 0.3 percent every day on average -- the cedi could hit a trough of 3 cedis to the dollar by the end of May.
Its slump to this dreaded limit will happen probably sooner in the forex bureau market, where quotations are presently between 2.8-2.9 cedis to the greenback, compared to the interbank exchange rate of 2.78 cedis to the dollar.
The relentless slide continues to hurt the economy and households, with destabilising effects on government’s fiscal plans.
The price of fuel, absent subsidies, has shown a strong correlation with the cedi’s fall. Further depreciation means the price of petrol -- already up by 25 percent this year and a drain on household budgets --will become more expensive. So will other fuels including Liquefied Petroleum Gas (LPG), which has risen by 14 percent since January.
The depreciation also stokes inflation, which stands at a four-year high after rising for seven consecutive months since September 2013. It’s not clear when inflation, measured at 14.5 percent in March, will peak; but the weak currency implies inflation will rise some more and its peak could be many months away.
How to staunch the alarming depreciation -- and its inflationary effects -- has been the biggest immediate concern of the Bank of Ghana (BoG) in the first four months of the year.
At the first sitting this year of its Monetary Policy Committee, held in February and dubbed an emergency session, the central bank responded with a 200-basis-point hike in the policy rate. This was after it had issued fresh regulations to curb demand for the dollar by limiting its use in domestic transactions.
While the BoG has said its interventions are bearing fruit, that assessment seems increasingly contradicted by the cedi’s 14 percent loss to the dollar since the first set of measures were introduced.
“The announced measures were never going to work, and we said so at the time,” said Philip Walker, an economist covering West Africa at the London-based Economist Intelligence Unit (EIU), in an interview on April 22.
“If anything, they have further undermined confidence in the cedi as it showed that the authorities were struggling. The cedi is unlikely to stabilise until the current/fiscal deficits come down and inflation eases,” he added.
At its last meeting on April 2, the MPC voted to raise the cash reserve requirement of banks from 9 percent to 11 percent. This was done in lieu of further interest-rate hikes, which it feared would ratchet up government short-term borrowing costs that have jumped from 19 percent in January to 24 percent per annum this month.
The MPC also lowered the single currency Net Open Position of banks -- a measure of the difference between banks’ assets and liabilities in a single foreign currency expressed as a ratio of regulatory capital -- from 10 percent to 5 percent, while the aggregate NOP, which aggregates the ratio for all foreign currency exposures of a bank, was reduced from 20 percent to 10 percent.
The actions were intended to slow the expansion of liquidity, boost supply of foreign exchange and protect the balance sheets and earnings of banks from the impact of exchange rate volatility. But investors still demand fat returns on government debt to offset inflation and exchange rate losses: on
Thursday the government’s three-year borrowing costs soared to 25.5 percent at an auction, compelling it to borrow just about half the GH˘400million it was seeking from investors.
The yield on a similar bond was 23 percent two months ago, and 19 percent in May 2013.
As government struggles to slash a 2013 deficit of 10.8 percent of GDP, the International Monetary Fund, in its Regional Economic Outlook for sub-Saharan Africa published last week, warned that “countries with large fiscal deficits or increasing debt levels -- for example, Ghana and Zambia --should intensify their efforts to bring their public finances back to a sustainable footing, including by containing expenditure”.
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