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$1 Now Gh4.00 - Seasonal Demand Exerts More Pressure On Cedi   
 
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07-Nov-2016  
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The exchange rate of one dollar to the Cedi, which hovered around GH¢3.9 to one $1 for many months this year, has now crossed the GH¢4 mark at forex bureaus and in open market trading.

For over a week now, persons in possession of dollars who visit forex bureaus receive GH¢4 for $1.

On the other hand, persons who buy dollars from forex bureaus and open market pay GH¢4.03 for $1.

As at the end of the third quarter this year; the Cedi depreciated by just 4.65% to the US dollar, 7.8% to the Euro, and 8.27% to the British Pound.

However, the local currency faces its biggest test from now to the end of the year.

Cedi could be on the ropes

Currency traders believe that the cedi could be on the ropes as seasonal forex demand by importing firms exerts pressure until a planned Central Bank foreign exchange auction on the interbank market in the middle of this month.

The depreciation is also being experienced at the interbank market.

On Thursday, the Cedi was quoted at GH¢3.98 to the dollar, compared to GH¢3.97 in the previous week at the interbank market.

Festive season depreciation

The Cedi has always had its worst decline in the last quarter of the year due to an escalation in import activity in the commercial sector due to the festive season of Christmas.

During this season, importers have a huge demand for foreign goods they have to meet and as a result, demand for dollars shoot up tremendously.

These importers sell their goods in cedi but need dollars to import.

As a result, these traders usually buy dollars from forex bureaus and the open market for their business, thus exerting pressure on the Cedi.

The surge in fourth quarter demand is also buoyed by election spending as most of the paraphernalia and other materials used by political parties are imported.

The effects of Cedi depreciation are known not only by intellectuals, the business community or policy makers, but also the ordinary man or woman on the street has some level of appreciation of the effects of rapid exchange rate depreciation.

One expects exchange rate depreciation to shift local demand from imported goods to locally-produced ones due to higher prices of imported goods relative to prices of locally-produced goods on the domestic market and, more importantly, promote exports which eventually exert expansionary effect on national output.

Cedi depreciation raises the domestic currency value of foreign currency debt and debt service burden in view of the fact that domestic revenues are in domestic currency.

Cedi’s fall wipes out $11.8b of economy

A new report by the Jubilee Debt Campaign, released last month, noted that since the start of 2013, the value of the Cedi against the dollar had fallen by 50% and this had caused the dollar-denominated size of Ghana’s economy to fall from $47.8billion in 2013 to $36billion in 2015.

Cedi’s fall hikes external debt to GDP

The report explained that because external debts are owed in dollars or other foreign currencies, this had, in turn, increased the relative size of the debt and debt payments.

It revealed that external debt had grown from $14.7billion in 2013 to $21.1billion in 2016, an increase of 44% yet because of the depreciation of the Cedi, external debt had gone up from 30% of GDP in 2013 to an expected 56% in 2016, an increase of 87%.

Underlying cause of cedi depreciation

The underlying cause of exchange rate depreciation in Ghana is directly linked to the demand for and supply of foreign exchange.

Most often, heavy dependence on imports and reliance on exports of primary commodities are cited as the sources of exchange rate problem in the country.

Dollar traders

Some Ghanaians said to have found foreign currency as a profitable financial instrument, particularly during a period of rapid exchange rate depreciation, and thus demand dollars in an effort to diversify their portfolio and protect the value of their wealth.

This exerts further pressure on the exchange rate and exacerbates instability in the exchange rate market, thus creating a vicious cycle in the exchange rate depreciation problem

The depreciation of the Cedi implies an increase in the volume of local currency for a unit of foreign currency which is a measure used in Ghana’s foreign exchange market.

On an annual basis, there has not been a single year when the Cedi has not lost value since the country moved from the fixed exchange rate regime to the current floating exchange rate system as part of economic reform program embarked on in April 1983.

 
 
Source: The Finder
 
 

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