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BUSINESSES in the country are outraged over what they say is the Bank of Ghana (BoG)’s lackluster approach to the stability of the local currency and the exchange rate.

The Bank must be proactive and minimize the exchange rate volatility.
Last month, the cedi recorded an impressive appreciation (21%), a development attributed to the daily injection by the BoG of some $20 million into the money market.

The appreciation was however short-lived, as the currency has in the past few days lost about 15 percent to the dollar and other major trading currencies.

Manufacturing firms are worried that the depreciation of the local currency will cause the collapse of their businesses.
The 2015 second quarter report (Business Barometer) of a survey conducted by the Association of Ghana Industries (AGI) amongst its members mentioned the volatility of the cedi as the top most challenge facing businesses.

According to the report, 80 per cent of businesses say they made huge losses in the second quarter of the year as a result of the volatility of the currency, inadequate power supply, the multiplicity of taxes, and limited access to credit and high cost of credit where available.

Chief Executive Officer (CEO) of the AGI, Mr Seth Twum Akwaboah has raised serious concerns over the dramatic exchange rate volatility and “worsening macro-economic situation in the last three months.”

Mr Akwaboah points out that since most products sold to big businesses by manufacturing firms are done on credit, “when you’re getting back your money in two to three months time, you want to be able to keep the value of whatever money you’re getting but if the situation is such that you cannot predict your inflows, at what price should you sell the product?”

“It has become virtually impossible to price our products well,” he laments.

According to the AGI, if firms price their products too high, they risk going out of competition and if they price too low, they lose money so “industry players cannot expand to be able to increase production.”

Confirming the findings of the survey, some manufacturing firms have questioned the BoG’s handling of the exchange rate market, wondering whether the bank is up to the task.

“We have been compelled to increase prices of our products along with the depreciation. In fact, last year, we had to change prices every month,” says an official (name withheld) of multi-local food manufacturer, Promasidor Ghana Limited.

The company has been struggling to limit its losses since the beginning of 2014 in the height of the turbulence experienced in the exchange rate market.

“As the Finance person of the company, the first thing I do every morning is to check the rate of the currency; this is very stressful and has bad prospects for us as a company, in view of the fact that we employ over 700 Ghanaians,” she laments.

She questions the judgment of the Central Bank in its monetary policy operations and wonders why the bank would support the cedi to gain value in one month and withdraw the support the next month.
It will be recalled that the Institute of Economic Affairs (IEA) recently challenged the BoG to change its approach in stabilizing the cedi.

The institute believes the Central bank needs to focus its monetary policy stance on maintaining a stable currency rather than forcing an “automatic drastic appreciation in the value of the local currency.”

Economist and visiting Fellow at the Institute, Professor Edward Ghartey describes as unhealthy the Bank’s daily injection of $20 million into the market.

“Most countries experience deprecation but the BoG should temper it by influencing it so it does not depreciate as much as it is doing or appreciate as much as it did,” explains Prof. Ghartey.

The Institute emphasizes that in monetary policy, the goal should be a stable exchange rate as “a stable exchange rate will allow businesses, both exporters and importers to plan but if you destabilize the exchange rate by causing excessive appreciation or depreciation, it dislodges market participants.”

Economist and Head of Finance at the University of Ghana Business School, Dr. Godfred Bokpin however points out that what is happening to the cedi is simply a reflection of the fundamentals of the economy
For him, instead of the Bank of Ghana being asked to stabilize the Cedi, the focus should be on the fundamentals of the economy.
He indicates that when the fundamentals of the economy are put right, the Cedi will necessarily provide good feedback.

Dr Joe Abbey, Economist and Executive Director at the Centre for Policy Analysis (CEPA) explains that underlying cause of the turbulent exchange rate market is the result of industry’s inability to produce optimally to feed the local market .

“If you have suffered a bad harvest or if the ‘dumsor’ is impacting on your production, then the result is your firm is producing fewer goods than the capacity you have otherwise installed,” he observed.

According to Dr Abbey, importer s find it more profitable bringing in more goods from outside to supplement the domestic goods available, a situation which only places undue pressure on the cedi.

“When you import, you do so with foreign exchange so there will be an increased demand for foreign exchange connected with the fact that the country isn’t producing enough so that is where the pressure on the exchange rate will come from.

“Our manufacturing sector is contracting and so to maintain their standards of living, people will find an opportunity to import and this will lead to a fall in the value of the cedi,” he said.