Falling Cedi — On Everyone’s Minds

Witnessing the cedi drop by, at least, 10 percent in a week, I feel like I’m living in a macroeconomics case study.  On Monday, the exchange rate to buy dollars was 2.52 cedis; yesterday, the forex bureau at the Accra Mall posted that it was 2.75 cedis. (The bid-ask was 2.75-2.90.) The change was so rapid that I recall on Friday, the rate to change dollars was 2.60 cedis.

Last Sunday, Nicholas Duncan-Williams, the leading pastor of Action Chapel, “commanded” the cedi to “rise.”

“…I hold up the cedi with prayer and I command the cedi to recover and I declare the cedi will not fall; it will not fall any further. I command the cedi to climb. I command the resurrection of the cedi. I command and release a miracle for the economy”.

Duncan-Williams was widely ridiculed by a government official, radio personalities, other pastors, and journalists.

The rapid decline in the cedi has caused alarm among government officials, business leaders, and individuals.  On February 6, the Bank of Ghana raised the policy rate from 16 percent to 18 percent.  It also implemented foreign exchange controls at banks throughout the country including:

  • Commercial banks cannot issue checks and check books on foreign exchange accounts and foreign currency accounts
  • Banks cannot offer loans or facilities in a foreign currency to customers who do not earn foreign exchange
  • Ghanaian companies, including exporters, cannot conduct offshore foreign deals
  • “Undrawn foreign currency-denominated facilities shall be converted into local currency-denominated facilities”

The price of fuel and diesel is pegged to the dollar.  Thus, this week we saw the price of fuel per liter go from 2.21 to 2.42 cedis.  This caused a ripple effect in the price for buses, taxis, and all goods.  The price of water sold in 500 ml bags or “satchets” has gone up from 10 pesewas (or 0.10 cedis) to 15 pesewas — though my taxi friend said it is now 20 pesewas.

The Bank of Ghana said it was trying to “support” the currency with a $20 million intervention.

Many people are aware that the cedi is falling because of the country addiction to imported goods and the Fed’s decision to reduce the amount of liquidity globally.  Unfortunately, with a mere $5 billion in foreign exchange reserves, the government has few options to rein in the falling cedi.  More importantly, I cannot imagine how the government can attract more foreign investment in the short-term nor how it can alter the structure of the economy to be less reliant on imports.

As global investors move flows out of frontier markets and into developed markets and as the Ghanaian economy continues to demand foreign imports, I believe the cedi will continue to fall.  I’m not a trained economist but I expect the following to happen:  the cedi’s fall make Ghanaians less able to afford imported goods.  Ghanaian spending will slow as people try to anticipate what will come next.  Trading businesses will suffer and some will shut down.  A more challenging business climate will make Ghana a less attractive place to invest and the “hot money” will either flow slower to Ghana, stop completely, or reverse to other more attractive countries and markets.  As demand for imported goods slows, the cedi’s decline will also slow.

During the Asian Financial Crisis that started around 1997-98, those countries that devalued their currencies witnessed them fall from 25 to 40 percent.  Those countries — Indonesia, Thailand, South Korea, Malaysia — were arguably more diversified and more developed than Ghana.

Ghana’s economy relies on gold and cocoa for foreign currency.  Some people are advocating greater “domestication” of the economy. The lack of a strong industrial sector that manufactures products for export makes the Ghana cedi susceptible to trickling depreciation.  For instance, without a crisis of any kind, the “official” cedi rate weakened from 1.50 in 2011 to 1.90 at the start of 2012.  Since the Fed hinted it was ending its quantitative easing policy last September, the “official” cedi rate has weakened from 2.15 to 2.49 (Friday) or about 16 percent.

The big question is where will the cedi stabilize at?  3.5? 4.0?

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