Cedi in free fall: 77% depreciation in 3 years

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Category: Business & Finance

Created on Wednesday, 04 April 2012 00:00

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04 April 2012

Cedi in free fall: 77% depreciation in 3 years

It is official! In just three years of President Mills’ administration, Ghana’s currency has experienced an unprecedented level of depreciation against the US dollar, as the cedi continues to show further signs of perpetual fall against the dollar.

Yesterday, the Bank of Ghana quoted the cedi at a rate of GH¢1.78 to the dollar and a rate of depreciation of 7.9% for the first quarter 2012. This current exchange rate means the cedi has depreciated 77% in three years.

Economic analysts and businesses are deeply concerned about this crisis, with many describing Ghana’s situation as mimicking the currency crisis that hit Mexico and Russia in 1994 and 1998 respectively.

The depreciation of the cedi against the US dollar for the entire 8-year tenure of the NPP was 58.2%, using 2000 as the base year.

In 2000, the cedi depreciation against the dollar was as high as 49.8 percent. But through astute economic policies, the NPP government was able to reduce the cedi/dollar depreciation to as little as 2.2 percent by the end of Kufuor’s first term in office (a reduction amounting to over 92%).

By the end of Kufuor’s first term in office, the cedi had depreciated against the US dollar by 24.1%, from ¢6,750 in 2000 to ¢8,750 in 2004.

The Bank of Ghana, according to analysts, could be compelled to raise interest rates for the second time this year if the cedi continues to fall under increased demand for foreign exchange by the corporate sector and importers.

At the Central Bank’s monetary-policy committee last meeting, the bank raised its key lending rate by 100 basis points to 13.5%, the first time in three years, to draw-down excess liquidity and avert further weakness in the exchange rate.

“Monetary policy has already been in ‘overtime mode’ with the central bank reported to have supplied more than US$1 billion to the market (so far this year) to support the currency.

Should demand for hard currency continue to rise, the MPC may be compelled to increase the policy rate further to keep these volatile pressures in check,” said Nii Ampa-Sowa, Vice President and Head of Research at Databank Asset Management Services Ltd.

“That said, having raised the rate by 100 basis points in February, the committee’s natural inclination would be to wait till its effect is fully transmitted into the system,” he added.

“If the depreciation persists, with the effect that it will have on prices of imports, we’re likely to see an increase in the [policy] rate,” said Yaw Adu-Koranteng, research analyst at Gold Coast Securities Ltd.

With the cedi in free fall under President Mills, the prices of goods will accordingly go up, despite the much touted fall in inflation. Importers and exporters will accordingly pass on the price hikes of goods and services resulting from the free fall of the cedi onto customers.

It is also likely this could affect the Gross International Reserves position of the Bank of Ghana or the Balance of Payment of the country.

Fiifi Arhin

Source: The Statesmanonline