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12.07.2020 Feature Article

The Demand Side of the Exchange Rate

The Demand Side of the Exchange Rate
LISTEN JUL 12, 2020

One of the issues that attracts attention in every political cycle is the management of the exchange rate. In the 2020 general elections, it will definitely have the concerns of the politicians in their campaigns. Its healthy management or otherwise will be the focus of opposition parties.

The exchange rate, in simple terms, is the amount of one currency that an individual or an organisation considers as being equivalent to another when either buying or selling it at a particular time. For instance, the amount of Ghana Cedis institutions such as banks and forex bureaus and perhaps in the black market, money sellers consider to be equivalent to the dollar, euro, pounds sterling, yen etc. when buying or selling it at any time is the exchange rate.

The performance of the exchange rate is a key issue in the politics of Ghana. It is always difficult to draw a line of distinction between political and economic issues in our country. The performance of the exchange rate affects everyone and almost everything in Ghana.

There are two aspects of the exchange rate. The supply side and the demand side. The supply side deals with the quantity of foreign currencies such as the dollar, yen, euro, pounds sterling etc that are made available in the economy. The demand side, on the other hand, concerns the quantity of foreign currencies that individual businesses, other institutions and the general public desire to spend on goods and services.

The supply side of it, the exchange rate, is often dealt with by generating foreign exchange, contracting loans in the form of bonds, receiving aid including grants (in the form of cash), remittances of the citizens of a country in other countries and others. The continuous depreciation of the exchange rate is caused by demand being more than supply. The economic fundamentals may be genuinely fine, the demand and supply factors are the key determinants of the exchange rate. This is not debatable and ambiguous.

The demand side of the exchange rate in Ghana seriously affects the price at which foreign currencies may be sold or bought. The demand for foreign currencies such as the euro, pounds sterling, dollar, always out-weigh the supply of them. The demand-side factors must be assessed properly in an attempt to solve the depreciation of the Ghana Cedi. The demand-side factors include but not limited to these: capital flight by contractors and multinationals, excessive imports, interest payments, payment of school fees and other services like rent, air travels etc.

The political discussions about the worsening exchange rates cannot be halted but the solutions are far-fetched in those discussions. The solutions can be derived from a thorough evaluation of the factors that affect the demand side. In light of this, I suggest the following measures as discussed.

The Central Bank should use its moral suasion strategy to address the issue of capital flight by persuading foreign contractors and other multinationals to replace any amount of foreign currencies they intend to remit instead of buying the foreign currencies in the domestic market. That is, they should bring in or make available foreign currencies to replace the amount they wish to remit. In remitting profits, they always demand foreign currencies, the replacements will ensure a balanced equation. It will surely reduce the demand for more foreign currencies. The exchange rate is a barter system. It is a classical and Keynesian barter system. The Central Bank can make it a directive to these individuals and institutions within this category. If directives cannot work, persuasion could.

Interests payment will continue to be an issue that affects the demand side of the exchange rate as borrowing will not end soon. A plausible remedy is to either borrow more internally, from the domestic market or have long term loans whose interests and length of payment will be longer than short-term loans whose interest payments occur closely. If governments can have all their loans borrowed from the domestic market, interest payments which will call for the conversion of domestic or local currency to foreign currencies will cease. This is very difficult given the level of economic development and performance of Ghana.

Importation of goods and services demand the use of foreign currencies. Excessive imports put undue pressures on the exchange rates. The demand for widely-used currencies in Ghana is high and occurs closely. This demand factor is a big challenge to be addressed in our country. It is inevitable to use foreign currencies in the international market but it can be reduced to some extent through import-substitution. It is already suggested by some seasoned analysts that producing chicken, rice and other basic commodities in our trade will help address this need.

The demand for foreign currencies to pay for services such as rent, school fees and to some extent air travels can be avoided. School owners, landlords as well as air-service (travel) providers can also be persuaded to charge in Ghana Cedis. The charging of some services in foreign currencies have been banned in Ghana. The authorities need to ensure strictly that people comply with the laws set.

In fact, the government must persuade the air-service providers to charge in the local currency just like many multinationals do. The procedure to undertake such an activity is simple. The amount to be paid for air-ticketing can be priced in Ghana Cedis. It is just about converting the amount to Ghana Cedis. This way, the value is not lost. The companies in charge will only be required to do a conversion to the local currency. This will reduce drastically, the demand for foreign currencies to pay for such services.

Schools can also convert the prices of their services from dollars, euros, pounds sterling etc. to the local currency. The same profit will be made and the public will not consider it an excessive increase in such services. The charging in other currencies is of the same effect; people are required to convert Ghana Cedis in order to pay in dollars, euros and pounds sterling.

In my opinion, this issue should be discussed dispassionately without political inclinations. Though it is difficult to have such a critical issue shelved in election years, the issue is more economic than political. The review of my thoughts without political prejudices will help address this important economic issue that appears difficult to be solved.

Emmanuel Kwabena Wucharey

Economics Tutor-Kintampo SHS.

Emmanuel Kwabena Wucharey
Emmanuel Kwabena Wucharey, © 2020

The author has 68 publications published on Modern Ghana.Column: EmmanuelKwabenaWucharey

Disclaimer: "The views/contents expressed in this article are the sole responsibility of the author(s) and do not neccessarily reflect those of Modern Ghana. Modern Ghana will not be responsible or liable for any inaccurate or incorrect statements contained in this article."

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