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02.03.2015 Feature Article

Ghana Cedi; Looming Depreciation Part 1

Ghana Cedi; Looming Depreciation Part 1
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Last year was a very difficult year for the country because of weak economic fundamentals especially the depreciation of the cedi. Ghana's cedi and Zambia's kwacha in 2014 were the worst performing African currencies among a small basket that are relatively liquid, as falling commodity prices took a toll on some of the continent's "lion" economies. Nigeria's naira shed around 13.5 percent last year; South Africa's rand fell over 10 percent while the Kenyan and Ugandan shillings yielded about 4.5 and 9 percent respectively. In Ghana, we practice a floating exchange rate regime which means the currency can appreciate and depreciate depending on the market forces. Standard Chartered Bank is predicting a GH¢4.20 rate depreciation against the U.S dollar by the end of year. The prediction was contained in a report issued by the research wing of the bank responsible for Africa.

Currency depreciation can occur due to a number of reasons – economic fundamentals, interest rate differentials, political instability, risk aversion among investors and so on. The latest data from the Ghana Statistical Service (GSS) estimates that, real GDP growth rate for 2014 was 4.2 percent, compared to 7.3 percent recorded in 2013. The deceleration in economic activity during 2014 was broadly attributed to energy supply constraints and rising input costs.

The cedi depreciated by 26.7 percent between January and June 2014 but remained relatively stable during the second half, depreciating by 4.5 percent. The cumulative depreciation for 2014 was 31.2 percent compared with 14.5 percent in 2013. In January 2015, the cedi depreciated by 1.3 percent compared with 7.8 percent depreciation a year ago. Below are exchange rate tables from the Bank of Ghana which will serve as a basis for my analysis:


USD/GHS 2.2088 2.2113
GBP/GHS 3.6542 3.6588
EUR/GHS 3.0449 3.0480
CAD/GHS 2.0791 2.0810


USD/GHS 3.1988 3.2013
GBP/GHS 4.9665 4.9716
EUR/GHS 3.8998 3.9021
CAD/GHS 2.7523 2.7544


USD/GHS 3.1988 3.2013
GBP/GHS 4.9866 4.9918
EUR/GHS 3.8800 3.8825
CAD/GHS 2.7616 2.7632

3RD MARCH, 2015

USD/GHS 3.4719 3.4753
GBP/GHS 5.3516 5.3582
EUR/GHS 3.8870 3.8907
CAD/GHS 2.7819 2.7838

Inflation is the general rise in prices of goods and services. The two main types of inflation are demand pull and cost-push inflation. Demand-pull inflation refers to the idea that the economy actual demands more goods and services than available. This shortage of supply enables sellers to raise prices until equilibrium is put in place between supply and demand. The cost-push theory, also known as "supply shock inflation", suggests that shortages or shocks to the available supply of a certain good or product will cause a ripple effect through the economy by raising prices through the supply chain from the producer to the consumer. The major components of Ghana's inflation have been demand pull factors coupled with some cost push factors.

The Consumer Price Index (CPI) measures the change over time in the general price level of goods and services that households acquire for the purpose of consumption. CPI rose from 13.5% in January, 2014 to 17% in December, 2014. The Producer Price Index (PPI) measures the average change over time in the prices received by domestic producers for the production of their goods and services. Producer Price Index (PPI) ended at 34.2% in December, 2014.

The rate on the 91-day instrument increased to 25.8 per cent from 19.2 percent in 2014. Similarly, the rate on the 182-day instrument increased to 26.4 percent from 18.7 percent same year. The rate on the 1-year note rose to 22.5 percent from 17 percent, and the 2-year rate increased to 23 percent from 16.8 percent same year. The 3-year bond rate rose to 25.5 percent from 19.2 percent. On the financial front, the weighted average interbank rate increased to 23.7 percent from 16.3 percent in December 2013. Average lending rates of the banks rose to 29 percent from 25.6 percent in December 2013. The average rate on 3-month term deposits increased to13.9 percent from 12.5 percent. The trend shows a rise in interest rate putting pressure on the cedi .

On the fiscal front, preliminary banking data on the execution of the Government budget for 2014indicate that total revenue and grants mobilized for the review period was equivalent to 16.6 percent of GDP, higher than the 15 percent recorded in 2013. Government spending (including arrears clearance) amounted to 23.6 percent of GDP, slightly above the outlay of 23.2 percent of GDP for 2013.These developments resulted in a narrow budget deficit equivalent to 7 percent of GDP. In the corresponding period of 2013, the narrow budget recorded a deficit equivalent to 8.3 percent of GDP. The budget deficit was financed from both domestic and foreign sources, with the banking sector accounting for 57.7 percent while the non-bank sector financed the remaining 42.3 percent.

The stock of domestic debt stood at GH¢34.6 billion (30.5% of GDP) at the end of 2014, up from GH¢26.7 billion (28.4% of GDP) in 2013. External debt stood at US$13billion (36.6% of GDP) at the end 2014, up from US$11.5 billion (26.9% of GDP) in 2013. This (55.3% of GDP) in 2013. Provisional estimates for the balance of payments for 2014, recorded a deficit of US$85.2 million, a significant improvement from the US$874.2 million recorded in 2013. This was due to a marked improvement in the current account.

The current account deficit narrowed by US$2.1 billion from a deficit of US$5.7 billion (11.9% of GDP) in 2013 to US$3.6 billion (9.2% of GDP) in 2014. This was driven by an improvement in the trade balance. The balance on merchandise trade improved from a deficit of US$3.8 billion (7.9% of GDP) in 2013 to US$1.6 billion (4.1% of GDP) at the end of 2014. The services, income and transfer account net recorded a deficit of US$2 billion in 2014 compared with a deficit of US$1.9 billion in 2013. These estimates put pressure on the local currency.

Indeed, the signs are clear that, if the necessary steps are not taken, our dear cedi will suffer “in the battle against foreign currencies”. In the PART 2 of this article, I will suggest some measures that can be taken to strengthen the Ghana CEDI.

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Emmanuel Amoah-Darkwah
Emmanuel Amoah-Darkwah, © 2015

The author has 42 publications published on Modern Ghana.Column: EmmanuelAmoahDarkwah

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