The government should issue Eurobond quickly in the first quarter of the year and use the foreign exchange (forex) to cushion the cedi from further depreciating against the country’s major foreign trading currencies, according to three economists.
In separate interviews with the Daily Graphic , Professor Peter Quartey of the Institute for Social, Statistical and Economic Research (ISSER), Dr Said Boakye of the Institute for Fiscal Studies (IFS) and Mr Courage Kwesi Boti of Databank said in December last year that the pace of depreciation of the currency could aggravate this year if credible measures were not used to raise forex to meet demand.
The forex, they said, was needed to shore up the Bank of Ghana’s reserves and provide comfort for investors and the international community that the country was capable of meeting demand for hard currencies.
They, however, emphasised that borrowing to shore up reserves was unsustainable and should, therefore, not be relied upon as a long-term measure to address the perennial fall in the value of the currency against its major trading partners.
That position was reinforced by the Governor of BoG, Dr Ernest Addison, who told the Daily Graphic in a separate interview that the answer to the perennial depreciation of the cedi “is not about issuing bonds to shore up reserves.”
“That is not a long-term solution,” he said when asked about the impact of the 2020 Eurobond on the current depreciation.
“We must improve our capacity to export and reduce import dependency. That is the long-term solution,” Dr Addison added.
The economists and the BoG Governor were speaking to the Daily Graphic on how to arrest the fall of the cedi during and after the yuletide.
Their comments came after the cedi suffered its biggest fall in four years, according to BoG data.
The data showed that as of December 31, last year, the local currency had lost 12.9 per cent of its value to the dollar to trade at GH¢5.54 to a dollar.
In 2016, 2017 and 2016, the cedi depreciated by 9.6 per cent, 4.9 per cent and 8.4 per cent, respectively.
Unlike previous years when the cedi depreciation was accompanied by increased imports, this year’s depreciation was in spite of a fall in the amount of goods imported into the country.
Data from the Ghana Shippers’ Authority (GSA) showed that imports declined by 11 per cent in the first six months and more than 40 per cent in the third quarter of 2019.
The Head of Research at BoG, Mr Philip Abradu-Otoo, said on December 16, 2019 that the current depreciation could be traced to uncertainty on the fiscal position of the country and increased payments by the government in forex for obligations in the energy sector.
In the interaction with the Daily Graphic, the BoG Governor said the shifts in the currency market were a reflection of the economic fundamentals.
“Remember Ghana is running a flexible foreign exchange regime. The cedi must be allowed to reflect shifts in the fundamentals. If the fundamentals weaken, the cedi must fall to compensate to sustain the competitiveness of the economy,” he explained.
Meanwhile, Mr Boti, who is an economic analyst at Databank, expressed fear that the BoG’s reserve position showed that the pressures on the cedi could “fester into the first and second quarters of this year.”
“The last Monetary Policy Committee report showed that reserves could cover up to 4.1 months of imports and in this December, the information we have is that the BoG is increasingly intervening in the market to stabilise the cedi.
“That will deplete the reserves that we have and that is why an intervention like an early Eurobond issuance or any source of forex outlay is necessary to sustain the currency otherwise the situation in 2020 may be worse than we are seeing now and it is all because of the reserve position,” he said.
Impact on rate
In the 2020 Budget, the government sought and got approval to borrow a total of $3 billion this year for liability management and budget execution.
The same amount was raised in March last year through a three-tranche Eurobond that was seven times oversubscribed.
Prof. Quartey, who is the Director of ISSER, said beyond providing forex to cushion the cedi, an early issuance of the 2020 Eurobond could earn the country a comfortable rate.
Given that last year’s Eurobond was issued in March, Dr Boakye, a Senior Research Fellow at IFS, said a similar time should be targeted this year to help provide reserves to cushion the currency, albeit in the short term.
He, however, explained that such a venture was unsustainable and “an alternative and a better way should be used.”