Cedi depreciation: Cause, controlling it

Currency depreciation is a fall in the value of a currency in terms of its exchange rate versus other currencies.

For example, the cedi might depreciate against the US dollar so that GH¢100 buys less of the US currency.

The external value of the cedi depreciated against the Pound Sterling and the Euro.

Currency depreciation can occur due to factors such as economic fundamentals, interest rate differentials, political instability or risk aversion, among investors.

A weakened currency means that hikes in import costs must be passed on to individuals within the country, adding pressure to the already higher cost of living.

A fall in the world price of the country’s major exports leads to declines in export revenues and a fall in overseas demand for the exporting nation’s currency.

We all know Ghana is one of the leading cocoa-exporting countries. When there is a depreciation in our local currency, we have to export more tonnes of cocoa for the same sum of money we used to receive before.

A surge in the value of imports, causing a deficit on the current account of the balance of payments, leads to a net outflow of currency, causing exchange rate weakness.

If Ghana’s central bank reduces interest rates, it leads to a net outflow of money — this is short-term financial capital that searches for the best risk-adjusted rate of return.

Depreciation might be caused by intervention from the Central Bank, for example, when it goes into the market to sell its own currency and buy gold and foreign currencies.

As it’s currently happening through the Local Mineral purchasing programme introduced due to the influx of galamsey and foreign miners, who in turn pay no or little royalties to the country when they export the mineral.

The intervention by the Central Bank can help strengthen the cedi to appreciate, with some advantages, when these minerals are traded on the world market.

When the cedi changes, prices for goods are affected. When the cedi appreciates (when the value increases over time), it results in a lower effective price for imported goods.

However, when it depreciates (when the value decreases over time), it translates into higher import prices.

Due to some goods and services being priced in dollars (the dollarisation of the economy), the repatriation of business profits of major international companies in the country and interest rate disparity cause high demand for dollars, weakening the strength of the cedi.

The following are some best ways for the government to improve or control the depreciating cedi:

The dollarisation of businesses must stop, with all transactions in the local currency.

Lower interest rates and effective monetary policies, including lower taxes and government spending are measures.

Others include the sale of foreign reserves on the foreign exchange reserves market while the government must also have the capacity to control a large number of major trading currencies such as the dollar, euro, pound sterling, etc.

We must rely on local produce and control imports. The government must work for cheaper production costs for Ghana to stand the competition of imported goods and the quality of the same.

Manager/Engineer.
E-mail: cashflow70@yahoo.com