Understanding The Depreciation Of The Ghana Cedi

On August 26, 2022, 4:14 AM

In January 2022, a dollar was somewhere around GHS7. Now a dollar has hit the GHS10 mark, officially an all time low in value against the dollar. The cedi has depreciated over 30% against the US dollar since the start of 2022.

Now let us understand why the Ghana Cedi has fallen over 30% since January.

1. The increased use of the US dollar for transactions in the country. Increased demand of dollars by businesses and private individuals creates a rise in value of the dollar which will in effect make the Cedi suffer. We see a lot of business do this especially in the real estate industry and most recently in vehicle finance. Here we see excessive demand for dollars exceeding its supply in the country.

2. Rapid rise in crude oil prices – Ghana has traditionally been a net importer of crude oil, the price of which is determined on the international market. As a small and open economy, Ghana is often vulnerable to oil price shocks in the event of any significant price fluctuations. Ghana imports more than 90% of its oil requirement, and during the Russia-Ukraine war, crude prices touched a 12 year high! And note that oil bills are paid in US dollars, so dollars go out of Ghana, creating a short in supply within the country, hence placing more value on it as demand in-country also rises. This suppresses the Cedi in effect.

3. Foreign Investors on repatriation spree. Foreign investors or businesses in Ghana who move out returns/profits/revenue to their domiciled countries also create an effect just as the above (point 2). They take home the Cedi returns made here in Ghana, but not in Cedi form, they rather take away the equivalent amount in dollars. And this is another scenario when dollars go out of Ghana, giving more value to the dollar at the expense of the cedi.

The second part is, as a Ghanaian, how does a failing Cedi affect you?

Ghana mostly depends on imports including crude oil, metals, electronics, consumables etc. The country makes payments in dollars. Now it must pay more for the same quantity of items resulting in increased cost of production and services. So, you see yourself paying more since final cost is transferred to the consumer.

Inflation then sets in. The failing Cedi’s biggest impact is on inflation. Given Ghana’s level of import appetite, high import prices manifesting into high cost of goods and services creates inflationary pressures in the economy.

Story By Edem Korbla Agbavor