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Why Ghana’s Cedi has been stable in 2016, Q1

Economy

Why Ghana’s Cedi has been stable in 2016, Q1

The Ghana cedi has been fairly stable in the first quarter of 2016, recording just about 1% depreciation against the US dollar, the largest traded foreign currency in Ghana.

Comparatively, the cedi slumped 17 percent against the US dollar in 2015 from an opening of 3.20 to a dollar to 3.74 by the end of first quarter. The story was worse in 2014 when it slumped by 21 percent and 9 percent in the last election year, 2012. However, the story has been very different this year – positive signal to the business community.

Low Speculation

Speculation may be good or bad for a currency, depending on what position traders decide to take. Confidence in the cedi was boosted heavily by the marvelous performance in the last quarter of 2015, despite the year end festivities, which normally leads to rise in demand for foreign currencies (mostly the US dollar) by both corporate and individuals towards imports. The cedi’s performance in 2015 Q4, may have given some assurance to traders and importers not to buy-and-hold the US dollar when the early year depreciation begun. This has caused the cedi to recover most of its early year losses in 2016 – a situation which would have normally aggravated into double digit depreciation by end of Q1.

Fall in Oil Price

As a net importer of crude oil, movements in oil price affects the cedi’s performance as nominal values of imports fluctuate accordingly. Oil price fell by more than half in the second half of 2015. Though it has seen some recovery year -to-date, the commodity remains relatively cheaper this year than recent past year prices. The country’s export commodities also suffered price declines over the period, but not as much as crude oil.

The Demise of Dumsor

The deficit in power supply has many implications on trade – international trade. Whereas production of goods and services were reported to be shrinking as a result of unused plants and machinery due to absence of power, other small and medium-sized businesses snatched the opportunity to import dumsor-relieving gadgets such as rechargeable fans and lamps, and generators in large quantities that could have impact on import values. At the same time, consumption of fuel was expected to go up as both industrial and domestic demand grows as a result of the power deficit. In contrast, this year has seen fairly stable supply of electricity, which is expected to cut down industrial and domestic demand for fuel. This, in addition to comparatively low oil price has contributed to stability of the cedi.

Foreign Investment

The direction of capital flows has effect on the cedi. Noticeable investment in Ghana from foreign parties leads to inflow of foreign currencies into the economy, albeit staying in the economy over a long-term. These investments come through government and private businesses and they strongly improve the strength of the local currency.

 

Central Bank’s role

The role of Bank of Ghana in stabilizing the cedi cannot be overlooked. The central bank has been effective in its market operations and interventions to quickly turn around what would have normally resulted in an uproar in the country when the cedi begun depreciating in January 2016, to a rather calm ride for businesses, individuals and investors. Perhaps, one thing we would remember the outgoing governor Dr Henry Kofi Wampah for, is his ability to hold the cedi firm despite the popular suspicion of large depreciation because 2016 is an election year. In this regard, he has set a strong foundation for his successor to build on.

 

A stable currency is what both importers and exporters need. It is what most businesses require in order to be able to plan and most importantly operate within those plans. It is one of the major factors foreign investors consider when investing in any country, as large depreciations can eat away all the profits and sometimes portions of the capital invested.

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