|Photo Credit: Wikipedia|
The Ghana Cedi continues to suffer a fall in value against the US Dollar. The cedi is currently trading at GH¢1.733 to US$1 which is a 5.67% depreciation from the about GH¢1.64 to US$1 as at January 1 2012. The fall comes despite efforts by the Bank of Ghana to shore up the cedi by releasing about 600 million dollars into the market to meet the demand of commercial banks.
The driver of the fall in the exchange value of the cedi seems to be
the high demand for the dollar by telecommunication and manufacturing firms which are purchasing equipment from the US to undertake capital expansions. This demand for the dollar has reduced the amount of dollars a cedi
can buy, hence the fall in value.
Considering the 2011 figure of near 14% growth in Ghana’s economy, one would have expected that the cedi should be appreciating or at least remain stable against the US$, especially considering the oil revenue of over $444m as at the end of 2011. The trade deficit stood at $2.6bn as at the end of the first eleven months of 2011. Although Ghana’s total export value had experienced an over 105% increase from January 2010 as at 3rd quarter 2011, imports grew in value by about 90% over the same period.
It is evident that Ghana has to do more in terms of reducing the trade deficit. However the import of capital goods will be of benefit to the country in the long term. Capital expenditure is essentially an investment in the economy. It is expected to increase the production capacity of the country. Even if it will not lead to the production of export goods to bridge the trade deficit, it will help expand Ghana’s $31bn (GH¢53bn) GDP.
The effect of the fall on the confidence of investors is yet to be fully ascertained. The 3-year GH¢200m bond issued by the bank of Ghana last month with a yield of 14.99% was oversubscribed by GH¢439m with the majority of bids coming from offshore investors. In fact 77% of the accepted bids were from offshore investors. This underscores a healthy confidence in the Ghanaian economy.
This in no way means that we should be lax about the free fall of the cedi. It is a threat to the macroeconomic stability of the country highlighted by the 8.6% rate of inflation as at February 2012. Inflation may rise through a price hike in imported commodities resulting from the weak cedi. It also remains to be seen if the next batch of bonds to be issued by BoG will be as well received as the first batch. Another huge over subscription will exhibit investor confidence that their gains will not be eroded by a weakening cedi or by inflation.