There was a discussion on radio and online this morning about whether the cedi was at its real value or overvalued and whether that was hurting exports. When a country’s currency is strong in relation to other countries, its exports become expensive and therefore reduces and imports become relatively cheaper. This is why for years China tried to keep the value of its currency low in other to promote exports.
However, there are somethings that must be clarified. First of all the Ghana cedi is a floating currency. Its value is determined by the supply and demand for it in the international market. When the demand for it is low the value falls and when the demand for it is high the value rises. This demand and supply is manifested in the current account balance, which is simplistically the money coming into and going out of Ghana.
The essence of a floating exchange rate is that at any given time the currency is at its real value. Yes, the Bank of Ghana can intervene by buying cedis and selling dollars but for that to be lasting it must have a whole lot of reserves to spare. As at February 2016, the BoG had $5.4 billion in foreign reserves, enough to pay for only 3.1 months of imports. Hardly money they can intervene consistently with. Central banks intervene at times when the short-term volatility is so much that businesses are unable to plan but if you seek to maintain some long-term value, then you don’t have a floating exchange rate.
This paper from the BoG explains that they intervene to either manage liquidity in the market i.e. they can buy or sell foreign exchange to control how much cedis is in circulation. Also they could sell foreign exchange if it felt its foreign exchange reserves are too high. I do not think that is the case now. That is why when media reports claimed that the BoG was pumping $20 million a day into the market, an Assistant-Director at the BoG clarified that what they were doing was stabilizing the currency by committing to reduce volatility and not that they literally went to the market each day with $20 million to sell.
This does not mean that a country’s currency cannot be overvalued or undervalued. Forex traders make money by betting on the direction that a country’s currency will move. A country’s currency may be overvalued in relation to other countries’ because their economic fundamentals are bad or political risk is high and so people believe the currency will fall in the future. But that is the function of the market. The market determines the rate and you can take advantage if you feel the market has undervalued or overvalued a currency relative to other currencies.
However, our issue of Eurobonds and the opening up of our two year notes to foreign investors have helped the cedi by bringing in extra foreign inflow. If the argument that the cedi is overvalued is based on the fact that we borrow too much in foreign currency, then it is legitimate. But then again the floating exchange rate means that if foreign investors believe our external debt is getting too big for Ghana to handle, they will start withdrawing their money and the cedi will depreciate rapidly. The floating exchange rate is therefore a type of self-regulating mechanism.
The other thing about the value of the cedi is that at this moment, our external debt burden is about 43% of GDP. 29% of our revenue is used to pay the interest on the debt. A weaker cedi would mean the debt in cedi terms would be higher and we will pay even more in interest. Also, of our total exports of $10 billion in 2015, 76% was made up of gold, cocoa and oil. The exports of those commodities depend far more on global demand than whatever rate the cedi is currently at. Could the remaining 24% benefit from a weaker cedi? Maybe, but what if they depend on imported inputs? Also by how much do imports reduce when the cedi is weaker? (I ought to examine this in another post).
My final point. How strong is the cedi really? The chart below shows appreciation since 2015 but the cedi has depreciated by more than 70% against the dollar since 2013.
The chart below shows our currency hasn’t exactly being a top performer.
I understand the concern of exporters but our currency really is not that strong and I think we stand to lose more from a weaker currency than to gain.