What a week it has been! I had meant to write about the 2023 budget statement, then the IMF Staff Level Agreement, and then 50.3% inflation recorded for November. However, I figured that all these pale in importance to discussing the rapid appreciation of the cedi which has left many people asking questions. And if you cannot read about the cedi on CediTalk then what exactly is the purpose of this publication?! So let’s dig right in.

After USD/GHS reached a peak of GH¢15 in mid-November, the cedi has gained 35% and now trades around GH¢9.5 to the dollar. This brings the year-to-date depreciation to about 36% compared to the ghastly level of 60% that it was at its lowest. This rapid rate of depreciation and appreciation indicates that there is a large level of speculation in the currency. This simply means there’s a lot of buying and selling of the cedi not for purposes of business transactions but simply for the purpose of profiting from the price swings. The level of speculation in October was so high that the Bank of Ghana (BoG) met heads of banks and forex bureaus to understand what could be done to check the cedi’s volatility on the retail market. In explaining the cedi’s shock slide and rapid recovery, I will be relying on the importance of a narrative.

People tend to think that financial markets are rational or that they operate on standard principles with millions of number crunchers determining what assets to buy or sell. But that’s not necessarily so. Markets are driven by demand and supply. And human sentiment plays a large part in this. An asset can rise sharply because of a strong narrative around it even if there does not appear to be any fundamental difference between it and other assets with much lower valuations. In the same way, an asset can sharply drop based on a narrative. Information does not flow as freely as it should to inform investors and even when it does, investors have sharply different interpretations of information based on their preconceived ideas as well as their emotional attachment to the bets they have placed. In the case where information is interpreted in almost the same way by almost all market participants then assets can move sharply in one direction at unprecedented rates.

In the case of the cedi, the 2022 budget statement that was read in November 2021 simply spooked investors. The 2020 deficit of 13.8% of GDP was followed by a 2021 deficit of 12.1% which showed that Ghana’s debt, already bordering distress levels before COVID-19 struck, had ventured into the territory of unsustainability. Ratings agencies downgraded the nation’s debt and for the first time in 10 years, there were no eurobonds for the country to rely on. To make matters worse, high inflation in the US and Europe as well as high global oil prices hit the currency on two fronts. Firstly, higher US and Europe interest rates to tackle inflation sucked investors out of riskier countries like Ghana and back into the safety of US, UK and Eurozone assets. Secondly, a $400m per month fuel import bill was emptying the BoG’s forex reserves as well as draining forex out of the economy as a whole. (For a more detailed explanation on the economic causes see this post).

But let’s leave the macroeconomics and take a dive into market psychology. To paraphrase Matt Levine, risk-free assets are riskier than risky assets. If a stock swings 20% per day, people will hardly budge. But if a risk-free asset that guarantees 0.5% appears that it can only pay 0.4% suddenly there’s a whole risk of systemic collapse and people panic. So if a country that has a finance industry built (almost through regulatory design) on the inviolability of government debt faces a fiscal situation where debt looks like it cannot be paid back then there’s a panic. People will frantically discard the currency and seek sanctuary in safer currencies. I wrote about this development in September, even before the frantic speculation that we saw in October.

Now to this rapid pace of appreciation. Starting with the macroeconomics.

• Soft US inflation numbers for October and November have slowed down the fear that the US Federal Reserve will continue to hike interest rates at the pace that they have in 2022.
• Oil prices have fallen significantly from about $100 per barrel to around $80 per barrel slightly reducing the value of dollars needed for fuel imports.
• According to Dr. Philip Abradu-Otoo of the BOG, demand for dollars have reduced as high import prices and high custom duties have traders on the sidelines.
• Dr Abradu-Otoo also mentioned the tightening of liquidity requirements in banks that the BoG implemented in September, thus reducing the supply of cedis on the market.
• Cocoa syndicated loans that hit the BoG’s account in October aided to stabilize the cedi a bit through the storms of November before the change in narrative started to strengthen the currency.

But the most important catalysts were the announcement of the debt exchange programme and the subsequent announcement of the Staff Level Agreement with the IMF. People’s concerns was that Ghana, long seen as a stable investment destination, was becoming an economic pariah due to their refusal to seek help from the IMF and then their unsustainable debt which was going to lead to a rejection by the IMF. Once the debt exchange was announced sentiments turned immediately. Ghana had found a way to work around its unsustainable debt and so this was just going to be another one of Ghana’s numerous IMF deals. Nothing to see here. Situation is back to normal.

This post is already lengthy so I will not dig into whether the fundamental financial imbalances have changed (they haven’t) or whether the debt exchange programme (an IMF board level approval requirement) will be accepted by investors. Instead I would like to conclude on how dangerous the violent volatility of the cedi this year is.

The above chart is not how any currency of a sovereign nation should trade. Trust that a country’s currency would be a store of value and a stable unit of account is essential. People plan their savings, investments, businesses, careers and retirements around the assumption that a country’s economy would be largely predictable. When a currency displays the tendency to swing wildly in one direction or the other in very short periods it raises the possibility that one can be brought into financial ruin within a short period. That is a disincentive for long-term planning centred around a currency or even worse – around a country. These wild swings over the past few months have been indicative of a systemic weakness in the currency that needs to be addressed with all urgency. People’s lives should not have to be this impacted by narratives.