Sunday, 24 February 2019

Cedi depreciation caused by limited safe assets investment options in Ghana

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Adnan Adams Mohammed

The recent sharp depreciation of the cedi has been attributed to lack of safe asset classes into which people can invest due to limited product availability on the capital markets and the dismal performance of the stock markets pushing fund managers to invest in performing assets like the US Dollar, gold, land among others.

The recurrent situation of the cedi depreciating was to do with supply and demand of the US Dollar, which is a preferred asset or currency the ordinary Ghanaian wants to hold so it does not lose its purchasing value relative to other available assets; given the crises in the banking and fall in confidence in savings in the non-banking sector, and the low rates given by the commercial banks.
“People need to move excess funds into some other asset that can give them some return or at least hold its purchasing parity”, Alex Mould, former GNPC boss has said. 

The local currency, the cedi since January 2019 has witnessed some depreciation, trading against the dollar at GHC5.27 as at press time last week from GHC4.90 as at December 31, 2018. The decline in the value of the cedi is having a negative impact on traders, particularly importers.

Traders and businesses in the import business need to continuously buy Forex for their business at a higher rates, this applies to nearly every sector in the country since the economy is heavily import driven. This results in the scarcity of the US Dollar which is a major trading currency for Ghanaians. The shortage in supply results in appreciation in the value of the currency while weakening or depreciating the value of the local currency (cedi).

“Given that we have opted for a regime of flexibility, we will see some level of depreciation. What we want is to bring some level of stability to slow the depreciation rate…I’m not saying that at GHc5 to the dollar, market players won’t lose money but with a stable rate of 3% instead of an uncertain rate, people can then plan,” Economic Advisor and Spokesperson to Vice President Dr Mahmud Bawumia, Dr Gideon Baako has said.

Meanwhile, Director of Treasury at the Bank of Ghana, Steven Opata debunked that, the current free fall of the cedi against major trading currencies especially the dollar has nothing to do with Ghana’s economic fundamentals. He added, currently, the economic fundamentals are good and the central bank expects the cedi to bounce back sooner than later.

“If you look at the fiscal situation, it has improved significantly, if you look at the trade account, it’s been very solid. The current account has also been improving. The fundamentals are solid.” 

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