Saturday, 27 April 2019

Cedi depreciation likely to improve on fiscal deficit

Image result for Cedi depreciation

By Elorm Desewu

A debt analysis by the Finance Ministry shows that a 10 percent cedi depreciation would improve the country’s fiscal deficit by 0.06 percent. This is because oil revenue and foreign grants will exceed forex denominated spending in 2019 which is made up of interest plus foreign financed capital spending.
According to the Finance Ministry, the cedi depreciation will also improve the trade balance by 2.27 percent in 2019 through import compression, although this would also increase domestic prices through imported inflation.
A 10 percent depreciation of the cedi against the US dollar affected the budget deficit negatively in 2018, but positively in 2019. In particular, a 10 percent depreciation would result in an increase in the debt-to-GDP ratio by 1.53 percent in 2019.
Exchange rate depreciation poses a major risk to the fiscal position through various channels. On the revenue side, while international trade tax revenues are expected to decline as importers cut back on imports due to higher import prices, inflows from oil-export revenue are expected to increase. The net revenue impact depends on which effect dominates. On the expenditure side, exchange rate depreciation may increase the cost of expenditures in cedis through higher interest cost and principal payments on foreign currency denominated debt, as well as increase the cost of foreign currency denominated government contracts and imports. It will also cause the debt-to-GDP ratio to deteriorate, given the large share of external debt (50.7% of total public debt).