Cedi depreciation likely to improve on fiscal deficit
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).
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