What caused the Ghana Cedi to fall?
Not so long ago, the Ghana cedi was considered safe to hold as a store of value – and therefore a good instrument for investment. It was even nicknamed ‘Kufuor dollar’, reflecting its almost consistent one-to-one parity with the US dollar. But since the beginning of the year, that high level of confidence has waned dramatically; with people holding large stocks of the cedi dumping them especially, in favour of the US dollar, causing the cedi to depreciate at almost two percent against the dollar since the beginning of the year.
Fearing that the depreciating local currency might induce economic panic or rather, the more undesirable reverse case of a panic causing flight from the cedi the President of the Association of Ghana Industries (AGI), Mr. Tony Oteng-Gyasi, last week, sought to assure the public of the economy’s sound health by emphasising the confidence of industrialists in the economy.
Of course, this is the sensible thing to do: however, investors with dollar-denominated mortgages are getting nervous by the day, since a continuing slide of the cedi means difficult times ahead for them. They believe it is time for government’s intervention to shore-up the cedi.
But they are not the only ones biting their nails and hoping for some state intervention. Manufacturers, whose products have a substantial component of imported inputs, tend t to buy such inputs in dollars and they lose purchasing power when converting their cedi earnings to dollars.
Indeed, the cedi started sliding against the dollar last year, in which period the local currency recorded its worst annual depreciation against the dollar at over 25 percent.
That situation is attributable to the negative impact of the four interlinked crises; food and fuel crunches accompanying and intensifying a financial one, which in turn became a global economic recession that rocked the world last year.
And that would have been enough reason for panic, to cause a slowing in foreign direct investments with a possible low intensity flight from the cedi. That did not happen.
In fact, the slow, steady slide of the cedi in some period of the previous year could have helped in offsetting yet another worry to the country’s economy.
With the meteoric slide of the cedi since the beginning of the year, exchange rates at the banks changing two or three times in a day (not to mention the rates of forex bureaux, and worse – the increasingly thriving black market), the private and public sectors are indeed beginning to be panicky.
Certainly, the state may have to intervene to set interest rates to control the value of the local currency rather than to hit growth targets, among others. Such a measure could succeed ultimately, if it were only the four interlinked global crises causing the cedi’s woes.
What other cause?
Judging from the behaviour of the cedi, its rapid dip from the beginning of the year is attributable more to dynamics within the country than to the external environment.
The intensity of electioneering activities in the last quarter of the preceding year created some apprehension among investors, with instances of imported machinery and other inputs for production being held at sea awaiting the outcome of the elections.
Subsequent pronouncements by some key functionaries of the victorious National Democratic Congress (NDC) party may also not have helped matters.
The Oxford Analytica, a London based political economy think-tank, in an early outlook of Ghana’s economy indicated that the new administration would have to act quickly to shore-up investor confidence, given that that party’s legacy from the Rawlings era is one of hostility towards private business.
President Atta Mills has assured that his administration will be a clear departure from the negative practice whereby every government without exception, since independence, had suppressed private sector companies because they were perceived as being allied to an opposing political interest. Utterances of key functionaries in his administration could, however, be undermining investor confidence.
Mr. Ken Otori-Atta, the CEO of Databank Ltd, the first winner of Ghana’s premier ‘Most Respected Company Award’, was a major supporter of the Akufo-Addo (NPP’s presidential candidate) campaign effort. After the elections, Databank was maligned – only to be subsequently apologised to.
Moses Asaga, NDC’s finance spokesperson and Hannah Tetteh spokesperson for the new administration’s transitional team and now selected as Minister for Trade and Industry, have all been talking of a frightening economic mess they have inherited.
However true that may be if it is at all it does not inspire confidence in investors to want to retain their monies in, much less commit more to the local economy. In this day and age, timing the release of critical information is as crucial as its content.
Mr. Haruna Idrissu, selected for the Ministry of Communications, has stated emphatically that several investment contracts under the previous regime will be critically revised.
The NDC is not so wet behind the earshot to know that investors are a breed of shy creatures whose money is even shier and will take to flight at the slightest hint of danger.
The least said about the utterances and the activities of other appendages of the new administration such as the CJA and some founding-members of the party, the better.
The new administration stands to lose most in the event of the cedi depreciating uncontrollably, simply because they will be assessed against the backdrop of a long spell of macroeconomic stability under the NPP administration.
As the country integrates more and more into the global economy, it becomes increasingly sensitive to changes in the external environment; but so also does the external environment react sharply to developments within the country.
We are no longer an island.
Since the quality of our lives is significantly influenced by the perception others have of us, we cannot afford to be reckless any longer. The health of our economy can be, and indeed is, affected by our political posturing maybe this is the best time to learn that our politics is not a zero-sum game anymore.
Credit: Emmanuel Kwablah