Question

Ghana cedi is the best performing currency against US dollar’ – Bawumia

The cedi is the best performing currency in the world against the US dollar. This is according to Vice President Dr. Mahamudu Bawumia.

The cedi depreciation, which has been a major problem in the country over the years, has even led to the inauguration of the FX Development Committee to tackle issues relating to the depreciation of the cedi and find solutions to them.

The cedi last year depreciated by more than 12.7 percent, the worst performance since 2015 when the cedi depreciated by more than 14.6 percent.

But commending the governing New Patriotic Party (NPP) for the good work done in sustaining the cedi at the Town Hall meeting held at Kumasi on Tuesday, the Vice President said there has been a major change in the cedi’s performance since the NPP got into power.

“Indeed for us, if the cedi is to match what the NDC record is, in terms of the nominal change in the currency, we’d have to do a quadruple jump which means we have to move from 4 close to 16 to be able to match their record. We have only gone from 4 to 5.35 and they are making noise.”

“So thankfully, this year, the cedi is performing quite well and reflecting the fundamentals and currently, the cedi is the best performing currency in the world against the US dollar. As we speak this year, with an appreciation of 3.4%, the data shows that Ghana’s macro-economic fundamentals are strong,” he indicated.

Bawumia on cedi depreciation

Dr. Bawumia at a town hall meeting in 2019 similarly took a jab at the NDC for an explanation of the cedi depreciation.

The opposition party had trumpeted a popular quote from Dr. Bawumia that “if your fundamentals are weak, the exchange rate will expose you” to show that the NPP government had also failed in the management of the cedi.

But the Vice President insisted that the fundamentals are strong and described such arguments as warped.

BoG to auction US$715 million

As part of plans to fight the depreciation of the Ghanaian currency, the Bank of Ghana (BoG) announced that it will auction US$715 million in Forward Foreign Exchange Auctions for the year 2020.

Per the schedule released by the Bank of Ghana, the central bank will have the highest auction of 80 million dollars each in January, February and March 2020.

The move to auction such an amount of US dollars is expected to help arrest, to some extent, the perennial depreciation of the cedi.

FX Development Committee

The Finance Ministry inaugurated a committee to look into the causes of the depreciation of the cedi and propose solutions to the problem last month.

The establishment of the committee, named the FX Developments Committee, is in fulfilment of a promise made by the ministry last year to constitute a bi-partisan committee to look into the problem and help address it.

According to the ministry, the committee will work to complement the efforts of the Bank of Ghana in curtailing the usual poor performance of the cedi against other major foreign currencies.

The committee will also review the current forex regime, identify the inherent constraints in the system and offer workable alternatives by way of policies and programmes which potentially would reduce FX risks in the economy.

QUESTIONS

1. How is Ghana positioned to increase the value of the cedis?

2. Do you think there is a conflicting role between BOG and FX Development committee? (Please give reasons for your answer)

3. Controls on imports and/or foreign exchange dealing has been one of the arguments used in maintaining fixed exchange rate. What problems might arise if the government were to

adopt this method of maintaining a fixed exchange rate?

Answer 1

1) To increase the value of cedis, Bank of Ghana is going to auction US$715 million. If it sells US dollars in the market, then demand for cedi will increase vis-a-vis dollar and its value will increase. Furthermore, it set up FX comittee to look into the problem and arrest the depreciation. Going by the Vice Presidents's assuarnace that the fundamentals are strong, Ghana can sustain the value of its currency.

2) No, there is infact a complementarity between roles of BOG and FX committee. Both were set up to ensure better performance of cedi in the international market. As is stated by the ministry of finance, "the committee will work to complement the efforts of the Bank of Ghana in curtailing the usual poor performance of the cedi against other major foreign currencies".

3) A fixed exchange rate does not represent the true value of a currency. A country needs huge amount of reserves to engage in foreign exchange dealings. Otherwise, rapid devaluation can take place, which leads to capital flight. Import controls might make the currency stable in short run, but it also increase the price of those goods which are imported. If those goods are essential, then this can lead to unsustainable level of inflation. Inflation puts a downward prssure on currency.

Hence all measures to maintain fixed exchange rates prove futile in long run.