Solution to the Depreciating Cedi

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inflation

According to Ghana Statistical Service, Ghana’s annual inflation rate accelerated for the 16th straight month to 37.2% in September of 2022, from 33.9% in August.

It was the highest reading since July of 2001, even after Ghana’s central bank delivered another 250 bps rate hike during its October meeting.

Prices of imported goods (40.7%) accelerated faster than domestic items (35.8%), largely due to a weakening cedi. Upward pressure came mostly from prices of housing & utilities (68.8%); transport (46.8%) and food products (36.8%). On a monthly basis, consumer prices increased by 2%.

Ghana has been battling economic development since post – independence. To ensure economic development, there needs to be sound monetary and fiscal policies to curb habitual government spending, heightened imported consumer goods, corruption and increased printing of local currency which has culminated to the insidious effect of cedi depreciation and inflation. The current structure of Bank of Ghana is ill suited to ensuring stability of the cedi.

Little has been done by the central bank and government to rectify the structural weakness of the economy. Today, previous structural economic weaknesses compounded by unanticipated global shocks – COVID 19, Ukraine Russian war and an energy crisis engulfs the economy.

The government has to focus its attention on addressing basic issues causing the free fall of the cedi. The major cause of inflation is attributed to the exchange rate as we are an import – depending country. It’s time we stir up serious discussions on alternate solutions to fixing the Cedi’s Plight.

In this article I have provided solutions to ensuring economic recovery and to the depreciating cedi, however in one form or another Ghana needs to transform its economy to becoming a manufacturing or service delivery powerhouse to effectuate the under listed solutions.
Solution to ensuring economic recovery includes;

1. Government should industrialize (add value) to the cocoa sector as Ghana and Cote d’voire contribute about 60 percent of global share of 10 billion dollars, this should increase governments revenue.

2. According to worldometers Ghana has proven reserves equivalent to 20.5 times its annual consumption, which this is exclusive of net exports. At current consumption levels excluding unproven reserves at 20.5 times annual consumption rate Ghana will be left with 21 years of oil left. Ghana has been a net importer of crude oil, which its price is determined on the international market. We should establish oil and gold refineries to add value to these raw materials established as this will reduce USD foreign reserves which are used to purchase the oil. The balance of payment, government revenue and USD foreign reserve position will be strong as refined crude and gold is exported.

Solution to depreciating cedi;
1. Establishing a currency board. This board will be a rule based institution and hold 100% of the reserve USD against our monetary based (sum of all notes and coins in circulation) and will not engage in monetary policy. The currency board will consist of commercial banks and financial institutions as well as the currency board. Whenever we issue a currency it will be fully convertible into the reserve USD at a fixed exchange rate on demand. If this is done the government cannot finance its spending and monetize debt by printing money.

Hong Kong, Djibouti, Gibraltar, Bermuda, Cayman Islands, Singapore, Estonia, Bulgaria and the Falkland Islands operates currency board systems. There is hardly depreciation of the local currency from operating a currency board. An act of parliament should aid in establishing the currency board to prevent political interference. BoG should be independent from the currency board.

The major setback to establishing a currency board is the amount of USD reserve required to provide full backing to the cedi. For starters Ghana may need about 8 billion USD in addition to its 7.6 billion USD reserve as at June 2022 to cover the monetary base.

2. The proposed 3 billion USD IMF loan should be invested in foreign currency assets, and the returns from investment can be used to service the loan.

3. Ghana needs to transform its economy to becoming a manufacturing or service delivery powerhouse or provide global services. Not doing this will be a worthless exercise since our primary export products are determined by the dynamics of the global market.

4. Government needs to restore confidence in BoG and provide appropriate economic policies. In doing so a precipitous cause of the cedi depreciation which could partly be blamed by currency speculators will be cured. We cannot leave the cedi to stabilize entirely to the outcome of the actors in the market.

Source: Asuama Yeboah Atoapoma
Economist

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