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Fall Of The Cedi

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Fall Of The Cedi

Postby Minister of Finance » Sun May 20, 2012 9:02 pm

http://business.peacefmonline.com/news/ ... 112990.php

Ghanaians should blame the government and Bank of Ghana (BoG) for embracing the dollarization concept that is currently diminishing the strength of the cedi that looked so strong few years ago.

Instead of making strong policy that will make Ghanaians stick to the cedi and use it in major transactions internally, they have allowed Ghanaians to adopt the dollar as the preferred currency in most of their internal transactions, thus bringing about the sudden upsurge of the dollar which has rendered the cedi weak.

The officials of Bank of Ghana and the ruling party should know there are some substantial drawbacks to adopting a foreign currency.

In a fully dollarized economy, the central bank loses its role as the lender of last resort for its banking system. While it may still be able to provide short-term emergency funds from held reserves to banks in distress, it would not necessarily be able to provide enough funds to cover the withdrawals in the case of a run on deposits.

Another disadvantage for a country that opts for full dollarization is that its securities must be bought back in U.S. dollars. If the country does not have a sufficient amount of reserves, it will either have to borrow the money by running a current account deficit or find a means to accumulate a current account surplus.

Because a local currency is a symbol of a sovereign state, the use of foreign currency instead of the local one may damage a nation's sense of pride. Any country that embraces the dollarization concept loses right to control its own monetary policy and the Central Bank of that country forgoes its right as a lender of last resort for its financial network.

Today, rent rates are quoted in U.S dollars instead of the cedi, hotels operating in the country quote their rates in dollars. In this case, one has to go to the forex bureau or bank to purchase dollars to make payment as if Ghana is America.

We know that companies need foreign currencies to import materials; hence the use of dollar internally should be reserved only for these purposes and not for rental charges and other minor things that could have been taken care of by the cedi. Today in Ghana, when one puts GH¢2000 and a $1000 on a table and asks a Ghanaian to pick one, the person is likely to pick $1000 even though GH¢2000 is more than $1000 by the current exchange rate. This is how Ghanaians adore and glorify the dollar.

The Ghanaian Cedi exchange rate depreciated by 4.24 percent against the US Dollar during the last month. During the last 12 months, the Ghanaian Cedi exchange rate depreciated by 22.96 percent against the US Dollar. Historically however, from 2009 to 2012, the USD-GH¢ exchange averaged 1.50, reaching a historical high of 1.86 in April 2012 and a record low of 1.39 in May of 2010. The Ghanaian Cedi spot exchange rate specifies how much one currency, the US Dollar is currently worth, as against the GH¢.

Implications of Currency Devaluation:
For a currency to be devalued means that the issuing government has mandated that the price of the currency (in foreign dollars) is lower than it was before. Now, regardless of whether a country has a fixed or flexible exchange rate system, there exists a "true" (we say "equilibrium") exchange rate. The equilibrium exchange rate is the exchange rate at which everyone who wants to sell the currency can find a buyer and everyone who wants to buy the currency can find a seller. By definition, a flexible exchange rate is the equilibrium exchange rate. This is not the case with a fixed exchange rate.

Consider the following analogy. The equilibrium price of a car is GH¢10,000. If the government imposes no restrictions on car prices (i.e. car prices are flexible), then the free market price of a car will be GH¢10,000. Further, there will be no surplus or shortage of cars; everyone who wants to buy a car (at GH¢10,000) will find one to buy, and everyone who wants to sell a car (at GH¢10,000) will find a customer.

Now, suppose the government imposes a price floor on cars of GH¢15,000. At the official price of GH¢15,000, many people will want to sell cars, but few people will want to buy cars. There will be a surplus of cars. If the government wants to avoid ending up hip-deep in unsold cars, it will have to buy the extras itself. That is the case with what is happening to the cedi. Initially, government was using its reserves to cushion the cedi and has now run out of dollars; hence it could no longer support it.

In conclusion, the current crisis hovering around the cedi and other economic crises in Ghana are caused by a combination of factors: The government has been ineffective in collecting taxes, which means that the government has to borrow more money to buy and pay for what it needs. In an effort to escape the effects of the economic collapse, investors want to buy strong currencies like the dollar and the Euro and to sell weaker currency like the cedi.

The voyage to dollars causes the equilibrium exchange rate of the cedi to fall flat. The Central Bank (BoG) finds itself forced to sell off almost all of its stock of dollars in an attempt to support a now untenable exchange rate.

As government runs out of money to buy what it needs and the Central Bank runs out of dollars to support the cedi, two things have been done: (a) the government prints more cedis thus causing internal inflation), (b) the Bank of Ghana devalues the cedi thus causing the government to default on its loans).
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Postby Minister of Finance » Sun May 20, 2012 9:03 pm

BoG institutes measures to arrest fall of Cedi


The Bank of Ghana (BoG) has taken measures to prevent further depreciation of the cedi against the major international currencies.

As part of the measures, the bank has reintroduced the Bank of Ghana treasury bills in tenors of 30 days, 60 days and 270 days with the intent to support the monetary operations of the bank and also provide additional avenues for cedi investments.

Furthermore, the BoG has introduced a revision in the application of the statutory reserve requirement of banks where banks will no longer hold their reserves in different currencies.

According to a press statement issued by the BoG, the banks would now be required to maintain the mandatory nine per cent reserve requirement on domestic and foreign deposit liabilities in Ghana cedis only.

The BoG has also made provision for the banks to provide 100 per cent cedi cover for their accounts with corresponding banks with the Bank of Ghana.

The measures take effect from Tuesday, May 1, 2012.

Presently, the value of the Ghana cedi against the US dollar stands at GH¢1.75 at the interbank exchange rate.

The Ghana cedi was introduced on July 1, 2007 at a rate equal to 10,000 old cedis. From the beginning of 1996 to the end of 2009, the cedi depreciated by over 90 per cent against the US dollar.

Meanwhile, Finance Minister, Dr. Kwabena Duffuor, has described the current fall of the cedi to the dollar as a departure from its normal performance.

Commenting on the free fall of the cedi in Accra Monday, Dr Duffuor said the government was doing all it could to surmount the situation in the next few days.

The minister said the government would not over-spend during this year’s election period, as was being speculated.

According to him, the current depreciation of the cedi to the dollar was an artificial problem which could be solved.

He said the country had, over the years, done well in controlling the fall of the cedi, noting that the government had laid a strong foundation for the economy and expected that the current problem would be controlled.


Source: Daily Graphic
http://citifmonline.com/index.php?id=1.882604
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Postby Minister of Finance » Sun May 20, 2012 9:05 pm

Political tension costly to nation - CEPA, AGI

The Executive Director of Centre for Policy Analysis (CEPA) and the President of the Association of Ghana Industries (AGI) say the rising political tension can undermine investor confidence in the local economy.

While the CEPA boss, Dr Joe Abbey, attributed the fall of the cedi to the high demand for the dollar due to fears of political uncertainty regarding the December polls, Nana Owusu-Afari said no businessman would invest in areas where there was persistent conflict.

They, therefore, appealed to politicians, political parties and their agents to defuse the political tension which was gradually creeping into the political discourse for the sake of the national economy.

Joining the fray of institutions and individuals concerned about developments in the local economy, the Trade Union Congress (TUC) also expressed worry and attributed the rapid decline in the value of the cedi to those developments.

In an interview on the economic implications of the current political tension, Dr Abbey said though Ghana had enjoyed a relative political and economic stability since the inception of democracy in 1992, the current political tensions might send wrong signals to the investor community.

The cedi has in the last four months lost more than 10 per cent in value against the US dollar on the back of a high corporate demand for the dollar and the withdrawal of some foreign investors from the secondary markets.

On Friday, April 20, 2012, the Ghana cedi traded at 1.792 to the dollar. The currency remains within sight of its recent record low of GH¢1.800.

This is in spite of the Bank of Ghana’s efforts to bolster the currency with a hike in the policy rate to 14.5 per cent in addition to other measures to free up foreign reserves held by local banks.

The CEPA boss said :“The investors in our market are speculating about future events in Ghana and those speculations are fuelled by the tensions we are currently witnessing”.

According to the renowned economist, though all the appropriate monetary and fiscal policies are in place for a stable currency, “inflammatory statements from politicians have tended to poison the atmosphere, thereby sending wrong signals to investors who have invested heavily in the country’s markets.”

He warned that “the weakness of the currency posed an inflationary threat and endangered the stability of the economy”.

The Bank of Ghana has since the beginning of the year circulated more than US$800 million dollars in order to stem the fall of the local currency, but the cedi is yet to stabilise.

Nana Owusu-Afari said the emerging violence in the biometric registration exercise could discourage investors from putting their monies in the Ghana's economy.

“As a businessman, I know no investor will invest in areas of persistent conflict. The result will be lack of development in those areas, which in turn will perpetrate poverty, which will lead to further conflicts-a vicious circle Ghana can ill-afford,” he said.

Speaking at the induction and graduation ceremony of the Organisation of African Trade Union Unity (OATUU) students, Nana urged the media and others on the political platforms to use language skills effectively.

Good communication skills, he noted, was key to ensuring peace and avoiding national and international disputes and conflicts.

“The resort to the politics of insult should be minimised. We in this country should be reminded of Budumburam and other refugee camps that harbour citizens from neighbouring countries. It is those countries today and, God forbid, it should not be Ghana tomorrow,” he said.

He observed that there were matters that could be resolved by parties through the process of mediation.

Meanwhile, a statement signed by the Secretary General of TUC, Mr Kofi Asamoah said the workers movement was worried about the rapid decline in the value of the Ghana cedi against its major trading currencies.

The TUC said depleting the national reserves to shore up the value of the cedi amounted to treating the symptoms of the problem rather dealing with its root cause.

The statement attributed the free fall in the value of the cedi to what it described as failed economic policies championed by governments over the last three decades under the influence of the World Bank and the International Monetary Fund (IMF).

It said the structure of Ghana’s economy made the nation over-reliant on imports while bringing down the value of exports.

These policies, according to the TUC, had been compounded by the over-liberalisation of the country’s external payment system allowing for the transfer of foreign currency out of the country.

It said the legal limits of people and companies transferring millions of dollars through the country’s porous borders had rarely been enforced.

“The regime of allowing foreign currencies to be traded like any other commodity is part of the problem,” it said.

The TUC believes that halting the free fall of the cedi would require a fundamental shift in policy and attitudes, particularly among the monetary authorities.

It called on the government and its agencies to review Ghana’s trade policies to ensure that in the medium to long term, Ghana put in place measures to wean itself from excessive imports.

“We expect them to address the many constraints that hinder domestic production and value addition and which perennially necessitate over-dependence on imports,” it said.

The statement said the current state of the cedi was worsening the living conditions of Ghanaian workers since it had pushed up the prices of goods and services. It had also forced a number of businesses that dealt in the dollar out of business.

“The TUC also urges the BoG to curb speculation on the forex market by imposing a Financial Transaction Tax (FTT) on foreign exchange transactions. The FTT would not only help stem the speculative attacks on the cedi but importantly generate revenue for national development” the statement said.

The TUC concludes with a call on the government to break the tradition of excessive spending in this election year.

“The tradition does not inure to the benefit of the people of Ghana. Also, a discerning voting public is increasingly becoming averse to such fiscal recklessness” it said.

When the local currency was redenominated in July, 2007, it traded at GH¢0.92 to US$ 1.00. By the close of 2008, it had fallen to par at GH¢1.00 to US $1.00.

Since the beginning of the year 2012, the national currency has depreciated by 8.3 percent against the dollar compared to the two percent depreciation it saw the same period in 2011.

In January, 2012 alone, the value of the cedi went down by 5.9 percent.

The Bank of Ghana (BoG) has explained that the situation was transitory as a result of the increasing demand by businesses for the dollar to pay for goods and services procured in December for Christmas.



Source: Daily Graphic
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Postby Minister of Finance » Sun May 20, 2012 9:07 pm

GCCI warns against free fall of Ghana cedi

The Ghana Chamber of Commerce and Industry has cautioned continuous speculation of the performance of the cedi against the dollar will push the cedi into continues free fall.

In January this year, the cedi has depreciated at a much faster pace of 5.9 percent compared to 1.9 percent the previous year.

The Bank of Ghana cites the strong demand for foreign exchange and some speculative activities as reasons for the cedi’s fast depreciation.

Some financial analysts had earlier this year predicted that the cedi will depreciate against the dollar by 10 percent but the Central Bank has downplayed the figure.

Businesses under the Ghana Chamber of Commerce and Industry have been severely hit by the depreciation of the Cedi and they fear the continuous speculation could lead to further depreciation.

“It’s hitting everybody, because we import a lot and in every sphere of trading, be it manufacturing or general trading, we buy and sell goods and by the time you need to restock, your revenue cannot even cover the things you bought the first time,” said Emmanuel Doni Kwame, the acting CEO of the chamber to Citi Business News.

He cautioned against the growing levels of speculations which he said played a role in the depreciation of the cedi and all the while deterring foreign investors from bringing business in the country.



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