The Ghana cedi has strengthened against the dollar in 2020, with signs that the currency continues to gain some stability in line with the recent rebound in economic activities.
The Bank of Ghana noted in its 98th Monetary Policy Committee (MPC) meeting that the Ghana Cedi depreciated by 3.9 percent against the US dollar in 2020, compared with a depreciation of 12.9 percent in 2019.
Head of Treasury at Republic Bank Ghana Ltd, Nana Yaa Faakye has attributed the Cedi’s performance to the coronavirus outbreak which resulted in a reduction of travel and trade, which ultimately reduced demand for foreign currency from Ghanaian importers.
Steve Opata, head of financial markets at the Bank of Ghana, however, credited the performance of the Cedi to the central bank’s tight monetary stance, which he said: “is also supporting the currency”.
According to Mr. Opata, another factor in favor of cedi gains was the market reforms including the introduction of forward-rate foreign exchange auctions since October last.
It becomes very curious from the narrative so far for someone to want to know what accounted for the sterling performance of the Cedi last year.
Although some experts credited the performance of the Cedi to proper economic management by the current government, others hold contrary views.
The government deserves some commendations for the policies it rolled out to cushion the economy and to strengthen the Ghana cedi.
However, the performance of the cedi could also be credited to COVID-19.
Available data from the Bank of Ghana supports the latter view, as both exports and imports declined last year.
Total exports contracted by 7.8 percent year-on-year to US$14.5 billion in 2020, which the Central Bank attributed to a significant decline of US$1.6 billion in crude oil export receipts on the back of low prices.
Gold and cocoa export earnings, on the other hand, went up by 9.1 percent and 2.1 percent respectively, due to favorable prices and production volumes.
Total imports also declined by US$974 million to US$12.4 billion at the end of December 2020, underpinned by significant declines in both oil and non-oil imports.
These developments resulted in the trade balance recording a lower surplus of US$2.0 billion, representing 3.0 percent of GDP in 2020, compared with US$2.3 billion, representing 3.4 percent of GDP in 2019.
Depreciation of the currency is normally a result of excess demand for foreign currencies by economic agents. For instance, some domestic firms quote their prices in dollars, some schools pay their fees in dollars; all these put pressure on the domestic currency as a result of the increasing demand for foreign currencies.
Basic economics teaches us that once demand outweighs supply, the price must go up.
However, the opposite holds during the outbreak of the COVID-19 pandemic as supply chains were disrupted as a result of the imposition of the lockdowns across the globe.
The restrictions mean that businesses that import will no longer do so, therefore, they will have to reduce their demand for foreign currencies which they mostly used to pay their creditors or suppliers.
Travel restrictions also mean that demand for foreign currency will go down. All these factors play significant roles in the strong performance of the cedi in 2020.
Therefore, even though COVID-19 has caused havoc to the global economy, it may deserve some praise in this regard.
It is, however, very difficult to delineate the impact of the COVID-19 and the impact of government policy measures on the performance of the cedi from each other.
The question that begs for answers is; who should be credited, the government or Coronavirus?
