Fitch Solutions has predicted that the Ghanaian cedi will recover some of its recent losses against the US dollar in the coming months.
According to the London-based firm, this anticipated improvement is due to enhanced investor confidence, increased dollar inflows, and easing external conditions.
In its article titled “Sub-Saharan Africa Currency Round-Up: Greater Stability Ahead in Second Half of 2024,” Fitch Solutions predicts that more favorable external conditions will provide support to Sub-Saharan African currencies in the coming quarters. This is welcome news for Ghana, as the cedi has lost approximately 20% of its value against the US dollar so far this year, marking it as one of the worst-performing currencies globally.
Several factors have contributed to the cedi’s decline. Weak capital inflows, subdued market sentiment, and ongoing debt restructuring negotiations have exerted significant downward pressure on the currency. However, the tide seems to be turning. The start of an economic recovery, evidenced by an acceleration in real GDP growth from 3.8% in Q4 2023 to 4.7% year-on-year in Q1 2024, has increased demand for foreign exchange, setting the stage for a potential rebound of the cedi.
Ghana’s international reserves remain low, covering just 2.5 months of imports as of March. Nevertheless, agreements with the International Monetary Fund (IMF) have allowed the exchange rate to adjust more freely to market conditions, which should help stabilize the currency.
Fitch Solutions projects that the cedi will regain value by 9.0% by the end of the year, from the July 9, 2024, spot. This optimistic outlook is bolstered by recent developments on the international front. On July 8, Ghana reached an agreement with international bondholders to restructure $13 billion worth of external debt. This restructuring process is expected to be concluded by the end of September 2024.
Fitch Solutions noted, “This restructuring will improve investor sentiment towards Ghana, enhance capital inflows, and apply appreciatory pressure on the cedi.” This sentiment is critical, as investor confidence plays a significant role in the performance of emerging market currencies.
Maintaining Macroeconomic Stability
The potential recovery of the cedi is not only crucial for maintaining macroeconomic stability but also for supporting Ghana’s broader economic objectives. A stronger cedi can help reduce inflationary pressures, making imports cheaper and aiding in the stabilization of domestic prices. This, in turn, could foster a more conducive environment for business and investment, ultimately supporting sustainable economic growth.
Furthermore, the expected improvement in the cedi’s performance aligns with broader trends in Sub-Saharan Africa. The region is anticipated to experience greater currency stability in the second half of 2024, driven by improved external conditions and increasing economic resilience. This regional stability could provide additional support for the cedi, as positive spillovers from neighboring economies help bolster investor confidence in Ghana’s economic prospects.
However, it is important to recognize that the cedi’s recovery is not guaranteed and will depend on several factors, including the successful implementation of debt restructuring agreements and continued economic reforms. Maintaining fiscal discipline and addressing structural challenges will be essential to ensuring sustained economic growth and currency stability.
As Ghana circumnavigates this period of transition, the focus must remain on maintaining fiscal discipline and implementing necessary reforms to ensure long-term economic stability and prosperity.
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