Corporate demand and a strong US dollar have put significant pressure on Ghana’s currency, the Cedi, during the first four months of 2024.
Databank, an asset management company, predicts that the cedi will continue to weaken in the coming weeks due to a mismatch between foreign exchange (FX) demand and supply.
According to Databank’s latest reports, the Bank of Ghana has injected approximately $270.1 million into the FX market as of April 3, 2024.
This injection included $150.1 million in immediate transactions and $120 million in forward contracts for Bulk Oil Distribution Companies (BDCs). The aim is to enhance liquidity and stabilize the value of the cedi.
Despite the demand and supply mismatch, Databank anticipates that liquidity will improve following the approval of the IMF program.
“We anticipate improved liquidity conditions toward the end of Q2 2024 after board approval of the second review, which will lead to a tranche disbursement of US$360 million under the IMF program.”
Databank
Meanwhile, the US economy remains robust, leading to continued strength in the dollar. The greenback has outperformed nearly every other major currency so far in 2024.
The Federal Reserve recently announced that it will maintain its current interest rates following its meeting from April 30 to May 1, 2024. This decision keeps the federal funds rate within a target range of 5.25 to 5.5 percent.
The Fed’s decision coincides with a 3.5 percent year-over-year inflation rate recorded in March, following a peak of over 9 percent in mid-2022, which was the highest in decades.
According to the US Bank, “If attractive interest rates and economic conditions in the US draw foreign investors, the dollar is more in demand and gains strength.”
As a result of the dollar’s strength, the depreciation of the cedi against the dollar worsened year-to-date. It saw a depreciation from 6.8 percent at the last Monetary Policy Committee (MPC) meetings to 14.11 percent currently.
However, investment advisor Constant Capital warned about a potential shortage in foreign exchange (FX) supply, citing underlying fundamental factors.
“The disinflationary trend seen earlier in the year was reversed in two CPI readings in the first quarter and inflation remains worryingly elevated in the economy, on rising food and utility prices. Additionally, Ghana’s cocoa output for the 2023/24 season is expected to be almost 40 percent below a target of 820,000MT.”
Constant Capital
Government FX Funding Falls Short
Moreover, the current total government financing in foreign exchange (FX) from the World Bank complex does not fully offset the decline in FX inflows from offshore bilateral and commercial sources.
Vice President Dr. Mahamudu Bawumia believes that the depreciation of the cedi has been manageable despite global economic challenges, especially when compared to the previous administration’s tenure.
He noted that the average exchange rate depreciation was 13.9 percent between 2009 and 2016, whereas it averaged 13.1 percent between 2017 and 2023 under the current government.
The significant depreciation of the cedi is directly impacting individuals and businesses, leading to increased costs of imported goods and higher inflation.
It’s crucial to address this issue urgently to alleviate the burden on the general population. Measures should focus on enhancing foreign exchange inflows through investment promotion, export support, and fiscal discipline.
Additionally, implementing policies to stabilize the currency, such as strengthening monetary policy and improving FX management, is essential.
By addressing the root causes of currency depreciation, Ghana can mitigate the adverse effects on real people and businesses, fostering a more stable economic environment.
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