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Real Effective Exchange Rate appreciates 2.1 %

November 18, 2020
Stephen M.Cby Stephen M.C
in Economy, Top Stories
0
Real Effective Exchange Rate appreciates 2.1 %

Financial business themed illustration with financial numbers and US dollar symbol in blue

 Real Effective Exchange Rate from Ghana’s 18 trading partners for the first eight months of the year shows a real average appreciation of 2.1 percent in year-on-year terms. Compared to the same period in 2019, the cedi depreciated 3.0 percent in real terms.

According to the central bank, this was driven by the relatively higher domestic inflation compared to the average of the 18 trading partners.

In the recent Monetary Policy Report on the Global Economic Developments & Ghana’s Balance of Payments, the Bank of Ghana stated that the real effective exchange rate on average appreciated by 3.2 percent in year-to-date terms compared with a real depreciation of 0.8 percent in the previous year.

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Conversely, the real effective exchange rate movements of the cedi against the three core currencies (Pound Sterling, US Dollar, and the Euro) shows that on a year-to-date basis, the cedi appreciated by 1.4% in real trade-weighted terms and by 5.0 percent in real forex transaction weighted terms at the end of the first month in Q3 2020.

In August 2019, there was an appreciation of 0.03 in trade-weighted terms and a depreciation of 3.8 percent in FX transaction weighted terms regarding the real effective exchange rate regarding its economic fundamentals.

The Bank of Ghana stated that the “estimated Behavioral Exchange Rate Equilibrium points out that the real effective exchange rate is broadly in line with its macroeconomic fundamentals, with deviations within generally acceptable levels and a strong tendency to converge to the long-run trend as depicted in the last data point.

“In terms of its impact on the external sector performance, the real exchange rate remains competitive in supporting the strong trade balance outturn and the current account improvement for the first quarter of the year”.

BOG ghana news compressed
Dr. Ernest Addison – Governor of the Bank of Ghana

The real effective exchange rate is the weighted average of a country’s currency in relation to an index or basket of other major currencies. The weights are determined by comparing the relative trade balance of a country’s currency against each country within the index.

In nominal effective terms, which involves taking the movements in major trade partner currencies into account, the cedi depreciated by 7.94 percent in nominal trade-weighted terms on a year-to-date basis.

 This compares with the depreciation of 5.55 percent in nominal trade-weighted terms over the same period in 2019.

In real bilateral terms, which means adjusting for inflation, the cedi appreciated by 5.4, 4.9, and 0.3 percent, respectively against the dollar, pound sterling, and the Euro on a year-to-date basis.

Comparatively, for the corresponding period in 2019, the cedi’s real exchange rate depreciated by 4.3 percent against the dollar and appreciated by 0.7 percent against the Pound Sterling, and the Euro respectively.

The central bank stated that the movements in the cedi also reflected the improvement in global financial market risk sentiment in addition to inflows from mining, remittances, FX auction, and BOP support which helped to ease the pressures from the corporate sector.

The Interbank Exchange Rates also shows that on a year to date basis, the cedi depreciated by 2.66 percent against its major trading partner, the dollar in August 2020, compared to a depreciation of 8.74 percent in 2019. The cedi has therefore gained some level of stability in the review period in 2020 as compared to the same period in 2019.

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