A Financial Analyst and Portfolio Manager at SIC Financial Services Limited, Mr. Isaac Kwasi Mensah, has recommended some solutions to the country’s exchange rate problems as Ghana’s monetary policy authority scratches its head in search of policy options to stabilize the foreign exchange market and save the plunging local currency- the cedi.
Last week, the Ghanaian cedi was expected to remain largely stable across all segments of the FX market as the apex bank in its Monetary Policy Committee (MPC) meeting maintained the policy rate in a bid to continue safeguarding the local legal tender. However, following the outcome of the MPC meeting last week where the MPC held its policy rate at 19%, the cedi weakened further by 14 pesewas, declining from GH¢8.13 in the previous week to GH¢8.27 last week (29th July, 2022) to the dollar in the interbank market. However, in the forex market, the cedi ended the week selling at GH¢8.80 to the dollar.
In reaction to the outcome of the MPC meeting in an exclusive interview with the Vaultz News, Mr. Isaac Kwasi Mensah, recommended the Bank of Ghana (BoG) to use the crawling peg option as the sure path for the country to tackle the spiraling depreciation of the cedi. This option means that the country fix the rate at a near market GH¢/USD exchange rate and then allows its currency to depreciate (or appreciate) against the USD by close to the difference in annual inflation.
“Today, this means starting at a GH¢/USD exchange rate of around 8.27/1 and then allowing the currency to depreciate by around 10 percent per year. It also means allowing knowledgeable willing buyers to do business with knowledgeable willing sellers at contracted rates. The Bank of Ghana may intervene in the market when rates are significantly higher or lower than its target. Kenya and Botswana have successfully managed their exchange rates for a number of years using this option.”
Mr. Isaac Kwasi Mensah
Mr. Isaac Kwasi Mensah moreover, noted that the policy of pegging the Ghana cedi to the USD exchange rate has the benefit of dampening imported inflation.
Floating of the Cedi
The second option, Mr. Kwasi Mensah said, is to float the currency. That is, allow the forces of demand and supply to determine the rate at which the local currency exchanges for the USD.
“Countries that have been able to do this successfully are those who are able to achieve a long-term rate of inflation that is not significantly different from that of our benchmark currency– the USD. Examples are the UK, Eurozone, Japan, and Singapore.”
Mr. Isaac Kwasi Mensah
On why Ghana should not float its currency, the analyst stated that there would be “A lot of exchange rate volatility because of the large difference between Ghana cedi inflation and USD inflation and the fact that oil revenues, one of the principal source of US dollar, fluctuates wildly”.
Given the above scenarios, Mr. Mensah said Ghanaian politicians and policymakers need to face the reality, eat the humble pie, and accept that the current exchange rate regime is not working.
While adopting the crawling peg exchange rate management option, Mr. Mensah averred the country can manage its long-term inflation downwards and significantly reduce the annual rate of currency depreciation. To do this successfully, he said there is the need to first understand the cause of depreciation in Ghana.
“Ghana adds more people to her population every year. This results in a significant increase in demand for imported items which required significant dollar for the transactions.
“I believe that if Ghana is better able to manage her population growth [demand] and can get a greater proportion of her people to work and produce [supply], she can reduce long-term depreciation and inflation significantly. These, in my opinion, are the nuts that Ghana needs to crack to get there.”
Mr. Isaac Kwasi Mensah
Meanwhile, the Bank of Ghana’s efforts to stabilise the foreign exchange market are failing to yield the desired results while the cedi continues to take a beating amid demand pressure for dollars to meet her importation needs.
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