The Zeros Are Coming Back

The accelerating depreciation of the Ghana Cedi in recent times has attracted a lot of attention and concern and now fears are been raised about how deep the Cedi will sink before a rescuer is called in to help.

In December 2008, the United States dollar was going for GHc1.10 only. In a spate of five years the Ghana Cedi has so depreciated that one US dollar is now going for Ghc2.60; more than a 100 per cent cumulative depreciation.

The exchange rate, we have been told, is a measure of the relative price of goods between two countries. So in the case of the US dollar and the Ghana Cedi, its mean the exchange rate is about the relative price of goods and services that the two countries trade in.

For this reason some people like to blame the depreciation of the Ghana Cedi against the dollar to increasing imports. But that cannot be the case. The prices of these goods are relatively stable in their countries of origin but the problem is that since the sales are done in Ghana Cedis the importers always have to buy dollars in order to return to the market to import some more.

The question of supply is therefore a major factor in the determination of the exchange rate. How many US dollars does Ghana officially and legitimately make and how many US dollars that the country routinely require to run the economy?

So for instance we need to find out how many dollar-denominated statutory payments the Government makes by way of interests on loans that the Government has contracted. This goes to suggest that the more loans a Government contracts, the more interests it has to pay in dollars terms.

If the Government’s investments with loans do not yield the necessary profits in dollar terms, then the Government is forced to borrow more to pay interests. It has been suggested somewhere that the Ghana Government requires about USD4bn annually to pay interests on loans that are due. The high demand on the dollar and accelerating depreciation of the Ghana Cedi is therefore understandable.

The Bank of Ghana has shown over and over again that they simply do not have the answers to this puzzle. They are always blaming the “dollarization of the economy” for the depreciation. A month ago, the Governor of the BOG, Dr. Henry Wampah was quoted in the media as saying “We have a policy that aims at broad stability in the exchange rate. We don’t know the basis of the current projections in the media but we will still continue to ensure that the tight monetary policies will continue.” This was when the BOG was being alerted about the free fall of the Cedi. At the time the dollar was still selling at GHc2.20.

Today the dollar is going for GHc2.60 and the BOG is still talking about their tight monetary policies. They are also still blaming the depreciation on the dollarization of the economy. They simply are not up to it.