Weak cedi, energy challenges choke economy

Business News of Tuesday, 10 February 2015

Source: Graphic Online

Ghana Cedis 19Nov2010

The domestic economy was under strain the better part of last year as the sliding local currency, recurring energy challenges, high government expenditure, rising fuel and utility costs and other factors combined to create nervy times for Ghanaians.

With the eight months election petition holding back economic activities in 2013 most people were looking forward to a rebound in 2014. That was not the case as those political risks in 2013 impacted negatively on external inflows and hence domestic reserves.

The development was also not helped by the U.S. Federal Reserve’s announcement of the winding down of its bond purchases leading to capital flight early in the year.

Furthermore, with demand by corporates, importers and individuals high at the beginning of the year, there was a supply crunch during the first six months of 2014 sending the cedi into a free fall. The cedi was down 19.3 per cent against the dollar at the end of first quarter (Q1) and 28 per cent at the end of June 2014.

The rate of the cedi’s fall against the major trading currencies necessitated the introduction of some measures by the Bank of Ghana (BoG) in February but these failed to yield the desired results as the local currency closed the year down by a cumulative 32.5 per cent against the dollar.

Moreover, with Ghana heavily import dependent, the foregoing developments impacted on the domestic prices of petroleum products, and hence goods and services. With the exchange rate a key determinant of fuel prices, petrol and diesel prices jumped by about 50 per cent over the course of the year.

Between December 2013 and December 2014 a litre of petrol rose from GH¢2.19 to GH¢3.39; diesel increased from GH¢2.26 a litre to GH¢3.30. The rise in fuel costs weighed on utility prices as the country derives about 48 per cent of electricity from thermal plants (crude oil and natural gas sources).

Inflation breaks new highs

The preceding developments led to inflation breaking new ceilings in 2014. Year-on-year prices of goods and services as measured by the consumer price index (CPI) rose from 13.8 per cent in December 2013 to a four-year high of 17.0 per cent at the end of December 2014.

In a bid to contain inflationary pressures, the bank of Ghana’s (BoG’s) Monetary Policy Committee (MPC) reviewed its policy rate cumulatively by 500 basis points during its quarterly meetings of the year; from 16 per cent at the end of December 2013 to 18 per cent in February 2014 and again by 21 per cent in November 2014.

The high levels of inflation, which led to higher borrowing costs, proved challenging for domestic economic participants. Businesses and consumers also had to grapple with irregular power supply, while those who depended on generating units saw costs rise.

Money market

Treasury rates rallied during the first half of the year as worsening economic conditions which saw the local currency lose grounds and inflation pressures reach heightened levels, led dealers and investors to demand higher risk premiums on their investments.

Though the local currency registered some gains during the latter part of the year, price levels continued to edge upwards on account of higher utility rates and fuel costs.

The rally in rates was also aided by the Central Bank’s move to make domestic investments attractive and reduce speculative activities on the forex front. In view of the foregoing, rates edged up to the highest levels since 2009.

The 91-Day bill rose from 19.22 per cent at the end of 2013 to close 2014 at 25.81 per cent. Over the same period, the 182-day bill also climbed from 18.66 per cent to 26.41 per cent, while the one-year and two-year notes also closed 2014 at 22.50 per cent and 23 per cent from 17 per cent and 16.80 per cent respectively.

Currency market

On the currency front, the cedi registered its worst performance in the last five years as external and endemic factors combined to haunt the local currency.

A decision by the U.S. Federal Reserve to trim its bond purchases in early 2014 saw inflows into the country taking a hit. This move led to a number of investors exiting some domestic investments and repatriating the funds.

Since demand by corporates, importers and other economic actors for forex usually outstrips supply during the first three months of the year, the Fed’s decision put further strain on the local currency during the first half of the year.

Additionally, improvements in the economies of a number of advanced countries early in the year, which gave a boost to their currencies, made the cedi struggle for stability, while deterioration in economic fundamentals also eroded confidence in the local currency.

The BoG introduced some measures to stem the tide but these failed to yield the expected results as the cedi closed the year down by 32 per cent against the dollar. Interbank midrates for the cedi versus the dollar rose from GH¢2.16 at the end of 2013 to GH¢3.20 at the end of 2014.

Funds from the Eurobond and the cocoa syndicated loan gave a boost to the cedi during the last three months of the year but the local currency still shaved 23 per cent and 28 per cent against the Euro and the Pound Sterling to close the year at GH¢3.90 and GH¢4.98 respectively.