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Value of the Ghana Cedi; what the economic and econometric data & analysis suggest

The structural challenges which confronted the Ghanaian economy in 2014 were considered mainly as the result of two-year lagged effects of policy decisions of 2011 and 2012, which necessitated the country’s engagement of the International Monetary Fund in 2014. The primary objective of the program (Extended Credit Facility) is to lay some credence to the policy regime of the government in order to possibly boost investor confidence, whiles providing a sound regime of fiscal policy to consolidate the existing distortions in the economy.
The decline/crisis in Ghanaian economy was primarily driven by key monetary factors such as
1) a tight fiscal space,
2) high cost of credit,
3) relatively high inflation,
4) deteriorating currency regime, as well as by structural issues including 1) deteriorating supply in energy, 2) deteriorating prices of commodity prices in the global markets, 3) decline in labour productivity from key sectors of the economy, together with 4) other social and political factors.

Among all, the most significant economic challenge is the value of the Ghana Cedi (GHS) against other major trading currencies. For an import-driven economy, where virtually all consumables are imported from Europe, Asia, South Africa, and the US, with little trade within Africa, the Ghanaian economy and by extension the Cedi is theoretically vulnerable to fluctuations in the global financial and goods market.
To support the growth of the economy in the recent rather short lived expansion, the government of Ghana has adopted expansionary monetary policy, just as fiscal policy. But with this expansion being artificial and foreign for that matter, triggered by a good outlook on commodity prices at the time and with the hydrocarbon industry, growth and value of the Ghanaian Cedi were waiting to implode.

The analysis in this brief seeks to explain the trends evinced in the value of the Ghana Cedi in the last 12 to 15 months, and make projections for its outlook over the next 6 to 12 months.
Available data from the monetary authorities suggest that the Cedi has fallen in value against all the major currencies of external trade since January 2011. Figure 1 below shows how the currency has fared throughout this five year period. The rate of depreciation has been slow in the earlier periods supported by favourable commodity prices and relatively high productivity of export driven products although imports were equally high during the same period, with relatively low levels of inflation.


[Figure 1: Trends in the value of major trading currencies against Ghanaian Cedi]
[Source: Bank of Ghana, 2015]

Figure 1 presents the monthly averages and end of month values of the Pound, Dollar and Euro, from January 2011 to May 2015. The relationship between the averages and the corresponding end of month values appear consistent until mid-2015, where the some end of month values appear higher than the monthly averages, further underscoring data credibility issues raised by various analysts.
Focusing on developments from 2014 to mid-2015, the monetary authority has held the view that the value of the Ghana Cedi is extensively driven by limited liquidity in the forex market, for financing the rather bastardized import driven structure of the Ghanaian economy. Without conceding the validity of this analogy (with evidence from Figure 2 below suggesting a persistent gap between import and export), one would expect the value of the currency (narrowing on its relationship with the Dollar as opposed to all the major trading currencies), to somewhat reflect the cycle of Ghana’s external trade outlook.
The Cedi fails to recover its cumulative value lost from the beginning of the 2014 fiscal year, a condition which significantly exposes analogy posed by the authority and most importantly magnifies the authority’s inability to adequately measure and anchor speculative behaviour. Every other fourth and first quarter since January 2011, the country’s exports are very low compared to the other two intermediate quarters. While imports trend in the same manner, it is high in the quarters within which exports are low. Figures 2 below illustrate this point.


[Figure 2: Quarterly import and export of Ghana]
[Source: Bank of Ghana, 2015]
In the absence of speculative behaviour in the forex market, these trends should provide some intuition for controlling the spate of depreciation of the cedi, if the challenge was mere liquidity to facilitate external trade.
Using exchange rate information which is close to that of the market, the Cedi has depreciated a cumulative 32.9 percent since the beginning of the year 2014 to May 2015 (see figure 3 below).


[Figure 3: Market value of Ghana Cedi (GHS) from Jan. 2011 to Sept. 2015]
[Source: First Atlantic Bank Ghana Ltd, 2015]
It is practically difficult to reconcile this decline with the real need for the foreign currency given the trends in external trade from figure 2, as a reconciliation should imply a consistent widening of the gap between import and export, without any recovery whatsoever from the export end. For this to happen during a period where the country is exporting crude oil is even more telling.
Claims concerning the stabilization of the Cedi due to increased liquidity of US Dollars, when COCOBOD receives the proceeds of its syndicated loans for procuring supporting the crops production is also unsubstantiated, and a solution dead on arrival. At best, the rate of depreciation slows, in the later part of the third quarter into the fourth quarter when the proceeds are received, masking the supply side inefficiencies in the system momentarily (see figure 3 above).
Thus, the current prospected injections of about US$ 2.3 billion (US$1.8billion cocoa syndication and US$1.5 billion Eurobond), will only postpone the inevitable until the structural issues together with speculative behaviour in the forex market are properly measured and factored in the monetary policy framework.
It will appear that other factors which the authorities seldom pay attention to although within their focus, could be influencing this trend, and will continue to, over the next couple of months (positively or negatively). These include money supply in a bid to control inflation, commercial bank deposits (somewhat captured in the money supply variable), and interest rates (policy rate, lending rates, and t-bill rates). These in summary will be the monetary and fiscal policies of the authorities to recover the economy, keeping in focus financial, economic and geopolitical developments around commodity prices on the global markets.
Money supply appears to have significantly accounted for the Cedi’s depreciation, over the time period. A high correlation of almost a unit (0.94) between money supply and the value of the dollar exists from January 2014, so that this period which has consistently seen a growth in money supply has also seen a substantial depreciation of the Cedi (otherwise an appreciation of the dollar). The effect of the growth in supply of money can be traced to growth in bank deposits, inflation [see figures 4 and 5] and even the policy rate as a “spurious” high correlation is observed between the variables for the data sets used.
Thus, money supply could be a significant game changer if the value of the cedi is to be restored. Strategies to slow down money supply as identified in the extended credit facility and that of the authorities’ could slow down the rate of depreciation if all goes well in the goods / real output sectors of the economy.


[Figure 4: Money Supply and Bank Deposits] [Figure 5: Bank Deposits and Inflation]
[Source: BoG, 2015] [Source: BoG, 2015]
In furtherance of the fiscal consolidation program under the ECF of the IMF together with the medium term development and economic recovery framework, there is a proposed recovery strategy which aims to reduce inflation to 12 percent by close of 2015. Guided by this projection, the central bank is to limit its financing to 5 percent of previous year’s revenue while aiming to bring its financing of government to zero (2016 & 2017). Additionally, the authority will no longer issue t-bills for monetary operation purposes. Granted these strategies, money supply should decelerate, a condition which should put a downward pressure on bank deposits, shrink the space for financial intermediation and private sector credit allocation, and increase the cost of credit. With interest rates increasing, the projections regarding the restoration of the value of the Ghana Cedi will be missed by some significant margins. This will play into the ‘hands’ of speculators who are looking at the scenario as it unfolds in the next 6 to 12 months.

[Figure 6: Money supply growth]

[Source: BoG, 2015]
Again, indications are that, in pursuit of price stabilization and possible reversal into a single digit region by close of 2017, the policy rate will gradually be increased. The evidence from the data suggests this could prove counterproductive as it could worsen the Cedi’s predicament over the next 6 to 12 months. All factors being equal/constant, the policy rate appears to be granger causing the exchange rate (between Jan.2014 to date), and is highly inversely correlated with it. Such an action can only increase the cost of credit to the private sector, as monetary policy tightening following the implementation of the ECF lingers. This can only prove cantankerous for the value of the GHS, all factors being equal.


[Figure 7: Trends in USD/GHS and the Policy Rate] [Trends in average value of GBP, USD & EUR and money supply]
[Source: Bank of Ghana, 2015] [Source: Bank of Ghana, 2015]
A causal analysis from of the policy rate and the exchange rate (using dollar as a proxy), shows a bidirectional relationship. Given the economic reasoning of hikes in policy rates negatively affecting the exchange rate, a vicious causal cycle can be inferred between the two variables in the short term, until extraneous determinants are favourable in the goods market (to support the forex ‘liquidity’ position)
All factors being equal, the current diagnosis for restoring the value of the depreciating Cedi appears ‘ill informed’ and could send conflicting signals to the markets based on existing data from the Bank of Ghana. The conclusions on the stability of the currency’s value in the last quarter of 2015 are misleading and not informed by external economic trade cycle.

It could well be that given the data investigated, capital and current account balances could be strong drivers of the external economic outlook, which could negatively influence the value of the Ghana Cedi. Granted, this cannot be a justification for all the trends evinced in the data available from 2011. It also appears that, the speculative activity in the market has been underestimated by the monetary authority, a condition which will make the restoration of the price transmission mechanism challenging and subsequently value restoration of the Cedi an odious task. The role and contribution of fiscal policy, should equally not be underestimated Using the data suggested in this review, and the general economic analysis provided herein, the Ghana Cedi could close the year at a possible low point of GHS 4.2 to GHS 4.5 per USD.

The writer is Patrick Stephenson, Research Fellow, IMANI
Feature Image: todaygh

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