Local inflation has also been exacerbated by import prices affected by the Ghanaian Cedi depreciation, hurting the country’s economy for 2022.
- Since the beginning of 2022, the Ghana Cedi has fallen precipitously in value relative to numerous other currencies, most notably the US Dollar.
- The pressure from various sectors for the government to shield Ghana’s fast-dwindling foreign currency reserves pushed the government to substitute dollars for gold in oil purchases.
- Policymakers seek to order large-scale mining companies to sell 20 per cent of their stocks of refined gold to the government, presumably in exchange for the country’s own depreciated currency.
Since the beginning of 2022, the Ghana Cedi has fallen precipitously in value relative to numerous other currencies, most notably the US Dollar. The Cedi fell by more than 55 per cent between January and October of 2022. Further, the currency fell by 9.5 per cent by the end of October 2022. The slump represents the most significant drop in 22 years. Because of the currency depreciation, the local market inflation has remained exceptionally high, reaching 40.4 per cent in October 2022.
As of September 2022, the Cedi had dropped 37.5 per cent versus the dollar. This is according to the Bank of Ghana’s most recent monetary policy committee (MPC) statement. Local inflation has also been exacerbated by import prices affected by the Ghanaian Cedi’s depreciation, hurting the country’s economy for 2022. Unless steps Ghana takes steps to support the currency, this tendency is expected to continue through 2023.
Understanding the Ghanaian Cedi’s depreciation
Ghana is an import-dependent economy. Thus, the country buys foreign currency to satisfy its import demands, even with a low supply of foreign exchange from exports. Periodically, the country records a net gain where export earnings exceed import costs. But these are paper gains. The depreciation of the Ghanaian Cedi largely remains seasonal until what happened in 2022.
Generally, currency lows against the US dollar are typical in February and March. During this period, Ghana-based multinationals repatriate their trade profits. Moreover, local businesses that import goods on credit for Christmas settle their debts. The retention law does not restrain these companies from repatriating all their trade proceeds.
Over the past two years, Ghana’s exchange rate remained relatively stable at the peak of the COVID-19 period (2020-2021). In that period, many import-dependent businesses slowed due to border restrictions by countries globally. But by the end of February 2022, the Ghanaian Cedi was among the most depreciated currency among the 15 top currencies in Africa, losing 7.6 per cent.
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Why the sharp depreciation of the Ghanaian Cedi?
First, the recent Ghanaian Cedi depreciation lies in the growing demand for foreign currencies considering most businesses in Ghana are now recovering from the recent economic shocks. This is not a special case for Ghana. Most companies globally are in the recovery phase and targeting serious production.
Secondly, Ghana’s inability to borrow from the international capital market has negatively affected its national currency. Since the country cannot generate sufficient foreign exchange from exports, successive governments have tried to contain the Ghanaian cedi depreciation by issuing dollar-denominated domestic bonds borrowing from the international capital market, draining the country’s foreign exchange reserves.
How the Cedi is performing internationally
As 2023 has started, the global economy is teetering on a potential recession, as described by economists worldwide. While global inflation has moved from 3.1 per cent in 2020, closing out 2022 with 6.5 per cent. The US inflation rose from 1.35 per cent in December 2021 to 7.46 per cent in February 2022. The US Federal Reserve responded by raising the interest rate, making the US sovereign bonds attractive. Many investors have reverted to selling their bonds in emerging economies like Ghana and buying those of advanced economies like the US.
The Ghanaian currency, Cedi, became the worst-performing currency globally in 2022 after losing close to 52 per cent of its value against the United States dollar. According to a Bloomberg report, Cedi’s poor performance against the dollar meant it was the worst among 148 currencies.
How Ghana’s Central Bank responded to its currency devaluation
Aiming to stem its currency’s year-long spiral, Ghana’s central bank took various measures in 2022. The measures included a crackdown with security operatives on supposedly unlicensed black market sellers on the streets of Accra.
However, the move by Ghana’s Central Bank to buy dollars from the mining and oil companies, which were to be repatriated returns to foreign countries, may have worked to worsen the currency struggles. The Bank of Ghana (BoG) had initially thought that this initiative would boost the declining foreign exchange supply to the economy.
But the move appeared to squeeze the local currency market, aggravating the Ghanaian Cedi depreciation. The BoG’s buying dollars from mining companies reduced foreign exchange availability within the interbank market. With groups within the country pushing for other fixes.
Gold for dollar in oil purchases
The pressure from various sectors for the government to shield Ghana’s fast-dwindling foreign currency reserves pushed the government to substitute dollars for gold in oil purchases. Ghana’s gross international reserves fell by about one-third. According to official data, the reserves stood at $9.7 billion at the end of 2021, dropping to around $6.6 billion towards the end of September 2022.
The Ghanaian government implemented a new policy of using gold to purchase oil products in the first quarter of 2023. The move aims to counter inflation due to the Ghanaian Cedi depreciation.
By dropping the dollar as a medium of exchange in the oil trade, the government hopes to reduce the stubborn depreciation of the Cedi. Using gold instead of the dollar would prevent the foreign exchange rate from directly impacting utility or fuel prices. Thus, fuel sellers in Ghana will no longer consider the dollar-cedi exchange rate when pricing their products. Consequently, the new policy will fundamentally change Ghana’s balance of payments.
The surprising gold-for-oil policy
Ghana’s gold-for-oil policy is a surprise since the West African nation is an oil-producing country. However, Ghana has been importing refined oil products, including diesel and gas, since Ghana’s only oil refinery has remained offline following the 2017 explosion.
It is even more unusual, as barter deals typically involve an oil-producing country trading for non-oil goods. But Ghana, a gold producer, hopes to restore value to its currency by accessing foreign exchange through the gold for oil barter.
Concerning this, policymakers are seeking to order large-scale mining companies to sell 20 per cent of their stocks of refined gold to the government, presumably in exchange for the depreciated currency. The plan appears to use bullion as a means of payment for oil imports. This would help ease the Ghanaian Cedi depreciation.
Ghana’s problems reflect a broader issue of global dollar reliance. Interestingly, Ghana is looking at a gold-for-oil swap to help its economy. This suggests that gold is being used for its money-like attributes. Interestingly, this has seemed unfashionable for much of the past 50 years.
Recent data from the World Gold Council suggests that the third quarter of 2022 saw the highest level of gold purchases in decades by global central banks. Thus, one wonders if this signifies global moves, if not to replace the dollar as the world’s reserve currency, at least to chip away at its dominance at the fringes, with all the geopolitical implications that come with this.
Ghana’s reversing economic slide and potential solution
Ghana has remained under pressure to reverse an economic slide amid foreign exchange struggles. The slide has rolled back recent gains that had seen the country rank as one of the fastest-growing markets globally. The long-term solution lies in industrialisation, value addition to exports, raising local production and cutting down on imports to raise enough foreign exchange in the country.
The medium-term solution is for the government to raise domestic revenue for debt servicing. Moreover, Ghana must look to finance development without heavily relying on borrowing.
The short-term solution is for the government to consider external borrowing to bring foreign currency into the country. But the government should demonstrate to the investment community its ability to mobilise domestic revenue to service debt.
Ghana finds itself in the classic emerging market trap. This comes from owing too much in someone else’s currency when the global economic tide turns. One ought not to read too much into an emerging economy getting creative with money or to confuse the confiscation of private assets with a more conventional process of fiscal retrenchment that would gain IMF approval. If the plan succeeds, the country may have saved itself from an economic meltdown caused by the Ghanaian Cedi depreciation, especially in a period widely considered economic turmoil, per the World Bank’s analysis of the 2023 economy.
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