Cedi flashing Signs of Currency Crisis
Written by Kofi Amoabin Thursday, 29 March 2012 12:29
If the currency crises in Mexico and Russia ring a bell, then watch the new Ghana cedi. The cedi dropped to a record low of GHc1.77 per dollar and the downfall is accelerating with no support in sight. The cedi versus dollar exchange rate shows the cedi has been in a perpetual fall against the US dollar.
President John Kufuor’s administration converted the cedi to a new Ghana cedi and delineated four zeros from the old cedi. The change meant ten thousand of the old cedi became one new Ghana cedi.
In 2008, the new Ghana cedi traded at par to the US dollar. However, the cedi has dropped so fast in the last three years that it is flashing red flags for currency crisis.
The red flags are the insatiable appetite for dollars, increased borrowing overseas and the collapsing price of cocoa.
Traders, businesses and investors in Ghana fear further depreciation of the cedi, so the dollar is preferred to the cedi. The cedi depreciation has been exacerbated because Ghana has persistent trade and budget deficits.
Businesses import everything from machinery to foods and others to meet domestic demand - and convert cedis to dollars. A pre-election disposition to stimulate the economy means the government will print money and increase spending.
Also, the Government of Ghana has accelerated its borrowing from China, World Bank and IMF to pursue an aggressive infrastructural development program ahead of general elections in December. Increased borrowing means the government has to increase spending because the loans from foreign nations, IMF and World Bank often fund imports.
Furthermore, the price of cocoa, Ghana’s main foreign exchange earner, has dropped about 40% from its peak of $4000, a year ago, to $2300 a ton. Ivory Coast and Ghana, the two leading producers of cocoa in the world show increased production ahead of the main crop harvests in October and prices could fall below $2300 per ton.
The Ghanaian economy resembles that of Mexico before its currency crisis in 1994 and Russia in 1998. In both crises, the IMF and World Bank failed to detect the early warning signals till it was too late.
On March 23, the Wall Street Journal quoted the cedi at a rate of GHc1.77 to the dollar and a rate of depreciation of 7.9% for the first quarter 2012. This current exchange rate means the cedi has depreciated 77% in three years.
As the December elections draw closer, the government of Ghana faces a much bigger problem in restoring confidence in the cedi than in winning an election in a country it controls the security agencies. The free fall of the cedi tells the true story about the management of the Ghanaian economy under President John Evans Atta Mills.
Kofi Amoabin is a Market Analyst with Futures Market Enterprises, Chicago. He holds a bachelor’s degree in Engineering and a masters in Finance.