Government Spending Weakens Cedi

Renaissance Capital has partly attributed the continuous weakening of the cedi against major international currencies to early government spending.

“While we expected an increase in financial outflows as the December elections approach, we had not anticipated them to begin so early in the year.”

In the firm’s August Macro-Economic Update, analyst Yvonne Mhango said the subsequent drop in foreign exchange reserves explains the 20 per cent depreciation of the Ghanaian cedi in July 2012 to GHS1.96 against $1.

The report said the weak cedi partly reflects financial outflows of the country, adding “we are of the view that financial outflows increased significantly during this period, particularly short-term money.”

“We expect this to have contributed to the widening of the current account deficit during this period in addition to the increase in services and income payments, which comes with the new oil industry.”

It said in their view, the sharp decline in Ghana’s foreign reserves is partly due to the widening of the trade deficit in May 2012 by 57 per cent to $937million, owing to a high international oil price that inflated the import bill and lower-than-expected oil export volumes that undermined export earnings.

Ghana’s gross international reserves declined by $1.1bn to $4.3bn or 2.5 months of import cover in May from $5.4bn or 4 months of import cover at YE11.

“Typically, economies with import cover of less than three months are considered to be vulnerable to external shocks such as a sharp increase in the oil price,” it said.

In order to stem what the Bank of Ghana (BoG) viewed as “speculative activity” in the interbank currency market that was exacerbating cedi failing, the BoG implemented measures that would ultimately stem cedi weakness.

Some of the measures included hiking the policy rate by 250 basic points (year to date) and reducing the limits on net open forex positions of banks, reintroducing BoG bills to provide additional avenues of cedi investment.

Others were revision of application of the statutory reserve requirement so that banks maintain the mandatory 9% reserve requirement on domestic and foreign liabilities in cedis only as well as requiring all banks to provide 100% cedi cover for their offshore account balances to be maintained at the BoG.

The think tank said “we have noted the retracement of the cedi to 1.94/$1 from mid-August, suggesting that a combination of the afore-mentioned policies may be taking effect.”

They however said “as it is still a few months to elections, we project some further weakness to GHS2.0/$1 at YE12.”

By William Yaw Owusu

Source: William Yaw Owusu/D-Guide