The cedi, which slipped by 3.43 percent against the dollar from the start of the year to Monday, is under pressure from high import demand as economic growth drives consumer and business spending, said Yaw Adu-Koranteng, research analyst at NDK Asset Management in Accra.
Ghana's imports jumped by 12.1 percent to US$17.7billion in 2012, accounting for 47 percent of the country's GDP. Export growth, on the other hand, was 5.7 percent with total earnings of US$13.5billion, causing the trade deficit to widen by 35 percent to US$4.2billion. These recurring trade gaps affect foreign exchange demand and the strength of the cedi.
The effect of a weak cedi is more expensive imports, which drives inflation and higher cost of inputs for businesses that import raw materials. Companies ranked exchange rate losses fourth among their top-ten challenges, according to the Association of Ghana Industries (AGI)'s first quarter business barometer report.
"From the beginning of the year, the cedi was quite stable; but an increase in dollar demand at the end of March as firms repatriated dividends to their parent companies caused it to weaken sharply- though it has still performed better than the last two years," Adu-Koranteng said.
Around this time last year, the cedi had lost 13 percent to the dollar, and two years ago the slump was 3.7 percent, he said. Policies by the Bank of Ghana (BoG) to strengthen the currency in the second half of 2012 were successful initially, but it appears the pressures have returned, he added.
To rein in the volatile cedi, the BoG sought to ease foreign exchange supply by demanding banks to hold their mandatory reserves for foreign currency deposits in the local currency only, in addition to an increase in interest rates to draw investors to cedi-denominated assets.
The measures stemmed the cedi's slide, which registered 18 percent in the first six months of 2012, eventually reducing the losses to 17.5 percent by year-end.
It is important for the Central Bank to indicate its response to current developments on the foreign exchange market, which would inform analysts' expectations about "where this will lead to", said Adu-Koranteng.
In February the BoG said it had US$5.5billion worth of foreign currency reserves, enough to pay for 3.1 months' volume of imports. Adu-Koranteng said dollar sales by the BoG have not been significant enough to meet rising demand.
The cedi will remain vulnerable to losses unless the BoG moves to check "sudden portfolio reversal", said Databank Research in an April report.
"Fiscal revenue shortfalls and expenditure pressure have pushed Government to overly rely on Treasury borrowing, of which a significant portion is being sourced from portfolio investors," said lead Databank analyst and Head of Research Sampson Akligoh.
"With low reserves, estimated at US$5billion, and a current account deficit of over US$4billion, Ghana risks a currency crisis if there is a panic among portfolio investors," he said. More than 90 percent of the GH₵800million worth of three-year bonds sold by the BoG in January and March were taken up by offshore investors, BoG data reveal.
The BoG's Treasury policies allow foreign investors to bid for debt of more than two years maturity only, restricting their purchase of short- term bills to the secondary market - such as when they are listed on the Ghana Stock Exchange (GSE).
The policies also allow them to redeem their investments before maturity by selling-off on the secondary market and repatriating the funds, a situation that injects volatility into the foreign currency market.
Source: Business and Financial Times
