Do you care to know why the Ghana Cedi is depreciating fast?

Do you care to know why the Ghana Cedi is depreciating fast?

Here you go…

Historically, Ghana struggles to raise enough revenue to implement the government’s programmes and projects contained in the national budget. The revenue gap, known as budget deficit, is financed through borrowing.

So, at the start of every year, the government goes to the international financial market to raise money to bridge the budget gap. If it does so in the European currency, (EURO), it is called EUROBOND, if it does so domestically, it is called cedi-denominated bonds. So the currency determines the name given to such transactions.

This government has been successful in getting investors to lend money to Ghana since 2018. So it borrowed and borrowed and borrowed. While doing that, revenue was underperforming so it kept borrowing to augment total revenue.

Consequently, the country’s debt ballooned to a level that investors found worrying in 2021. Interest payments alone and compensation (public sector salaries) were more than Ghana’s TOTAL REVENUE AND GRANT. Hence, there was no room to contain any shock.

As a result, the financial market perceived Ghana to be at DEBT DISTRESS. This means Ghana now stood a high chance of defaulting on its loan payment. Once a country attains this status, lenders will demand higher interest rates to balance the risk.

Because of this tag and its probable effect, the Finance Minister decided not to go to the capital market in 2022. Remember this is where he gets between 1 and 3 billion dollars every year to support the budget implementation. This meant a significant revenue gap, which needs financing.

That is why the minister introduced the controversial levy on electronic transactions (e-levy) among other revenue enhancing measures to help raise more for the state.

But the e-levy was largely resisted, causing it to woefully underperform. Consequently, revenue target was missed and lenders started to get concerned over Ghana’s debt repayment ability.

At this stage, rating agencies began downgrading Ghana – basically informing the market that Ghana MAY have issues meeting its debt and interest payments obligations because of weak revenue performance and near-unsustainable debt levels.

Rational investors, especially foreigners (foreign portfolio investors – FPI) holding government securities started to pull out of the economy from May 2022 (It is called sell-offs).

The selling pressures were so intense and at levels not seen before on the Fixed Income Market (where bonds, T-bills, etc. are traded). Already, investors were moving their funds to the United States as inflation-fight made interest rates lucrative there.

Amidst the sell-off pressure, it became inevitable that debt restructuring will be needed to help Ghana secure a bailout deal with the International Monetary Fund. This means lenders will either get their repayment dates extended or portions of their monies wiped off.

To prevent that, investors are scrambling to sell-off their holdings of government assets just to pull out. In addition, the delay in concluding talks with the IMF has worsened the situation as confidence level declined.

But how are these impacting the cedi?

The foreign investors sell their securities, which are cedi-denominated and convert the funds into dollars – either as a store of value or move it to their home countries.

This, coupled with the regular import activities strengthened demand for dollars, thus exerting pressure on the CEDI. However, the Bank of Ghana could not supply enough dollars to meet the high demand.

These resulted in more cedis chasing fewer dollars. Amidst that, the demand for dollars has continued surging at unprecedented levels – creating a situation where investors fleeing the Ghanaian economy will buy dollars at much higher rates.

It is why the cedi opened trading at GHS 13.20 last Thursday, and closed at 15.20 – depreciating by 14% in a single day (GHS 2).

So simply until investor concern is addressed, their continuous repatriation of their funds from the Ghanaian economy only means a lot more pressure on the cedi which in turn drives the value of the cedi down.

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