Opinion: Cedi appreciation and reasons for recent gains

The local currency (Cedi) has witnessed some significant gains beginning the month of December 2022. The gains are rapid and encouraging. The outlook going forward looks good as the stability is likely to be sustained.

There are both domestic and external factors responsible for the gains the cedi is having against some major trading currencies.

Domestic causes

First, government’s faster than expected International Monetary Fund (IMF) staff level agreement on a $3 billion loan has bolstered investor confidence.
The confidence build-up has slowed speculative behavior, causing speculators to offload forex as a store of value. There are high expectations of further cedi recovery. This has caused significant drop in forex demand.

Secondly, the announcement and news effect of government’s “Gold-for-Oil swap transactions” has also brought some renewed confidence in the system and calmed the waters.

The market’s reading into that announcement is that, should the policy kick-start, dollar supply will increase and cause the cedi to further rise; reason why a lot of forex holders are offloading now to avoid future loses.

Additionally, because of the “Gold-for-Oil” announcement, the BDC’s demand for forex has dramatically declined (60% decline at the last auction) and that is obviously influencing the appreciation trend of the Ghana cedi.

Thirdly, the tightening of the country’s monetary policy has reduced the cedi’s liquidity in the system and that is playing a significant role in the trend that is being experienced currently.

Global factors

At the global front, the US dollar is losing grounds on softer-than-expected US inflation. This has brought renewed hope that the Federal Reserve, the central bank of the United States, might slow the pace of rate hikes.

Additionally, the decision by China to ease its COVID-19 restrictions is also improving risk sentiments at the global level and by extension, influencing the cedi’s appreciation.

Another possible avenue contributing to the recent appreciation of the cedi is the “Month of Return”, which is December. The month sees a lot of foreign exchange flowing to Ghana, as tens of thousands of people from the Diaspora come to Ghana for our special Christmas experience.

This has been a growing new tradition since President Akufo-Addo launched “The Year of Return” in 2019. Although disturbed by the COVID-19 pandemic, the economy experienced a slight pick up in Christmas tourism in 2021.

This year is certainly bigger, and could rake in over $300 million in foreign exchange between now and early January 2023.

Sika mpe dede

The adage “sika mpe dede” (money abhors noise) has manifested in this instance to be profound. Since the President’s address to the nation on the economy.. where he called for greater circumspection in the media space on talking down the local currency, we have witnessed some enhancement in the quality of reportage to that effect.

Additionally, one cannot discount, the failure of the vote of censure motion against the Finance Minister, Ken Ofori-Atta. Also the turnaround by some NPP MPs who wanted Mr Ofori-Atta, to resign immediately or not have him read the 2023 budget statement, were important in helping the Government regain some confidence in its management of the economy.

All the talks in the media that the IMF did not have confidence in Ghana’s Finance Minister who has been leading the talks, were exposed to be false when the IMF announced that it had reached a staff-level agreement with the Ghana Government on an IMF programme and the requested $3 billion. Not a cent less than what the Finance Minister promised the country he would be seeking from the Fund.

Ken Ofori-Atta’s resilience, fortitude, focus and sense of purpose over the last four turbulent months have been most remarkable, winning back the admiration of many Ghanaians and investors alike.

Ken Ofori-Atta’s critics have had to revise their notes and the President’s decision to back his Finance Minister and the Economic Management Team, led by Vice President Dr Mahamudu Bawumia, appears to have been vindicated.