The Ghanaian Cedi: A Three-Year Currency Performance Review (2021-2023)

Introduction

The Ghanaian Cedi (GHS) has undergone substantial fluctuations against major international currencies over the past three years, including the US Dollar (USD), Euro (EUR), and British Pound (GBP). This article provides an analysis of the Cedi's performance from 2021 to 2023, exploring year-to-date (YTD) changes and examining the economic factors influencing these trends in the foreign exchange market.

2021: Mixed Performance

?In 2021, the Ghanaian Cedi exhibited a mixed performance against the major currencies, reflecting the varied economic conditions and market dynamics.

USD/GHS: The Cedi opened the year at 5.7573 and closed at 6.0031, marking a depreciation of 4.27%. This decline was influenced by increased demand for the US Dollar for international trade and investment and global economic recovery post-COVID-19, which put pressure on emerging market currencies.

EUR/GHS: Contrary to its performance against the USD, the Cedi strengthened against the Euro, opening at 7.0655 and closing at 6.8247, reflecting a gain of 3.41%. This appreciation can be attributed to stronger economic ties with the European Union, improved export performance, and favorable trade balances with European countries.

GBP/GHS: Against the British Pound, the Cedi opened at 7.8173 and closed at 8.1228, resulting in a depreciation of 3.91%. The depreciation against the Pound was due to heightened import activities from the UK and increased external borrowing.

This mixed performance indicated a nuanced response to global economic conditions and local economic policies, demonstrating both resilience and vulnerability in different aspects of the economy.

2022: Significant Depreciation

The year 2022 was marked by a notable depreciation of the Cedi against all three major currencies, driven by several external and internal factors.

USD/GHS: The Cedi depreciated sharply, opening at 6.0031 and closing at 8.5717, a substantial YTD change of 42.79%. This significant decline was fueled by rising inflation, increased import costs, and a higher demand for the US Dollar to service foreign debts.

EUR/GHS: Similarly, the Cedi lost value against the Euro, opening at 6.7820 and closing at 9.1412, a depreciation of 34.79%. The depreciation was influenced by the Eurozone's economic recovery, which increased the demand for the Euro and led to capital outflows from Ghana.

GBP/GHS: The Cedi also depreciated against the British Pound, opening at 8.1276 and closing at 10.3058, marking a 26.80% decline. The Pound weakened due to rising oil prices, increased import bills, and global supply chain disruptions.

The steep depreciation of the Ghanaian Cedi in 2022 can be attributed to a combination of global and domestic factors.

The US Federal Reserve increased interest rates to combat inflation, which led to a stronger US Dollar. Higher interest rates in the US attracted capital flows away from emerging markets, including Ghana, putting pressure on the Cedi. Moreover ongoing uncertainties due to the COVID-19 pandemic and geopolitical tensions, such as the Russia-Ukraine conflict, disrupted global supply chains, increased commodity prices, and led to volatility in global financial markets. These factors collectively reduced investor confidence in emerging market currencies like the cedi.

Increased Demand for Safe-Haven Currencies in times of economic uncertainty, led investors to flock to safe-haven currencies like the USD, Euro, and GBP. This increased demand for these currencies leading to a depreciation of the Cedi.

Ghana experienced the highest levels of inflation unseen for the past 22 years, driven by rising food and energy prices. Inflation hit a record high of 54.1% in December, which significantly eroded the purchasing power of the Cedi and increased the cost of imports, contributing to the currency's depreciation.

The fiscal deficit widened due to continuous increased government spending to support economic recovery from the pandemic. This deficit was financed mainly through borrowing, leading to higher debt levels which increased the pressure on the Cedi. Ghana continues to face significant trade imbalance, with imports outpacing exports. The high demand for foreign currencies to pay for imports, coupled with lower export revenues, led to a decline in foreign exchange reserves and depreciation of the Cedi.

External Debt Servicing obligations increased, requiring more foreign currency to meet these payments. The higher demand for foreign currency to service debt contributed to the depreciation of the Cedi. Investor Confidence reduced due to the economic instability, policy uncertainty, and concerns about debt sustainability, which saw capital outflows and reduced foreign investment in the Ghanaian economy further weakening the Cedi.

Government borrowings in 2022, from both domestic and international markets to finance its budget deficit increased demand for foreign currency putting additional pressure on the Cedi. As global energy prices surged due to supply chain disruptions and geopolitical tensions, Ghana faced increased import bills, which strained its foreign exchange reserves and contributed to the depreciation of the Cedi.

The Ghanaian government and the Bank of Ghana took several measures to mitigate the impact of the Cedi's depreciation, including Monetary Policy Adjustments, where the Bank of Ghana increased interest rates to curb inflation and stabilize the currency. Foreign Exchange Interventions with the central bank intervening in the foreign exchange market to support the Cedi by selling foreign currency reserves. A Fiscal Consolidation of government implementing measures to reduce the budget deficit and improve debt sustainability. Despite these efforts, the combination of global economic pressures and domestic challenges led to a steep depreciation of the Ghanaian Cedi in 2022.

2023: Continued Depreciation

The depreciation trend continued into 2023, reflecting ongoing economic challenges and external pressures.

USD/GHS: The Cedi further depreciated, opening at 8.5817 and closing at 11.8741, indicating a YTD change of 38.37%. Factors contributing to this decline included rising US interest rates, which attracted capital flows away from emerging markets, and persistent inflationary pressures in Ghana.

EUR/GHS: Against the Euro, the Cedi opened at 9.0731 and closed at 13.1204, a depreciation of 44.61%. The depreciation was driven by stronger economic performance in the Eurozone, increased demand for the Euro, and higher import costs for Ghana.

GBP/GHS: The depreciation trend was also observed against the British Pound, with the Cedi opening at 10.3152 and closing at 15.1252, marking a significant decline of 46.63%. The weakening of the Pound was influenced by higher commodity prices, ongoing supply chain issues, and increased borrowing costs.

This continued depreciation underscores the ongoing challenges facing the Ghanaian economy, including inflation, trade imbalances, external debt pressures, and reduced investor confidence.

Conclusion

Over the past three years, the Ghanaian Cedi has experienced significant volatility and depreciation against major international currencies. The mixed performance in 2021, followed by notable depreciations in 2022 and 2023, highlights the economic challenges faced by Ghana. Addressing these issues will be crucial for stabilizing the Cedi and ensuring sustainable economic growth in the future. Strategies such as improving fiscal discipline, enhancing export performance, diversifying the economy, and attracting foreign direct investment will be essential in achieving long-term stability and growth. Also, these fluctuations show that any investment that one is doing will have to take into account how the forex deferential will impact their earnings in real terms. In my next article, I will look at the impact in the Fixed Income and Equity sectors over the same period.

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