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Economist Challenges Finance Minister’s Explanation for Cedi’s Decline

According to the Dean of the Business School at the University of Cape Coast, Prof. John Gatsi has indicated that the reasons cited by the Finance Minister for the cedi's troubles are not justified.

Economist Prof John Gatsi has disagreed with Finance Minister Mohammed Amin Adam’s assertion that currency speculation and the need for more borrowing to service Ghana’s debts are responsible for the Ghana cedi’s decline, calling it unfair

The Bank of Ghana has revealed that the Ghanaian cedi has lost approximately 14.6% of its value against the US dollar as of May 2024

This is slightly better than the roughly 20% loss in value seen on the retail market.

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Finance Minister Mohammed Amin Adam assured on Friday, May 24, 2024, that the government is collaborating with the Bank of Ghana to address the cedi’s depreciation.

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However, according to the Dean of the Business School at the University of Cape Coast, Prof. John Gatsi, the reasons cited by the Finance Minister for the cedi’s troubles are not justified.

“Those things are just statements that we make to shift the blame to other people. If you go to the UK, they are not even interested in carrying their money in the US dollar, not even in any other currency like the euro and the rest. If you go to South Africa, it’s the same. Go to Rwanda, the same. Why are people trying to invest in the dollar? It is because the confidence around our cedi is not strong, so, the moment they see rampant and continuous depreciation, then they want to find alternatives to invest in, so, they go into buying the dollar as a means of investment vehicle,” he said.

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Mr. Gatsi added that if the Minister suspects speculation is the cause, then our priority should be to enhance the local currency’s resilience.

“So, to claim that [speculation] is the reason, then it means that you need to make sure there is confidence surrounding your currency but you cannot just continue to be saying it’s because of speculation. Why did the people speculate? You need to solve that,” he added.

The Bank of Ghana made a substantial intervention last week, injecting approximately $59 million into the spot market and auctioning $20 million to Bulk Oil Distribution Companies, which has temporarily stabilized the currency.

According to the Bank of Ghana’s May 2024 Summary of Financial and Economic Data, the cedi faced a 7.7% depreciation against the US dollar in March 2024, with an additional 10.5% decline in April 2024.

He also advised the finance minister that borrowing without creating assets or development and relying on refinancing to pay existing debt is an unsustainable cycle that will eventually lead to debt crisis and severe problems.

“Yes, that one the finance minister should know that if you are borrowing and you are not using the money to develop the country; you’re not using the money to create assets for the country and you need to refinance, that is to say, borrow more money to pay the existing debt, you’ll get to a point where that will not work again and it creates problems for you and that was the whole issue about the debt crisis that we went into,” he said.

Mr. Gatsi further noted that the finance minister’s argument that more money is needed to solve the debt crisis is flawed, as they have mismanaged borrowing and revenue, and should take responsibility for their actions.

“So, you know; you’re the one who has been going to the market to borrow and you know that the revenue that you’re raising is not enough to pay the debt, therefore, you don’t use your misapplication of the rules concerning borrowing to say that now you need more money,  who are you crying to? That is what you need to know when you are borrowing. So, those are not points that show us that the finance minister has a grasp of what it takes to solve the problem,” he said.

On the retail market, the dollar is averaging GH¢15, while the Bank of Ghana quotes it at GH¢13.01.

The cedi has experienced a 14.5% decline against the British pound, with a current exchange rate of GH¢17.70. Additionally, it has lost 12.9% of its value against the euro, with a current rate of GH¢15.07

Explaining the effects of the depreciation, Prof Gatsi said the depreciation of the currency has the potential to reduce individuals’ and businesses’ incomes, decrease purchasing power, erode business capital, and increase the cost of living.

“It has the potential to erode the incomes of individuals and businesses. It disrupts and truncates the purchasing power of people. It erodes business capital and makes the general cost of living very expensive for all classes of people” he added.

He added that the depreciation of the currency increases the government’s debt portfolio in Ghana cedi terms, but while it may generate some additional revenue through duties charged at entry ports, this benefit is outweighed by the numerous negative effects of depreciation.

 “It also increases the debt portfolio in Ghana cedi terms for the government of Ghana. It also may cause some increases in revenue for the government, especially at the entry ports because when the duties are charged in dollars and they are translated or exchanged into Ghana cedis, that means more money for the government but this benefit is not something that we should talk about because it is defeated by all other negative effects of the depreciation,” he concluded.

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