March 11, 2016

Finance Minister blames Bank of Ghana for the depreciation of the Cedi
Masahudu Ankiilu Kunateh, Ghanadot

Accra, April 17, Ghanadot - The Minister of Finance and Economy Planning, Dr. Kwabena Duffuor, has blamed the Bank of Ghana (BoG) for the depreciation of the country’s cedi, against major currencies such as the U. S. Dollar and Pound Sterling.

According to him, since the introduction of the Ghana Cedi in 2007, it has witnessed significant depreciation in its value, thereby reducing investor confidence in the economy.

Dr. Kwabena Duffuor disclosed this at a press conference in Accra, to officially highlight the performance of the economy of President Mills’ first 100 days in office.

He added that before the introduction of the cedi, the country’s economic fundamentals, which were necessary to support the value of the cedi at its appropriate level, were all very weak.

These were the broad money supply (M2) and total liquidity (M2+), which were all growing at very high levels; double digit headline inflation and negative balance of government finances.

Also, all the real sector indicators and composite index of economy were all showing significant negative growth.

While, developments at the external front were equally very disturbing, as trade balance was in deficit and increasing, and the overall balance of payments had deteriorated, the Finance Minister disclosed.

He explained that the driving factors behind the currency depreciation were the introduction of the new cedi, and liberalisation of the capital market to allow foreigners acquire significant shares of government’s 3-year and 5-year securities, saying “all these were inherited by the National Democratic Congress (NDC) Government, and therefore one cannot attribute the cedi depreciation to a government that has been in power for only 100 days.”

Dr. Duffuor noted that notwithstanding the macroeconomic imbalances at the time, the Ghana Cedi was introduced and fixed at GH¢0.9200 equivalent to one Dollar.

“The Central Bank then tried to hold the currency from serious depreciation, by intervening in the foreign market to sell the country’s hard earned dollars to support the cedi. Between July 2007 and December 2007, the Central Bank sold $288 million to prop up the currency.”

He intimated that the year 2008 was characterised by a continuous sharp depreciation, and currency propping by the Central Bank, in which $918 million was used by the bank to prop up the falling cedi.

Due to the weak economic fundamentals, namely high spending by the then government, and the associated growing fiscal deficit, surging monetary growth, rising inflation, and declining foreign reserves that continued to exist in the economy, the cedi depreciated by 25.3% as against the dollar in 2008.

The implication of this is that by December 2008, the cedi had seriously been weakened, causing it to further depreciate by 13.6% in the first quarter of this year.

Dr. Duffuor, who is a former Governor of the BoG, further hinted that the Central Bank spent over $1.2 billion to prop up the cedi between July 2007 and December 2008, yet the currency lost some 31% of its value, emphasising that “Ghanaians should therefore know that the currency had depreciated significantly long before the advent of the NDC government.”

He blamed the previous government for copiously liberalising the country’s capital market to foreigners, adding that “beginning in 2006, the Central Bank allowed non-residents to invest in government securities, the result of this was that by December 2008, foreign investors were holding 46% of the Government of Ghana 3-year fixed bond and 87% of 5-year fixed bonds.

“The risk associated with foreign investors participating in the capital market is that, when they sell their bonds to local participants, it has serious foreign exchange obligations for the local investor, which tend to put pressure on the value of the domestic currency,” he noted.

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