The Sharp Depreciation of the Cedi,

In the last few months the Ghana Cedi has lost grounds against the major international currencies such as the United States Dollar, the British Pound Sterling and the European Union Euro. The speed of depreciation of the cedi seems to have taken everybody by surprise.
Not long ago, when the cedi was redenominated in 2006, a Dollar could be exchanged for less than a Cedi and out of excitement for seeing our currency robbing shoulders with such a major currency as the United States Dollar, some people named the Cedi, “Kuffour Dollar” perhaps in expression of their happiness for seeing the Cedi rising in value against the Dollar.
Unfortunately, the appreciation was not sustainable because it was not backed by the expected macroeconomic fundamentals. Therefore, the Cedi started losing value until today that we are witnessing one of the most difficult times in the life of the Cedi. At present, one Dollar is worth almost equivalent to two Cedis. This is bringing untold hardship on the economy. What has gone wrong?
Several people, including economic gurus and businessmen in Ghana, have suggested numerous methods or mechanisms for arresting the fall in the value of the Cedi. Just about a week ago rumours had it that Bank of Ghana was considering the prevention of individuals and some businesses from keeping foreign currency accounts in Ghanaian banks.
The intuition behind this is simple and as one school of thought puts it “If you are in Ghana, why do you have to keep a bank account in a foreign currency? We have the Cedi that should be sufficient for us”, meaning all accounts in Ghana should be held in Cedis. Of course, this line of thinking is commendable and strongly backs the argument that Ghanaians do not need to keep accounts in foreign currencies whilst in Ghana. The question is, is that the root-cause of the Cedis’ sharp depreciation in value?
Some even argue that currency traders are to be blamed; since they keep accounts in foreign currencies they speculate on the value of the Cedi in order to profit from its depreciation and appreciation.
Others have put the blame on importers. They explain that foreign currencies are required by importers for international transactions and this leads to excess of demand over the supply of scarce foreign currencies thereby causing unnecessary pressure which ends up in sharp decrease in the value of the Cedi. They contend that in the heat of shortage of foreign currencies, people are less careful in terms of how many Cedis they have to exchange for a much- needed foreign currency, be it the Dollar, Euro or Pound Sterling.
The debate as to who or what is the cause of the Cedis’ sharp depreciation in value may go on unabated. Interestingly, the Central Bank has stepped in to salvage the situation. However, this has fuelled the rumour that the solution being proposed may end up preventing people from keeping accounts with Ghanaian banks in foreign currencies. This is the focus of this article. The big question I ask is, will the prevention from keeping foreign currency accounts in Ghanaian banks do the trick of helping the battered cedi gain some strengths against its foreign counterparts especially against the likes of the Euro, Pound and Dollar?
Is Ghana going to revert to the days where people used to keep their foreign currencies under “pillows” and in “bunkers” in their bed rooms? It is being argued that preventing people from keeping accounts in foreign currencies in Ghanaian banks may not answer the question of why that sharp depreciation in the value of the Cedi, rather it may worsen the situation.
If Ghanaians are prevented from keeping foreign currency accounts, numerous issues may result. Foreign currencies are likely to be a contraband item and most people will horde or hide them wherever they can instead of keeping them with their bankers. Also, what will the foreign exchange bureaux do, are they to cease operations?
One point that raises fear is that people are likely to keep their foreign currency accounts in banks in neighboring countries through proxies which may work to the advantage of our neighbours – Togo, Benin, Cote D’Ivoire etc.
Instead of preventing or penalizing people for holding accounts in foreign currencies which may end up creating an unwanted “black market” in foreign currencies, such accounts must rather be allowed and that deposit of foreign currencies in these accounts must be encouraged. It should rather be withdrawals in foreign currencies that must be restricted, discouraged or penalised through the tightening of the exchange control regulations.
Ghanaians must not be encouraged to make their homes, their banks for foreign currencies; they should be encouraged to deposit them with the banks to increase the supply of foreign currencies with withdrawals allowed only in Cedis. My submission is that the prevention from or penalization for holding a foreign currency accounts in Ghana as being proposed by many may not do the trick in helping to arrest the sharp depreciation in the value of the cedi.
By Rita Appiah
Business Development Consultant

Corporate Executive Development Centre
A Management Development and Financial Advisory Firm
cedecconsult@yahoo.com