He said positive growth projections from the World Bank and International Monetary Fund of 8.8 percent and 7.8 percent respectively for 2019, on the back of positive investor sentiment – coupled with an increase in oil production and good microeconomic factors, portend a bright future for the domestic currency which depreciated by 8 percent against the US dollar between January and end of March this year.
“On these positive grounds, the broad expectation is for a further improvement in value of the cedi over the short- to medium-term,” Dr. Addison said.
He said this in Accra during a Graphic Business/Stanbic breakfast meeting on the theme ‘Achieving sustainable exchange rate stability: Our options’.
Fiscal consolidation, complementary monetary policy and financial sector reforms, he added, have also started to yield results; and these factors will contribute to stabilising the currency.
“We have seen some improvement in growth, which has improved from as low as 3.6% in 2016 to over 7 percent; the drop in inflation from over 15 percent to a single-digit; and we have seen the halving of fiscal deficit and also a very strong external payments position,” he said.
He said the country’s reserves, which stood at US$7.6billion in 2017 representing 4.4 months of import cover, has gone up to US$9.9billion representing 5.1 months of import cover, following the recent sovereign bond issuance.
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Explaining the exchange rate regime, the Governor said Ghana has adopted the flexible exchange rate system.
“We have chosen the flexible exchange rate, and I think it has served us well in terms of the growth performance that we have all seen in the last few years.
“We need to understand that the exchange rate is only a price, and within that context it will respond to dynamics of the economy and also be subject to the dynamics of demand and supply,” Dr. Addison noted.
Buttressing his point, he said: “All that I am trying to say is that the cedi is driven by demand and supply. On the demand side we have the importers, and on the supply side we have the exporters. We therefore need to change the narrative about the currency, because for as long as we remain import-dependent, we will have that fluctuation”.
Commenting on causes of the cedi’s free fall in the first three months of this year against its major trading currencies, Dr. Addison mentioned the country’s exit from the IMF programme, unfavourable balance trade, among others.
“As we all know, Ghana’s economy is import-dependent; hence, the existence of persistent foreign exchange demand pressures. In addition to these huge demand pressures from imports, we also have the issue of repatriating profits and dividends of foreign-owned companies – which also represents a significant amount of resources from our services and income accounts.
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“There are also the microeconomic factors that come into play. We have some non-resident investors on the market who are looking at the returns on domestic bonds, and if they see that interest or yields in other markets are more attractive they will take their investments out – and the impact from that sort of exit from the bond market effects the cedi’s value,” he stated.
Achieving a sustainable exchange rate
On how to achieve a sustainable exchange rate, the Governor called for reforms to the country’s local content laws in sectors like mining and oil and gas, among others.
He said: “There is a need to improve local content in some of the leading sectors, such as oil and mining, in order to improve performance of the income and services accounts”.
This, he argued, will ensure that the country benefits more from it resources while avoiding huge capital flight.
In the area of exports, he called for work on all fronts to improve the country’s dependency on certain imports like rice and products that can be produced locally, while at the same time strengthening areas which can improve its export earnings.
“There is also need to improve debt management strategies, so that we shift financing of the budget away from non-residents and also away from sovereign bond financing,” he advocated.