Fiscal deficits and loose monetary policy contribute to exchange rate instability

Banking consultant, Dr. Richmond Atuahene, says undisciplined and persistent fiscal deficit and loose monetary policy are important factors causing exchange rate instability in Ghana.

In his opinion, the period from 2020 to 2023 is noteworthy in this respect, when government spending and money creation increased rapidly, causing inflation and currency depreciation.

Dr Atuahene, who was speaking at the Ghana National Chamber of Commerce and Industry (GNCCI) Dialogue Series, said whenever Ghana’s fiscal and monetary policies were relatively loose, the exchange rate tended to depreciate significantly.

The topic of the dialogue was: “Coping with the rapid depreciation of the Ghanaian cedi: surviving in the midst of crisis.”

He said the depreciation occurred because of supply and

fluctuations in demand, lack of access to international capital markets, shortage of foreign direct investment, poor cocoa harvest, government/Bank of Ghana prevention of leakage of foreign remittances.

He said the depreciation of the cedi, in turn, contributes to high inflation in the local market.

He said inflation for locally manufactured items was 16.1 percent while inflation for imported items was 25.0 percent in April 2024. Inflation is rapidly reducing the purchasing power of consumers as the prices of most consumer goods increase almost every other week.

The banking consultant stated that a secondary effect was a decline in demand for certain products that average consumers now consider luxury and unaffordable, not necessarily because of the increase in the prices of such products, but because the prices of competing basic needs have increased dramatically.

The situation affects all sectors of the economy; however, some key sectors particularly affected by depreciation affecting consumer demand include consumer and household goods, agricultural inputs such as fertilizers and pesticides, oil and gas (gas and diesel), and agribusiness and processed foods.

The rest are pharmaceuticals and medicines, raw materials, semi-processed products, poultry and meat products, tomatoes, onions and carrots.

He said the government must renegotiate existing leasing agreements with mining companies operating in the country based on Botswana’s model with Anglo/American De Beers. They can be considered part of a medium-term strategy to address the continuing depreciation of the Cedi.

“The average return on total gold exported is between 13.1 and 14.1 percent,” he said.

The total value exported was $43 billion between 2014 and 2022, while the value transferred to the Bank of Ghana was $6.4 billion, representing approximately 14.8 percent.

In 2022, Ghana produced and exported a total of $6.6 billion, with the committed portion of $865 million accounting for only about 13.1%.

Returns on existing mining contracts are relatively low compared to Botswana diamond mining for Anglo American De Beers, at 30 percent of diamond exports.

He said as part of its long-term strategy, Ghana must improve its current dependence on raw materials and increase export diversification in non-cocoa sectors such as industrial salt, rice, corn, cashews, soybeans, shea butter and poultry products to improve trade and products poultry. current account surplus to ensure exchange rate stability in Ghana.

He said the government must build sustainable external confidence in the economy by implementing disciplined fiscal and monetary policies to ensure exchange rate stability.

“The government must work hard to create a stable and supportive macroeconomic environment characterized by lower inflation, lower interest rates, lower bank lending rates and improvement in persistent central bank-financed fiscal deficits,” he added.

Dr. Clement Osei Amoako, President of GNCCI, stated that the Series was a significant initiative as it served as an advocacy platform where we engage on issues of national importance with the aim of making policy recommendations to the government to create an enabling business environment.

He said that as part of the dialogue, they also advised business entities on key business-related issues.

He said the session was particularly significant given the continued rapid depreciation of the local currency, which seriously threatens business growth and inflation, adding that after stabilizing for only about a year, the reemergence of rapid depreciation was worrisome.

Dr Osei-Amoako said the rapid depreciation coincided with a persistent economic slowdown, with growth averaging 3 per cent over the past five quarters despite participation in the IMF bailout programme.

He said that the conditions for business development are becoming increasingly difficult, characterized by high operating costs due to excessive taxes, irregular energy supplies and high interest rates on loans.

“The rapid currency depreciation is exacerbating the difficulties faced by Ghanaian businesses, requiring a strategic approach to mitigate risks to their businesses,” he added.

RESERVATION: The views, comments, opinions, contributions and statements of Readers and Contributors on this platform do not necessarily reflect the views or policies of Multimedia Group Limited.