On the Coronavirus – Ghana Cedi Linkage: What Do We Know so Far?
Dr. Muazu Ibrahim Writes
Ghana’s local currency, the Cedi has made significant gains against its major trading partner, the US dollar ($) in 2020. This earned the Cedi its current position as the best performing currency against the dollar globally according to Bloomberg. As it is always done, every Ghanaian professes to be an expert in analysing economic phenomenon and issues around exchange rate movement in particular, the performance of the Cedi, just as it is done in the area of football. However, for most part, factors driving exchange rate or how well or bad a currency is doing are often gleaned from public discourse with little or no theoretical and empirical backing supported with data.
I recently had a discussion on the performance of currencies with a friend. We zeroed it to African currencies and its trading partners particularly China. Of course, with the emergence of the ‘devastating’ Coronavirus (Covid-19) epidemic in China, one will naturally expect it to have implications on China’s trading partners and the exchange rates. For instance, my friend argued that the effects of the disease has led to reduced imports from China to African countries particularly Ghana, with the corollary effect of enhancing the value of the Cedi as the demand for the dollar is subdued. The implicit assumption from his analysis is that all countries which are exposed to China in terms of trade and balance of payments are expected to have some valuation effects on their domestic currencies as a result of the Coronavirus. Sadly, this kind of argument obviously excludes any country-specific policies and idiosyncrasies that support their currencies making the argument untenable. However, everything is possible. But I will choose to rely on the data to have a cursory look into the veracity or otherwise of the Coronavirus effects in driving the Cedi.
I rely on trade data from few top African countries that trade with China. Sadly, 2019 data is presently not available. However, the 2018 Comtrade data compiled by the UN shows the following total trade import value in US dollars: South Africa (17bn), Nigeria (8.3bn), Ghana (2.3bn), and Zambia (1.3bn). The trend is the same for 2017 and 2016. Looking at this data, if there should be any country (ies) in the sample to benefit from the effects of the Coronavirus, it will obviously not be Ghana.
Anecdotally, it suggests therefore that what may make any of these country’s local currency to appreciate or depreciate has more to do with other factors and not the Coronavirus.
The data on the exchange rates movement for these countries from 31st December 2019 to 27th February 2020 (within which the Coronavirus has been occurring) rather shows that the countries that import more from China which should have seen appreciation of their currencies are rather depreciating. The data shows that between the period stated above, the South African Rand moved from 14.0 to the dollar to 15.4 indicating depreciation. The Zambian Kwacha moved from 14.1 to 14.9 indicating depreciation. The Ethiopian Birr also moved from 31.9 to 32.2, indicating depreciation. And similarly, the Nigerian Naira moved from 361 to 363.8 also indicating depreciation.
On the contrary, the Ghana Cedi moved from 5.7 per dollar to 5.32 indicating appreciation. Before the Coronavirus happened the Cedi had earlier showed signs of appreciation by moving from 5.7 per dollar at the end of December, 2019 to 5.45 at end of January 2020.
In view of the above, attributing the appreciation of the Cedi as a result of the Coronavirus will not be tenable given the evidence in the data. Perhaps those who hold contrary view will also have to explain why the other African currencies with trade links to China are depreciating at the same time.
Together with my learned Professor based in South Africa, we wrote and published an empirical research on what drives Ghana’s exchange rate movement. This study which was conducted in 2015 at a time when our dear Cedi was under attack, used data spanning 1980 to 2013. This period is particularly relevant as it captures Ghana’s pre-transition period from fixed to a fairly floating exchange rate regime. The period also coincides with the launch of the Economic Recovery Program (ERP). What did we find? Our study showed that, about 72% of the Cedi movement are self-driven while the remaining is attributed to factors such as government expenditure, money supply, terms of trade and output shocks. The full article is available in Volume 18, Issue 2 of the Journal of African Business.
What is the low-hanging fruit here in terms of reversing the Cedi depreciation? Empirical evidence points to the management of the forex market. For most part, winning the battle against the Cedi depreciation will involve dealing with the excesses of our forex market. In this endeavour, the Bank of Ghana has since the beginning of the year announced and implemented bi-weekly forward FX auctions and maintained a tight monetary policy stance. These interventions are significant in terms of reversing the Cedi depreciation. In addition, the three consecutive years of trade surplus, a declining current account deficit resulted in a strong FX reserves of $1.4 billion and a 4.8% fiscal deficit in 2019 have resulted in positive investor sentiments in Ghana. These developments in addition to the successful Eurobond issuance in early February and accommodative US Federal Reserve monetary policy all have led to a strong performance of the Ghana Cedi.
Undoubtedly, the Coronavirus has affected all countries with strong trade ties to China and therefore it cannot be isolated as the reason for the performance of the Cedi in the first quarter of 2020. Let us not also lose sight of the fact that the appreciation of the Cedi started in the middle of December in 2019 when this Coronavirus had not emerged. I pray the Coronavirus does not find its way to Mother Ghana. I also pray we find lasting cure to all these deadly viruses that people are currently battling with. Amen.