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Downgrade of economy, speculations caused decline in strength of Cedi – Egyapa Mercer

A Deputy Minister of Energy, Andrew Egyapa Mercer has noted that the fall of the Cedi is as a result of the recent downgrade of the economy by some credit rating agencies.

He mentioned that steps are being taken by the government in collaboration with the Bank of Ghana (BoG) to take some steps to strengthen the Cedi.

The cedi is currently trading beyond 7 cedis to the dollar. Analysts have predicted it is most likely to cross 8.

“The cedi is depreciating at a faster rate owing to the downgrade by the rating agencies and some speculations by people scrambling for the dollar.

“A key consideration that has been tabled is to see how Bank of Ghana can intervene to create some FX market that make forex availability for importers.

“A meeting has been scheduled to that effect,” he said on the Key Points on TV3 Saturday March 19.

Recently, the Director of the Institute of Statistical, Social and Economic Research (ISSER) of the University of Ghana, Professor Peter Quartey, also noted that the downgrade of Ghana’s economy by credit rating agencies brought panic into the system.

This, he said, led to speculations and also the refusal of investors to buy bonds, a situation that affected the strength of the cedi.

Moody’s Investors Service (“Moody’s”) on Friday February 4 downgraded the Government of Ghana’s long-term issuer and senior unsecured debt ratings to Caa1 from B3 and changed the outlook to stable from negative.

The downgrade to Caa1, according to Moody’s reflected the increasingly difficult task the government faced addressing its intertwined liquidity and debt challenges. Weak revenue generation constrains government’s budget flexibility and tight funding conditions on international markets have forced the government to rely on costly debt with shorter maturity.

Moody’s estimated that interest payments would absorb more than half the government’s revenue over the foreseeable future, which is exceptionally high compared to peers at all rating levels. As a remedy, the government has proposed sharp fiscal consolidation and a switch to borrowings from external partners on more favourable terms.

However, the strategy comes with sizeable implementation risks, especially in a still-fragile post-pandemic environment and while international market creditors price in very wide risk premia. While Ghana’s external buffers and moderate external debt amortization schedule in the next few years afford the government a window of opportunity to deliver on its strategy, balance of payments pressures will build up the longer government’s large financing requirements have to rely on domestic sources.

The stable outlook balances Ghana’s significant fiscal challenges, large refinancing needs and constraints on access to funding against the government’s pre-pandemic track record of relatively effective policy delivery and maintenance of a variety of funding sources. Ghana’s institutional framework and dynamic economy remain key credit supports, with economic growth forecasts of around 5% over the medium term.

Speaking in an interview with TV3’s Alfred Ocansey on Tuesday March 1, Professor Peter Quartey said “Because of our fiscal deficit, revenue challenges and the high debt levels we were downgraded by rating agencies. So that sent some panic to the system and therefore, people started to speculate. When that happens, investors who will bring in the needed foreign currencies to invest, to buy bonds and other things, will hesitate.

“You will also find that even those that are holding on to our bonds, some might exit. All of that put pressure on the exchange rate. We also have some people out of the uncertainty, who are holding onto the foreign currencies, they might have dollars or Euros but because of the uncertainty they would hold on rather than trading.

“Exchange rate is determined by demand and supply, so if people are not supplying the foreign currencies but rather there is an increase in our a surge in demand, a surge could also happen when those who hold the local currency don’t have confidence in the cedi and rather exchange the cedi for dollars for keeps.”

“We have all these speculative activities happening and that affect the rate of depreciation. We also know that it has been the tradition that in the first quarter of every year we have this surge in demand for foreign currency because foreign companies will want to repatriate their profits.

“You will also find the Chinese New Year for instance, where a lot of Chinese investors locals will want to go home and celebrate, they demand a lot of foreign currency. So there is a lot of pressure in the first quarter of the year.

“The government revenue doesn’t flow as mush as expected, the donor inflow doesn’t come in as expected within the first quarter. Then also, what is happening in Ukraine and Russia is also affecting oil prices, oil prices are going up, so we tend to demand more foreign currency in order to import oil and import other essential commodities,” he added.

By Laud Nartey|3news.com

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