Explaining Recent Depreciation and Appreciation of the Cedi

The currency of Ghana has been in the news for a few months in 2022. This is due to the rate of depreciation of the Cedi with respect to the major trading currencies. The Ghanaian Cedi started the year at a rate of 1 USD to 6 Ghana Cedi. The Cedi depreciated slowly in February 2022 at a rate of 1 USD to 6.7 Ghana Cedi. The Cedi rose sharply from September to November to about 1 USD to 15 Ghana Cedi. However, in the month of December 2022, the Cedi had seen drastic appreciation compared to some major trading currencies in the world. These depreciation and appreciation are mainly due to speculation.

What is the speculative motive of holding a currency or money?

The speculative motive of holding money is the term used to describe people who hold money for profit. In other words, they hold money with the anticipation of getting returns from it(they either sell or buy it for rates they want). People in the country always keep dollar either to sell or buy to get additional monetary value on it.  In the case of the Ghana Cedi, people have an expectation of the currency depreciating to the dollar. As such, people will always buy the dollar and keep with the expectation of getting a higher future yield. 

What can speculation do to the Cedi?

Let us assume that  there are three individuals in the economy with 1500 dollars. Let us also assume that individual A purchased 500 dollars and used it for a transaction. The same 500 dollars will come to the system.  With individual B , he purchased 500 dollars and held it for profit. Again, individual C, purchased 500 dollars for transaction.

In all, 1000 dollars will be in the system with 500 shortages. This will cause a shortage of dollars and cause the price of the dollar to appreciate(increase) with respect to the cedi. 

Assume that, with 1000 dollars, individual A decided to purchase 500 dollars and keep it for return. This will further cause severe shortages, leading to a sharp appreciation of the dollar. 

The above happened to Ghana a few months ago. Most people identified the dollar as a means of getting monetary returns. This made more people buy more dollar with the expectation that the dollar would keep increasing to be able to sell for a higher rate. This resulted in a sharp shortage of the dollar, leading to the rate we were experiencing in the country.

What is happening now?

The bank of Ghana has initiated drastic measures to control the fast depreciation of the Cedi. 

One of the measures is the strict enforcement of forex bureau regulations towards the forex market. This enforcement will make the forex beat down expectations, leading to lower expected returns on the dollar held. This will make people sell their dollar, since they are aware that keeping them will yield lower future returns. In effect, more dollars will come to the system, leading to appreciation of the Cedi and depreciation of the dollar. 

Another measure is the regular publishing of the currency rates in the media, especially social media. As people get to know the bank of Ghana’s rate of the dollar to the Cedi, people will be able to get information to set their expectations. So, the recent publication of the downward trend of the dollar will make people reverse their expectations and begin to sell their dollars. As a result, there will be more dollars in the system, bringing the rate of the dollar to a lower level.

Again, the clamp down of the black market in the country. As people are not getting the black market to trade, they will use the regulated forex institutions to trade. This will make the Bank of Ghana check the rates in the country. This will also beat down expectations of many Ghanaians, leading to a lower dollar rate.

More importantly, the announcement of the government and IMF staff agreement on the IMF programme will further help strengthen the Cedi. 

We must note that the appreciation of the Cedi is not endless to where 1 UDS = 1 Ghana Cedi, it will reach a point  where it will start depreciating but at  lower rate.

In conclusion, the Bank of Ghana needs to keep doing all the tightening measures to save our economy.

WRITER

DANSO SAMUEL 

MPHIL (ECONOMICS) STUDENTS -SECOND YEAR

UNIVERSITY OF GHANA

dansosamuel2014@gmail.com