Ghana’s cedi will reach 6.45 ¢ by the end of this year, according to projections by the economic and financial think tank at the Center for Economics Finance and Inequality Studies CEFIS ‘Cedi Outlook Report.
The Center also predicts that the Ghanaian local currency will reach GH ¢ 6.24 by the middle of this year.
According to the think tank, the projection is based on the fact that the expected rebound in the economy will not be strong enough to support the stability of the cedi for 2021.
He argued that “the immediate effect of the covid-19 pandemic will persist beyond 2021, which will also affect the stability of the cedi business going forward.”
He also expressed concern that the cedi’s fortunes might be affected by some financial commitments made by the government in the run-up to the 2020 elections, and that will be felt this year. This will therefore put some pressure on the Ghanaian local currency.
“This excess liquidity without corresponding output will destroy most of the gains, especially exchange rate stability in 2020, made in the previous election year.”
Exports and income challenges
CEFIS in the report noted that exports will still struggle this year despite the expected opening of economies this year.
Another area that he says will have a negative impact on the cedi is the revenue gap and its effect on the budget deficit.
The think tank also believes government finances could come under pressure this year as most debts are expected to fall due.
Performance of the Bank of Ghana and the Cedi
The Central Bank was praised for its Forex futures auction policy which improved liquidity and ultimately brought relative stability to the local Ghanaian currency.
“We have recognized that the Bank of Ghana’s forward sales have been instrumental in stabilizing the Ghanaian cedi compared to last year.”
Currency risk management strategies
CEFIS in its report proposed internal strategies that can be adopted by companies to deal with the situation.
Invoicing in the currency of the country
In this strategy, Ghanaian companies must keep their invoices in cedi. In such a situation, the currency risk is transferred to the customer or supplier instead.
Companies that might opt for this strategy, however, should have strong competitiveness and change costs for customers and suppliers.
It is designed as a barter trade, where the trading parties exchange an equivalent amount of goods and services.
The downside of cleared trade is that the management of the business will have to resolve the tax implications of paying for goods and services in international trade.
These are strategies adopted after all internal means of managing foreign exchange exposures have been exhausted.
In addition, these strategies in many cases are expensive, as they may require the establishment of a treasury function within the organization; therefore, not recommended for small businesses in Ghana.
In many cases, external strategies are suitable for banks, investment and fund management companies, pension funds with cross-border investments, multinationals and central banks.