Ghana’s Trade of Vulnerability: Rise of Imports, Fall of the Cedi [Part 2]

The Ghana cedi has faced a steady decline against major international currencies, particularly the US dollar. This depreciation is driven by a combination of internal and external factors.

Internally, the country’s fiscal policies have been less than robust. Persistent budget deficits, fueled by excessive public spending and inadequate revenue generation, have undermined confidence in the cedi. Externally, global economic conditions, such as rising interest rates in developed economies, have made the cedi less attractive to investors, leading to capital flight.

The fall of the cedi takes a heavy toll on the cost of imports, creating a vicious cycle. As the cedi weakens, more local currency is required to purchase the same amount of foreign goods, increasing inflationary pressures. This situation is particularly dire for essential goods like food and fuel, which directly impact the cost of living for ordinary Ghanaians.

The economic implications of these trends are profound. The rising import bill and falling cedi contribute to a widening trade deficit, putting immense pressure on Ghana’s foreign reserves. This scenario limits the country’s ability to finance its import needs, service external debts, and stabilize the cedi. Additionally, the persistent depreciation of the cedi erodes the purchasing power of consumers, leading to higher inflation rates.

High inflation, in turn, affects every aspect of life. Prices of essential goods and services rise, disproportionately impacting low and middle-income households. For businesses, the cost of raw materials and inputs increases, squeezing profit margins and stifling growth. The uncertainty associated with currency volatility also deters foreign investment, which is crucial for economic development.

A Chartered Economist, Martin Ohene Anim, argues that addressing these vulnerabilities requires prioritizing macroeconomic stability which involves prudent fiscal management, reducing public debt, and enhancing revenue collection.

“We must be prudent in our expenditure as a country, and this is very important. We are not prudent in fiscal management. In 2020, an election year, there was a budget deficit of 15% and if care is not taken, we will have a budget deficit of 30% because we are in an election year,” he said.

According to him, reliance on commodities like gold and cocoa, which are subject to global price fluctuations, makes the economy vulnerable.

“In fact, Ghana’s smaller cocoa harvest in the 2023/24 season has hit the country’s external payments position, as its trade surplus fell by more than half in the first two months, posing a risk to the exchange strength of the cedi, which has lost more than 20% against the US dollar,” he revealed.

Mr. Ohene Anim said recent data from the Bank of Ghana, the West African nation’s trade surplus narrowed by 54% from a year earlier to $392.8 million for January–February 2024, and revenue from cocoa exports fell by a significant margin.

He called on government to invest in other sectors such as tourism, technology, and services can provide alternative revenue streams and reduce economic shocks.

Ghana’s economic challenges, characterized by the rise of imports and the fall of the cedi, highlight significant vulnerabilities that need to be addressed. While the path to resolving these issues is complex, a concerted effort to boost local production, stabilize the economy, and diversify revenue sources can pave the way for sustainable growth.

The stakes are high, but economists believe that, with strategic planning and effective implementation, Ghana can overcome these challenges and build a resilient economy that benefits all its citizens.