Good News on the Cedi

It looks like the cedi is finally gaining rather than losing value. Between now and January the cedi may actually increase in value relative to the US dollar by as much as 3%.  This appears to largely be due to intervention by the central bank to prop up the value of cedi. In the first half of the year the cedi lost a lot of value, about 20%. It has since August been making a comeback. The total loss of value for the cedi for 2012 versus 2011 in comparison to the US dollar will be about 11-12%. If the current increase in value can continue into 2013 I should be in good shape.

The tendency for the cedi to lose value against the US dollar is a long standing problem in Ghana. It is a result of the need to import a huge amount of goods that need to be paid for in US dollars thereby depressing the price of the cedi as there is a much higher demand to exchange cedis for dollars than dollars for cedis. Attempts to remedy this problem by import substitution in the 1960s and 70s largely failed. Although Ghana does produce very high quality and inexpensive goods such as pharmaceuticals, it does not produce enough of them to meet 100% of domestic demand. The alternative strategy which worked well in East Asia would be to gear the economy towards the export of manufactured goods to generate the hard currency needed to finance Ghana's current imports. While the current monetary interventions to increase the value of the cedi are absolutely necessary, in the long run the currency's stability can only be maintained by fixing the imbalance between imports and exports. Ghana needs to move beyond merely the export of raw materials such as cocoa, oil, and gold. It needs to engage in value added manufacturing for export which can generate more hard currency than than it spends on imports.

Source: Reuters