The Bank of Ghana (BoG) has indicated that their tight monetary policy and anticipated rate cuts in advanced economies are likely to ease pressure on the cedi through expectations management.
Additionally, the BoG expects that effective liquidity management and ongoing forex auctions will further support the forex market.
However, the BoG’s Monetary Policy Report for July 2024 highlighted a potential risk to the cedi’s stability due to increased fiscal spending related to the upcoming elections.
The report noted that while the US dollar strengthened in June, it has since weakened as investors anticipate a rate cut in September, influenced by a decline in inflation and softer-than-expected US economic data.
Pressure on the cedi decreased somewhat in June compared to May, thanks to revised regulations on advanced payments for imports and the implementation of the new Cash Reserve Ratio (CRR) regime.
Furthermore, positive impacts from the third tranche of the IMF External Credit Facility (IMF ECF), progress in external debt restructuring, and the expected rate cut by the Federal Reserve have also contributed to the cedi’s recovery.
“The domestic currency depreciated by 18.6 percent, 17.9 percent, and 16.0 percent against the dollar, the pound, and the euro, respectively, on a year-to-date basis. This was against a depreciation of 22.0 percent, 26.3 percent, and 23.8 percent against the dollar, the pound, and the euro, respectively, during the same period in 2023,” the report said.
The central bank is not the only institution raising concerns about how the elections pose significant risk to the Cedi as Ghana heads into a major election on December 7 this year.
Accounting and auditing firm, Deloitte, earlier issued a caution to the government of Ghana against overspending.
Deloitte said spending beyond the limit could pose a severe threat to the downward trend in inflation and also the improved currency performance.
Headline inflation declined to 22.8% in June 2024 from 23.2% in January 2023, per figures churned out by the Ghana Statistical Service (GSS).
The downward trend in inflation in 2024 has been largely driven by decrease in non-food inflation, tightening monetary policy, ongoing fiscal consolidation by the government, low volatility of transport fares due to stable crude oil prices, and some base drift effect from previous price increases.
In its assessment of the 2024 mid-year budget statement, Deloitte indicated that the downward trend recorded in the year-to-date depreciation and inflation further affirms the view that Ghana’s economic recovery process is on track.
This notwithstanding, it said, the upcoming elections and its potential for increased Government expenditure beyond targeted levels, as well as the recurrent increase demand for dollars ahead of Christmas festivities in the last quarter of the year present risk to the improved currency depreciation and inflation recorded so far.
“Having highlighted the risk to maintaining the positive trajectory noted above, it is important to note that the IMF Programme, whilst serving as a check on Government’s expenditure also provides opportunity to boost Ghana’s foreign reserves.
“This, together with other inflows expected from the World Bank Development Policy Operation (DPO) might help absorb some of the FX shocks associated with the December festivities,” it said.