Ghanas economy has been saddled with risks from foreign exchange development since the country adopted its own

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Ghana’s economy has been saddled with risks from foreign exchange development since the country adopted its own currency (Cedi) in July 1965 after it abandoned in 1963 the British West African Currency Board (WACB) which was constituted in 1912 to control the supply of currency to the British West African Colonies. Available evidence indicates that the country under the WACB did not have an independent monetary policy, the government could not print money at will and the discipline imposed kept inflation barely noticeable since there was no exchange rate depreciation to worry about against the pound sterling. However, in 1965, the country introduced the cedi with ¢1.04/$ though the country continued to operate a fixed exchange rate regime. Since then the cedi has never seen rest from pressures coming from the major trading currencies and has lost considerable grounds. Cumulatively, the cedi has lost 99.9999% of its value against the USD and was a major political campaign issue in 2016 as was a major issue during Dr. Nkrumah’s regime. It was predominant issue that necessitated the perhaps the first ever Economic Management Team Town Hall meeting this year. Many reasons have been cited for the persistent depreciation of cedi including weak economic fundamentals emanating from fiscal and monetary indiscipline. The rising public debt has come under scrutiny as well as its composition. The total public debt was over USD 500 million in 1965 from a very negligible amount in 1960 (perhaps part of the reasons for approaching the IMF in 1965). By the end of 2008, Ghana’s total public debt stood at GHS 9.5 billion (33% of GDP) after completion of Highly Indebted and Poor Country (HIPC) initiative and Multilateral Debt Relief Imitative MDRI. By the end of 2016, it stood at GHS 122 billion (73% of GDP), GHS 198 billion (57% of rebased GDP) as at March 2019 and GHS 236 billion as at end of May 2020. Recently, the Ministry of Finance indicated that Cabinet has directed that a Bi-Partisan Committee called the ‘Forex (FX) Development Committee’ be set up. The Committee to be chaired by the minister of Finance with membership drawn from all stakeholders whose activities impact on the FX is expected to start meeting on 17th July 2019. The Committee was expected to collaboratively assess the economic impact of the foreign exchange development on the country and come up with policies and programmes that will ease the FX risks facing the economy. You have been hired as a technical consultant to the Committee. You have been asked to set the framework to guide the committee in its first meeting. In your report to the Committee, you are required to explain:

On April 3rd 2019, The Economic Management Team headed by the Vice President had a Town hall Meeting with the Public perhaps the first of its kind. The following extract is taken from Myjoyonline.com on the 5th of May, 2019 at 3pm. “Vice President Dr Mahamudu Bawumia says the sharp depreciation of the Ghana cedi can be blamed on restrictions by the International Monetary Fund (IMF) for the Bank of Ghana to build its foreign reserves to about $800 million. Speaking at the Maiden Town Hall Meeting, Head of the Economic Management Team, Dr Mahamudu Bawumia said the situation has affected the supply of the dollar to businesses and the trading public between February and March this year. Dr Bawumia said “the most important and the proximate cause of the recent depreciation is the time inconsistency of an IMF prior action of the reserve target. At the end of January, as part of the seven prior action to complete the IMF program which went to the Board on March 20, 2019 the Bank of Ghana was required to ensure net international reserves (NIR) target on March 14, 2019 are the same levels as it was at the end of December 2018.” A year after, you had a wonderful presentation on Ghana’s Balance of Payments from Bank of Ghana with beautiful insights given the statistics that were contained in the presentation.

Immediately after, Covid-19 interrupted our normal lives and created a ‘new normal’ sending the noisy world into half time. Wide scale global, regional and local supply chain disruptions were evident impacting world crude price and Ghana’s petroleum receipt and for that Annual Budget Funding Amount (ABFA). In addition, other important tax handles have been impacted heavily given also the partial lockdown of Greater Accra and Greater Kumasi that put the economy practically on hold. The fiscal deficit has therefore expanded from GHS 18.9 billion in the 2020 budget to GHS 30.2 billion. The public debt has increased to GHS 236.1 billion and will rise further towards the end of the year. It is noteworthy that exchange rate depreciation alone added approximately GHS 15 billion to the public debt and perhaps highlights the importance of effective economic management and debt management. Bank of Ghana has in response to the impact of Covid-19 as it has elevated our fiscal deficit adopted Asset Purchase arrangement under a Quantitative Easing (QE). The Central Bank indicated it stands ready to support government with GH¢10 billion in the wake of the coronavirus pandemic. Out of this, the Bank has already purchased a Government of Ghana COVID-19 relief bond with a face value of GH¢5.5 billion at the Monetary Policy Rate with a 10-year tenor and a moratorium of two (2) years (principal and interest)

You are required to attempt the following questions:
a). What Do Economic Fundamentals entail and how do they explain the depreciation of the cedi?
b). Discuss the composition of Ghana’s International Reserves and the role the country’s international reserves plays in the stability of the local currency.
c). Describe five possible scenarios under which Ghana’s Current Account Deficit can be harmful.
d). In the midst of all these, it was suggested that Bank of Ghana should fast track the introduction of the Chinese Renminbi (RMB or CNY) to ease the pressure on the dollar on the China-Ghana trade corridor. Discuss to what extent would this intervention ease the pressure on the local currency.
e). Given the country’s debt composition (236.1 billion as at the end of March, 2020 made up of external and domestic), what risk does instability of the cedi pose to the country’s total debt stock?
f). How would this year’s election impact the foreign exchange market and how should the private sector manage its exposure.
g). Explain how fiscal indiscipline and higher than anticipated fiscal deficits contribute to the depreciation of the local currency.
h). Discuss how Bank of Ghana’s Quantitative Easing (QE) (essentially a form of monetizing the fiscal deficit) would impact price development ( i.e. inflation and exchange rate) and what measures should be put in place to mitigate the downside risk.
i). Discuss how this move (QE) co-exist with Bank of Ghana’s Inflation Targeting Regime and implication of fiscal dominance of monetary policy on exchange rate development in Ghana.
j). Discuss how Covid-19 is shaping the field of Development Finance reflecting also on the role of development finance in mitigating the harmful effects as well as how Development Finance can be deployed to take advantage of the opportunities arising out of the pandemic to Ghana.
k). State and explain the risks associated with the rising public debt and how the Debt Management Unit can manage those risks.