The ongoing struggle of the cedi to sustain its value over the long term is prompting concerns about the economy’s prospects for enduring transformation, according to financial expert Adjei Boateng.
Mr. Boateng, a chartered financial analyst (CFA), underscored the significant devaluation of the cedi, which has lost 91.6 percent of its value since the 2007 redenomination of the currency. This devaluation is primarily attributed to inflation, fueled by excessive money supply and exchange rate volatility.
He highlighted that the domestic broad money supply has experienced an alarming average annual increase of 29.4 percent for over two decades. This contrasts sharply with the less than four percent average growth observed in advanced economies and the less than 10 percent average in stable developing countries.
Addressing the audience at the 2nd Annual Forecast Dinner and Recognition Ceremony by CFA Society, Ghana in Accra, he remarked:“In the last 23 years, the cedi has not appreciated once; it is almost as inevitable as the laws of physics that the currency will depreciate.”
He added that holding cash without saving or investing over this period would render a certain amount of cedi practically worthless today.
Illustrating the impact of these factors on the local unit, he analyzed hypothetical pension contributions primarily invested in Treasury bills. While nominal returns over 10 years, starting in January 1994, would reach a seemingly impressive 1,451 percent, adjusting for inflation – which averaged 29 percent during the period – paints a different picture, a meager 3.2 percent real appreciation.
This pattern persists over longer periods, highlighting the illusion of high nominal returns.
According to his analysis, while nominal returns would reach 7,036.5 percent and 44,411.1 percent over 20 and 30 years, respectively, the real returns would have been a negligible 48.3 percent and 65.3 percent.
“We would pat ourselves on the back for the nominal returns to investors; but really, the needle has barely moved in real value terms,” he added, urging diversification of investment vehicles.
Similarly, Nana Wiafe Boamah, President of the CFA Society, Ghana, expressed concern over the diminishing investor confidence resulting from recent challenges within the ecosystem in a candid address. He emphasized the adverse impact on the investment industry.
Despite the setbacks, he highlighted the prospect of recovery and cited examples from other nations that successfully rebounded from similar crises.
Drawing parallels with the United States’ historical financial challenges, such as the S&L and housing crisis, as well as more recent scandals involving Bernard Madoff and Alan Stanford, Mr. Boamah expressed confidence in the resilience of the local finance and investment sectors.
He underscored that Ghana, too, can “build back better” through a concerted effort from all stakeholders.
“We can restore the broken wall of trust within our industry if we will all, our regulators included, commit ourselves to excellence, professionalism and integrity in our dealings. In today’s rapidly evolving economic landscape, the need for astute finance professionals has never been more pronounced. The challenges we face require collective sharing of ideas, knowledge and a commitment to staying ahead of the curve,” he remarked.
Despite the cedi’s relative stability since mid-2023 following its plunge in 2022, concerns persist. While the recent approval of the International Monetary Fund (IMF) loan program and debt restructuring offer temporary relief, the renewed depreciation against major currencies last week, driven by a stronger US dollar, underscores underlying vulnerabilities.
During the previous week, the cedi weakened against major currencies as a surging US dollar outpaced the central bank’s efforts to support it. The dollar’s strength originated from robust US economic data, sparking speculation that the Federal Reserve would refrain from cutting interest rates in the foreseeable future.
This led to the greenback rallying against various currencies, including the cedi. Even a US$11.6 million intervention by the Bank of Ghana in the spot market provided little restraint, resulting in the cedi losing 1.60 percent against the dollar to close the week at a mid-rate of GH¢12.53 per dollar on the retail market. The local currency also depreciated against the euro and pound, losing 1.12 percent and 1.11 percent, respectively, on the retail market.
Nevertheless, analysts at Databank express near-term optimism despite these challenges.
“Despite the prevalence of corporate demand, we expect FX market sentiment to improve as the deal’s inflow should help increase supply-side intervention and cushion the cedi in the near term,” Databank added in its forecast following last week’s development with the Bretton Woods institutions.
