Don’t blame cause of cedi depreciation on Russia- Ukraine war, COVID-19 – Economist debunks claims

Renowned finance scholar, Professor Alex Annan Abakah of the Bentley University, USA, has debunked widespread claims that the Russia-Ukraine war and the COVID-19 pandemic are the main contributors to the depreciation of the Ghanaian cedi.

Speaking at a policy dialogue organised by the Public Financial Management (PFM) Tax Africa Network in Accra, the economist presented findings from a comprehensive study on the drivers of Ghana’s currency depreciation.

The research revealed that the cedi’s decline was largely due to deep-rooted structural weaknesses within Ghana’s economy.

Prof. Abakah’s findings suggest that external factors, including the pandemic and the war in Ukraine, had a minimal effect on the cedi’s depreciation, with the COVID-19 pandemic contributing only 11 per cent.

The study also found that during the pandemic, Ghana’s currency exhibited relative resilience, with a moderate rate of depreciation compared to the severe post-pandemic decline.

Explaining, Prof. Abakah said this shift in the cedi’s value raises important questions about the internal factors at play.

“Ghana’s weak economic fundamentals are the primary drivers of the cedi’s depreciation,” he stressed.

The research revealed that both the Russian ruble and the Ukrainian hryvnia continue to appreciate against the cedi despite the war in the two countries.

“Even the currencies of Russia and Ukraine are doing better than the cedi so there is no point blaming the two warring countries for the cedi’s depreciation,” Prof. Abakah stressed.

The findings also revealed that the Ghanaian cedi depreciated at a rate far faster than that of other African currencies like that of Kenya’s shilling, adding that “post-COVID, the cedi depreciated by a staggering 104.69 per cent, in stark contrast to Kenya’s 21.17 per cent.”

External shocks such as the COVID-19 pandemic, Prof. Abakah noted, can affect economies worldwide; however, the severity of their impact is determined by the strength of a country’s economic fundamentals.

The professor also cited Ghana’s fiscal imbalance as a key factor exacerbating the country’s economic difficulties, adding that in 2022, Ghana’s interest-to-revenue ratio stood at 47.27 per cent, which is above pre-HIPC (Highly Indebted Poor Countries) levels “this means nearly half of the country’s revenue is consumed by interest payments, limiting the resources available for vital investments in infrastructure and human capital”.

To address the ongoing depreciation of the cedi, the professor proposed a comprehensive approach that focuses on restoring fiscal discipline.

He suggested introducing debt ceilings and ensuring that government spending aligns with revenue.

In addition, he emphasised the need for long-term investments in infrastructure and human capital development, to generate future revenue and create employment opportunities.

He also called for Ghana to leverage its abundant natural resources to foster industrialisation while implementing stronger foreign exchange regulations to stabilise the cedi, including controlling the repatriation of profits and dividends by foreign companies.

 Such measures he said would help reduce the pressure on the local currency.

A senior fellow at the Africa Centre for Economic Transformation, Prof. John Asafo Agyei, on his part lamented that since Ghana’s independence, the country has continued to rely heavily on imports, making the economy vulnerable to external pressures.

BY RAISSA SAMBOU

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