EXPLAINER: Cedi depreciation and what can be done to restore it

The Cedi has been on a depreciation spree since 2016.

What does depreciation in itself mean to start with?

Depreciation is when something loses its value over a period of time.

However, currency depreciation according to Investopedia is a fall in the value of a currency in terms of its exchange rate versus other currencies.

This can be caused by factors such as the rate of imports and exports, interest rate differentials, political instability, or risk aversion among investors.

Now, why does Ghana’s depreciation look like an unending cycle and what can be done to rescue the cedi. Take note however that, the Cedi is currently selling at GH¢7.0065.

Here is why the cedi is depreciating so fast. First of all, the country is heavily dependent on imports as its local industries are not able to manufacture to meet demand.

Also, the export rate does not quite match the rate of imports thus leading to the depletion of foreign exchange reserves.

In simple terms, when buying from outside the country, you need to acquire some dollars to make the purchase possible. But when goods are being exported, more foreign currencies are brought into the country which in turn boosts the country’s foreign exchange reserves.

The depletion of these reserves results in the reduction in the value of the cedi and that will require that more cedis must be used to get other foreign currencies.

This is quite unhealthy for the economy as it may result in the high cost of imports, leading to an increase in the prices of goods and services.

In as much as Ghana’s situation looks bad, global economies are currently going through the same phase.

But this is not a situation beyond redemption, however, it may take a long-term plan to address it.

To reduce imports, Ghana needs to industrialize, add value to its exports, and increase local production so that there will be enough foreign exchange in the country.

According to economists and industry players, government’s involvement in boosting agriculture with the one-district-one-factory initiatives will also help shore up Ghana’s exports.

Industry players advised that the government must devise effective ways of mobilizing internal revenue to reduce external borrowing.

According to experts, going to the IMF or other external financial institutions, and addressing the loopholes in the country’s tax regime will be a good way of restoring the cedi.

The challenge however is that the country must restore investor confidence by demonstrating that it can be able to mobilise revenue domestically, the reason the E-Levy is still being pushed despite several resistance from Ghanaians.