The Vice President of IMANI Africa, Bright Simons, has explained that economic indicators on the market show that speculation is not the cause of the rapid depreciation of the local currency – the cedi.
According to him, if speculation claims were true, it would have led to the strengthening of the cedi in the long run.
The IMANI Africa VP made the comment in his piece, "Ghana Should not set up the IMF to Fail".
Bright Simons noted that the country’s current inflation rate is evidently a reason for the cedi’s depreciation as people seek to find ways to preserve the value of their assets.
He said: “there are multiple factors involved with complex interrelationships… the linkage becomes stronger when the effects are so pronounced.”
The Ghana cedi has depreciation by over 50% in the past 8 months of 2022.
While many have attributed the rise to factors such as speculation and the activities of black-market operators, Bright Simons in the article said, “The government’s focus on speculators is wrongheaded because the conditions exist for the vast majority of rational economic actors to want to hedge against the currency. To focus one’s energies in such circumstances on the smaller number of actors with the financial heft, risk appetite and risk capital to profit from the situation is distracting.”
He further said: “Speculation primarily involves the use of risk capital to make gains from future shifts in the exchange rate, known in the jargon as “Inter-temporal carry-overs”.
“Sometimes those speculating are following the herd or trying to find the right bandwagon. But profit is a major intention. In that sense, speculators can actually be stabilizing if they sense that the local currency will rise in the future and start to dump their inventories of foreign currencies forcing the rate to align with the long-run equilibrium rate. Many theorists even go as far as argue that speculation at variance with fundamentals is always loss-making and thus unsustainable,” he said.
He however calls on the government to cut wasteful expenditure and “lay a good ground for securing an IMF deal.”
An update on Ghana's economy is overdue. So here goes. This essay is a series of notes to be read leisurely. Some key takeaways:
- Speculation is NOT the reason for the Cedi's woes.
- The govt is not laying good ground for the IMF deal.
Bright Simons, Vice President IMANI Africa