By Enoch AKUFFU-DJOBI (PhD)
Recently, the cedi has exhibited indications of strengthening against prominent foreign currencies, notably the US dollar.
This might be due to a mix of elements such as the government’s fiscal tightening policies, which include significant cuts in public expenditure, halting new initiatives, and freezing payments for outstanding debts. These actions have assisted in alleviating pressure on the national currency.
Although this shift has been embraced by numerous consumers and companies dependent on imports, it also prompts significant inquiries regarding its wider impact on Ghana’s economy—especially concerning the nation’s enduring aim to expand its export industry.
The article contends that although an appreciating cedi offers advantages to importers initially, it presents substantial difficulties for exporters and hinders the country's trade competitiveness over the longer term, particularly considering Ghana’s developmental objectives.
What is the problem?
The recent strengthening of the Ghanaian Cedi relative to key global currencies has elicited varied responses throughout different segments of the nation’s economy. On one hand, importers enjoy lower expenses for importing merchandise. Conversely, exporters encounter considerable difficulties because a more robust Cedi renders Ghanaian commodities pricier and less attractive internationally. This disparity highlights crucial economic issues.
One side effect of the Cedi’s appreciation is reduced inflationary pressure due to more affordable imported products, which might decrease the cost of living and enhance accessibility to international merchandise. Conversely, this could jeopardize the expansion and stability of enterprises reliant on exports—key contributors to national income, job creation, and currency reserves.
Even though exchange rate stability is crucial for overall economic well-being, the detailed impacts of currency appreciation on various industries frequently go unanalyzed.
There is a pressing need to understand how the appreciation of the Cedi is reshaping trade dynamics in Ghana—benefiting some actors while disadvantaging others—and what this means for long-term economic planning and policy.
The importer’s windfall
The importers stand to gain significantly from the recent strengthening of the Cedi. With a more robust local currency, they require fewer Cedis to purchase imported products. This can lead to decreased operational expenses for sectors heavily reliant on imports like electronic sellers, car dealerships, and medicine suppliers. Consequently, this may also result in lowered product prices for customers in certain instances.
Kwasi Akuffu, who brings electronic products from China, notes that the stronger Cedi has substantially reduced his costs. "A few months back, I required more than GH₵14 for each US dollar. Currently, it's around GH₵10. This change makes quite an impact when purchasing large quantities." In essence, within nations like Ghana, where market staples often consist of imported items, a robust Cedi could contribute to lowering inflation rates.
The Bank of Ghana has frequently emphasized exchange rate stability as a crucial instrument for managing increasing costs, particularly because many goods consumed by Ghanaians—including food products and fuel—are imported from foreign countries.
The exporter’s dilemma
Not everybody is joining in the celebration though. Those exporters and local manufacturers who trade internationally now confront a fresh hurdle: their items are getting pricier on the worldwide stage. With the Cedi gaining strength, overseas purchasers must shell out more of their own money to buy products priced in Cedis, making these goods less appealing next to rivals from nations whose currencies have weakened.
Rebecca, a cocoa processor who exports semifinished goods to Europe, succinctly explains the situation: "A stronger cedi means we take home less money when converting our foreign earnings into Ghanaian currency. This erodes our profit margins and complicates our operations." The strain is particularly worrisome for smaller exporters dealing with high production expenses, restricted access to loans, and infrastructural challenges. Currency fluctuations add another element of unpredictability for these businesses. This disparity leads to an alarming mismatch: importers thrive, whereas exporters suffer—a reversal of Ghana’s push towards shifting from consumption-driven expansion to production-led progress.
Theoretical Foundation: The Mundell-Fleming Model
This dynamic is well elucidated by the Mundell-Fleming model It serves as a fundamental concept within international macroeconomic theory. This framework suggests that in a small, open economy characterized by substantial capital mobility and a floating exchange rate regime, an increase in currency value may lead to decreased net exports because domestic products become more expensive for foreign buyers.
When applied to Ghana, this indicates that as the cedi appreciates, the demand from abroad for Ghanaian exports decreases—a trend that is currently being observed. Empirical research conducted in various emerging markets supports this theoretical basis.
Lessons from Emerging Economies
Turkey (2010s): A significant strengthening of the Turkish lira increased the cost of Turkish exports, leading to a decline in international demand. Although this aided in curbing inflation, it undermined the competitive edge of Turkish producers—a situation that forced many to either shift their operations elsewhere or scale down their businesses.
South Africa: The rand's volatility has demonstrated that an appreciation of the currency leads to underperformance in mining and manufacturing exports because they become less competitive. Meanwhile, importers gain advantages from decreased costs.
Nigeria: In short intervals when the naira strengthened, importers benefited from lower-cost imports. However, domestic exporters, particularly those in agriculture and non-oil industries, experienced a decline in profit margins because of decreased international demand.
These instances highlight an essential truth: for nations aiming to broaden their export sectors and undergo industrialization, managing the strength of their currency needs to be handled with care.
Striking a Balance
The differing impacts on importers versus exporters reveal a more complex reality: currency appreciation is not inherently positive or negative for everyone. Its effects vary depending on one’s position within the economic landscape.
A robust cedi can contribute to price stability and lower the expense of imported products; however, it might also adversely affect industries crucial for job creation, earning foreign exchange, and fostering long-term economic expansion. exporters play an essential role in bringing in foreign currency, promoting value-added processes, and helping to decrease Ghana’s trade imbalance—all functions key to national progress.
Furthermore, if exporters face difficulties and cut production or dismiss employees, the overall economy might be adversely affected even though a robust currency provides immediate advantages.
What Should Be Done?
Policy makers currently confront a subtle balancing act. They have to uphold monetary stability to manage inflation and bolster consumer well-being. Simultaneously, they must guarantee that both exporting companies and domestic manufacturers stay competitive.
Specialists propose that one aspect of addressing this issue involves broadening the economic base and decreasing dependence on basic commodity exports. Alternatively, some advocate for providing incentives and assistance programs aimed at aiding exporters to enhance their manufacturing capabilities, penetrate fresh market segments, and safeguard themselves from exchange rate volatility.
In the end, the Cedi’s appreciation serves as a reminder that economic power is more than mere figures; it's all about equilibrium. As Ghana moves through this economic phase, the task ahead will be to guarantee that the advantages of a robust currency do not undermine sustained development and industrial competitive edge.
Conclusion
Appreciation of the cedi is truly beneficial for importers—but for exporters, it poses an obstacle that might undermine Ghana’s long-term growth potential.
If Ghana aims to become a center for industrial production and value-added exports as part of its economic strategy, it needs to acknowledge and address the compromises posed by a robust currency. It is now essential to adopt a sophisticated exchange rate policy that fosters both import efficiency and export competitiveness.
Enoch holds credentials as a Chartered Accountant and Certified Banker and has a strong enthusiasm for accounting, banking, and corporate governance. With experience in teaching and practical work, he demonstrates dedication to research and disseminating information. You can contact him at enakuffu@gmail.com. Contact: +233244201383.
Provided by Syndigate Media Inc. ( Syndigate.info ).
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