as redenomination devours US$1.2 billion in propping-up measures

The Minister for Finance and Economic Planning, Kwabena Dufuor has noted that the Cedi depreciated by a whopping 31% between July 2007 and December 2008.

Dr Dufour said this happened in spite of the fact that the central bank spent Ghana’s dollar reserves to the tune of US$ 1.2 billion in a desperate effort to shore-up the value.

Taking his turn to brief the media on his stewardship so far after assuming office, the minister explained that the cedi has fallen this much due to the wrong timing of the currency redenomination that the nation embarked upon in July 2007.

Advancing his assertion, the finance minister said before the redenomination, the economic fundamentals necessary for supporting the value of the cedi at its appropriate level were all ‘very weak’.

At the time of redenomination,” the broad money supply (M2) and total liquidity (M2+) were growing at very high levels, with headline inflation hovering in two digits, while government finances were showing negative balances”, Dr. Kwabena Dufuor stated.

He lamented that the new currency was introduced at a time all the real sector indicators were showing a downward trend, with the composite index of economic activity having negative growth, while on the external front, trade balance was in deficit and the overall balance of payment had deteriorated with Gross foreign reserves grinding down to about 2.5 months of import cover.

“Notwithstanding the macroeconomic imbalances at the time, the new Ghana Cedi was introduced and pegged at GH¢ 0.9200 to one dollar”, he stated adding that, the central bank then tried to hold the currency from serious depreciation by intervening in the foreign exchange market to sell the country’s hard earned dollar to support the cedi.

He said between July and December 2007 alone Bank of Ghana sold US$ 288 million to prop up the currency, “Despite this, 2007 ended with the cedi having depreciated by 5.1% against the dollar although it was being circulated alongside the old currency”.

“The year 2008 was characterized with a continuous sharp depreciation and currency propping by the central bank with the bank spending US$ 918million for this purpose”, Dr. Dufuor disclosed.

The minister said due to the weak economic fundamentals of high spending by government and the associated growing fiscal deficit, surging monetary growth, rising inflation and the declining foreign reserves that continued to exist in the economy, the cedi depreciated by a further 25.3% by December 2008.

“The implication of this is that by December 2008 the cedi had seriously been weakened, causing it to further depreciate by 13.6% in the first quarter of 2009”, Dr. Dufuor noted.

Touching on inflation, the Finance Minister asserted that the inflation targeting framework of the central bank with a medium term target of 5% had also been a disaster.

He explained that the implementation of that framework, with a coordinated monetary and fiscal policy was expected to help anchor long term inflation expectations in the country. “But unfortunately, the expansionary fiscal policy pursued by the previous regime combined with the sharp growth in money supply worked to undermine the effectiveness of the inflation targeting module”, he noted.

He said the strong inflationary pressures that had been built in the economy before the current government took power are those responsible for the current surging inflationary trends.

The minister also blamed the liberalisation of the capital market to allow foreigners to acquire significant chunks of the government's 3-year and 5-year securities as another driving force behind the depreciation of the cedi.

The minister was however hopeful that with inflation beginning to slow down as contained in the Ghana Statistical Service report for March 2009; the outlook is beginning to look positive for the country.

He gave the assurance that government is up to the task of managing affairs to row the nation’s economy out of the trouble waters.