Head of Finance Department at the University of Cape Coast, Professor John Gatsi has raised some concerns about depreciation of the Ghana cedis, business cost structure and new economic policies by the Bank of Ghana.
According to Prof Gatsi, Ghana needs robust domestic policies in agriculture, trade and investment and a thriving tourism sector to stabilize the Ghana Cedi and change the circle of depreciation.
He said, “In the absence of such policies with the required commitments , the monetary policy framework by Bank of Ghana will not be potent to change the cycle of the depreciation.”
The Finance expert explained that the high cost of goods is due to the perennial Cedi depreciation as “Depreciation increase the cost and cost structure of businesses who pass on this cost to domestic consumers”.
This according to him, contributes to the “trend of inflation development in the country. Depreciation therefore over time erode both income and capital of entrepreneurs, traders and enterprises.”
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Depreciation Concerns, Business Cost Structure and New Policies- Prof John Gatsi
Engagement in international trade and international assets transactions require the exchange of one currency for another.From
time to time one of the currencies in the exchange process will experience depreciation or appreciation such that there is mutually exclusive characteristic . Implying that one currency cannot appreciate against the other and at the same time depreciate.
There is a clear relationship between the exchange rate and rate of inflation (price development) of goods and services in two countries. Simply put if the rate of change in inflation in Ghana is greater than US , the Ghana cedi will depreciate against the dollar. In the same vein attractive relative interest rate regime increase the demand for that currency and lead to appreciation all other things equal.
High expectations of investment returns in an economy compared to another has the potential of inducing investment and appreciation of the currency.
The above has domestic economic policy and management implications. Thus policies to make the investment environment for direct investments in goods and services as well as transactions in financial assets is very crucial in currency management. This is where the weight of domestic policy management contribute more to the cycle of depreciation than external. The strength of external factors are always experienced during periods of shocks when domestic policy gains cannot mitigate such interruptions.
There is therefore a relationship between depreciation-appreciation of the cedi and inflation rate.
Depreciation is a cost to those economic actors who need foreign currency such as government, students paying subscriptions for foreign professional examinations, importers among others. Depreciation increase the cost and cost structure of businesses who pass on this cost to domestic consumers and contribute to the trend of inflation development in the country. Depreciation therefore over time erode both income and capital of entrepreneurs, traders and enterprises. The weight of the revenue gain by government through depreciation because effective duties and taxes on imports increase, cannot be compared to the negative effects of cost distortion, upward price development and capital- income erosion of Ghanaian businesses. These effects are constantly monitored by importers not based on the rate of depreciation per se but the volumetric effects of exchanging Ghc5.30 to $1 for an importer who imports for example 80 containers of secondhand clothing given that the exchange rate 6months ago was Ghc4.50 to $1 . In terms of the volume of imports, the distortion in cost of imports have worsened.
Policy response to improve the business and investment environment on one hand and produce for consumption and export of many agricultural produce which have become part of the basket of imports on the other is crucial. Deepening domestic policy to deal with well known demand factors is lacking.
Importing tomatoes, rice,sugar and selected pharmaceutical products are clearly demand factors that can only be resolved using targeted domestic policies.
The economy is begging for robust forward looking domestic policies in agriculture, trade and investment as well as defining a congenial environment for tourism and financial services.
In the absence of such policies with the required commitments , the monetary policy framework by Bank of Ghana will not be potent to change the cycle of the depreciation.
By: Kekeli Kuatsenu/awakenewsonline.com