Cedi to hit GH¢6.45 against dollar by end of 2021 – Report

by Business Zone

The cedi will hit GH¢6.45 to the dollar by the end of this year, according to economic and finance think tank, Center for Economics Finance and Inequality Studies (CEFIS’)

The Projection was contained in the CEFIS’s Economic Forecast and Cedi’s Outlook for the forex market this year.

The Center in its report also projected that the cedi will by the middle of this year hit GH¢6.24.

Reasons for the Projection

According to the think tank, the projection is based on fact that the expected rebound of the economy will not be strong enough to support the cedi’s stability for 2021.

It argue that “the immediate effect of the pandemic will linger beyond 2021, which will also affect the cedi’s firm stability going forward”.

It also expressed worry that the cedi’s fortunes for the year will be affected by some financial commitments that the government will undertake due to many of the projects embarked upon in the run-up to the 2020 election. All this the think tank argued will put some pressure on the cedi.

“This excess liquidity without a corresponding output, will destroy most of the gains especially the exchange rate stability in 2020 made in the prior election year. This has also been factored in our forecast of Ghana cedi exchange rate for 2021.

Exports and revenue challenges and impact on the cedi

CEFIS in the report noted that it expect exports to struggle this year despite the expected opening up of economies this year.

Another area, which it believes will impact negatively on the cedi, has to do with revenue shortfall and how that may affect financing of the budget deficit going forward. The think tank also believes government’s financing might come under some pressure this year, as most debts are expected to mature.

Bank of Ghana and the Cedi Performance

But in the same report, CEFIS acknowledged that the Bank of Ghana’s forex forward sales has gone a long way to help stabilize the cedi.

It said the Bank of Ghana has managed the foreign exchange market well, boosting liquidity.

Strategies in managing Exchange Rate Risk

CEFIS proposed some strategies that businesses can adopt to manage the situation. These includes

Invoice in home currency

In this strategy, it advised businesses keep invoices in cedi.

In such a situation, the currency risk is passed onto the customer or the supplier.

However, companies that may opt for this strategy should have strong competitive strength, and high switching costs for the customers and suppliers.

Countertrade

This is fashioned out like a barter trade, where the trading parties exchange the equivalent amount of goods and services.

The disadvantage with countertrade however is that management of the company will have to resolve the tax implication of this type of payment for goods and services in international trade.

External Strategies

These are strategies adopted after all internal means to manage the forex exposures have been exhausted.

Also, these strategies are in many instances expensive, since it may demand the setting up of a treasury function within the organization; hence, not recommended for small firms in Ghana.

In many instances, the external strategies are suited for banks, investment and fund management companies, pension funds with cross border investment, multinationals, and central banks. The strategies available to these firms’ entities are forward contracts, money market hedges, futures, options, and swaps.

Bank of Ghana on cedi stability

The Bank of Ghana said it has put in place several measures that will help stabilize the cedi, especially in the first quarter of this year.

This includes building up enough dollar reserves and other measures that will help stabilize the cedi for 2021.

So far, the cedi has remained relatively stable to the dollar. On the average you may need about 5 Cedis 85 pesewas to get a dollar now.

ABOUT CEFIS

The Center for Economics Finance and Inequality Studies, previously called Center of Economic and Financial Studies (CEFS) is a not-for-profit research center with the objective of carrying out impactful scientific and practitioner-oriented research on issues that are pertinent to stakeholders of the financial services industry and the economy in general.

CEFIS is a bridge between academia and practice as it uses research inquiry and practical research solutions to positively influence decision both in the private and public space of the economy.

Majority of its membership are drawn from finance professors and lecturers from the University of Ghana and Central University.

Source: BusinessZone Online

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