Ghana’s external financial position and its currency, the cedi, have grown stronger since the beginning of the year despite the devastating effects of the COVID-19 pandemic on both imports and exports, data released by the Bank of Ghana earlier this week shows.
Despite a significant fall in export revenues in the first half of the year, a smaller decline in the country’s import bill, coupled with a narrowing of the current account deficit and net inflows into the capital and financial account, enabled gross international reserves to rise to US$9.2 billion by the end of June, up from $8.4 billion as at the end of 2019.
This translates into a longer import bill cover, which has risen to 4.3 months, up from 4.0 months at the turn of the year.
The improved external position has slowed the depreciation of the cedi, which fell by just 2.5% against the US dollar between the start of 2020 and 23 July, as against an 8.3% depreciation during the corresponding period in 2019. It indicates a potential for the local currency to remain relatively stable into the run-up to this year’s general election, although the government’s extraordinarily high fiscal deficit forecast for this year – 11.4% of gross domestic product – may threaten this prospect in the coming months.
Ghana’s trade surplus for the first half of 2020, at $952.7 million, was significantly smaller than the US$1.4 billion surplus recorded in the first half of 2019.
This was the result of an 8.4 % fall in total export receipts year on year, to $7.4 billion, this deriving from a 37.9% fall in crude oil export revenues caused by a 37.5% decline in crude oil prices due to sharply lower global demand.
Gold still glitters
Gold export revenues rose by 6.9% on the back of a 17.1% rise in the commondity price in response to global monetary policy easing, geopolitical risks and the global economic slowdown. In such circumstances, gold is regarded as a haven by international investors, thereby raising demand for the precious metal.
Cocoa export revenues also rose by 8.7% year on year despite a 7.7% fall in prices in response to the slackened demand for cocoa beans.
However, the import bill also declined, though more slowly than export revenue. Total imports fell by 4.1% to $6.4 billion, propelled by a 26.4% decline in oil and gas imports because of slower domestic economic activity.
Importantly, the current account deficit for the first half of 2020, at $556.3 million, was significantly lower than the $661.1 million incurred during the first six months of 2019. The improvement derived from relatively stable net current transfers, especially from remittances, as well as a significant decline in net investment income outflows in the form of repatriated profits and dividends.
Net inflows into the capital and financial accounts added on to all this to generate a near-zero overall balance of payments for the first half of 2020, compared with a $1.3 billion surplus during the corresponding period in 2019.
Remaining fiscal risk
All this has made for adequate liquidity on Ghana’s domestic foreign exchange market, further supported by the BoG’s ongoing forward forex sales.
The relative stability of the cedi has generated confidence among forex market traders.
They however remain wary of the potential effects of the unusual size of this year’s fiscal budget, forced on the government by the effects of and requisite policy responses to the COVID-19 outbreak.