Director of Economics at the Institute of Statistical, Social and Economic Research (ISSER), Professor Peter Quartey has cautioned that the cedi is at risk of depreciation due to the rising external component of Ghana’s public debt.
Out of the total GHS200 million debt figure as at May this year, the external component reached GHS105.4 billion cedi while the domestic component recorded GHS94.6 billion.
Commenting on the implication of the country’s rising external debt situation, Professor Quartey said the local currency will be hard hit if investors decide to move their funds to other markets in reaction to any lowering of the policy rate in the future.
“With the external component, apart from looking at the macro fundamentals in deciding whether to reduce or increase the policy rate, they also look at reactions from foreign investors who hold our debt. If you lower the interest rate what it means is that they are going to get less in terms of interest on their investment. So being a rational investor they will move their funds out of the country and that has effects on our exchange rate.”
The Governor of the Bank of Ghana, Dr. Ernest Addison stated that despite the country’s recent macroeconomic stability, the economy remains fragile as non-resident investors continue to hold a significant investment in local bonds.
Addressing the press at the announcement of the monetary policy rate, the Governor said the actions of these non-resident investors could have a dire impact, for instance, should they decide to sell off their investments.
Essentially, when non-resident sell-off their investments in local bonds, they will have to convert their Cedi investment into dollars for onward repatriation — an event that could lead to an unreasonable demand for dollars which the central bank will struggle to meet thereby leading to a depreciation of the Cedi .
He also mentioned that the rising external component of the public debt also means that a sharp depreciation of the Cedi could drive the nominal debt up without necessarily meaning that the country has taken on more borrowings.
The Governor explaining the decision to maintain the policy rate at 16 percent said given the vulnerabilities that face the economy, the Monetary Policy Committee had to also factor in the possible impact a decrease or otherwise of the policy rate could have on the economy.