The cedi is expected to depreciate further if the government fails to prevent the side effects of the numerous tax cuts it is implementing.
This is according to a research report published by GN Research.
They argue that even though the reduction in taxes is an incentive for businesses to expand, it will also lead to an increased demand for dollars.
“Ghana’s currency, the Cedi is likely to record high levels of depreciation during the year if the government does not clearly come out with a policy to manage the situation.”
“During the first weeks in March 2017, the cedi has recorded a significant year to date depreciation of 7.36% against the dollar and 7.31% against the Euro. This makes the Ghana Cedi the worst performing currency on the African continent for the period under review- 2017,” it added.
The study also explained that one main cause of the instability of the cedi is because of the increase in demand without a corresponding increase in the supply of the dollar.
“There seems to be some growth in business confidence within the business community that is driving high level of imports after the sector slowed in 2016. The market seems to be reactivated pushing high demand for the greenback, urging speculators within the foreign exchange market to reignite their business.”
The Minister of Finance Ken Ofori Atta announced the removal of some eight taxes and the revision of four other when he presented the 2017 budget statement.
However, the research indicates that the development is likely to increase the rates of imports following increased demands as a result of the reduction in prices.
In its view, “such opportunities offered to importers might lead to abuse and exploitation, as their desire to enlarge their jobs to meet the rising need for the goods can increase the need for the major trading currencies.”
The study has criticised the government for failing to announce any solution aimed at checking the depreciation of the cedi.
The research suggested the solutions below;
Government policies that will attract foreign direct investment (FDI) inflow to increase the supply of foreign exchange.
A deliberate effort aimed at reducing foreign currency expenditure in the economy.
Immediately deal with the ills of dollarization in the country to save the currency within its first year in office.
Finally, GN Research strongly recommends that the central bank continues the zero financing of government budget even after the expiration of the IMF program to help reduce liquidity, inflation, interest rate and stabilise the cedi.