Question

Use the description below to answer questions 1 & 2.

Characteristic of the cedi after every major election in Ghana, the currency depreciated against the major international trading currencies in the first two months of the new administration of Akuffo Addo. The cedi depreciated against the dollar by 5% in the month of March 2017. Similarly, by the end of the first quarter of 2001, the cedi lost almost 18% of its value, and by about 12% in 2009, whilst cumulatively it depreciated by 15% in 2013 and 17.6% by the end of the first quarter of 2014. It was largely held that the cedi would stabilize by the end of March this year because of the budget presentation in February 2017 and the subsequent issuance of cedi equivalent of US$2.25 billion bonds in late March 2017 (the bond issue consisted of the cedi equivalent of $1.13 billion through the issuance of 15 and 17 year bonds at coupon rate of 19.75% plus the cedi equivalent of $1.12 billion in 5 and 10 year bonds via a tap in arrangement) which were also opened to foreign investors.

From above, explain how elections in Ghana account for the depreciation of the cedi (8 marks)

From the above description, discuss how the 2017 budget and the domestic bond issuance contributed to the stabilization of the cedi and whether the stabilization is sustainable for the foreseeable future. (10 marks)

Answer 1

Solution:

During election year government announce populist measures which have more impact on government budget and to fulfill the election promise incumbent government provide sops to citizen from government coffer.

During the budget the government will bring some coercive measures to strengthen the economy like easing doing business, relaxation of rules and procedures, allowing foreign investors and companies to do business. It will generate confidence in Cedi and it will become stronger in due course. Also bonds will be opened to foreign investor and if they subscribe the bond, Ghana will get crucial foreign exchange reserve in terms of foreign currency and demand for Cedi will increase which will stabilize it in the longrun.It is sustainable for the future because contunious flow of foreign investment and economic prosperity in future will have sustainable impact in the economy.