The undulating feature of the cedi is a well-established fact about the Ghanaian economy. That erratic depreciation is normally a response by the cedi to severe shocks, mostly external. If there is no severe external shock, you don’t expect sharp and sustained depreciation hence a low depreciation rate.
The rate of depreciation is not normally the cost of depreciation. However, households and businesses are 99% of the time during the depreciation cycle and are interested in the cost of depreciation whether or not the depreciation rate is relatively low or high.
If ¢5:50 exchanged for $1 at the beginning of the year and today you need GHS6:30 to exchange for $1, then a serious business person will be concerned about the rate of change in their cost structure, how the new cost structure will affect prices and whether or not the entire development may deepen or reduce income erosion.
If an importer imported 1000 bags of rice at $1 each, then it will cost ¢5.500 to do the import, excluding duties and taxes. At the time when the exchange rate moved to ¢6.30, the cost for 1000 bags would have increased by ¢800.00 to establish a cost of ¢6300.
At the time, politicians are arguing about the rate of depreciation of 1.7%; from the beginning of the year to September, the entrepreneurs will be complaining about a 14.5% increase in the cost of importing the same 1000 bags of rice.
Given that depreciation affects external debt portfolio, interest payment obligations on the external debts, price developments and cost structure of businesses differently, reporting these effects together with the rate of depreciation will be a productive service to Ghanaians.
The cumulative changes in the cost structure of businesses covering the period for the rate of depreciation can reveal a lot.
Perhaps the effects of depreciation on household incomes, capital base protection for businesses, debt servicing capacity of government and cost of living should be daily concerns for the government.
We are not giving attention to the painful effects of depreciation on livelihood, Procurement, debt servicing and income erosion. Issues about depreciation are not mere macroeconomic articulation but critical livelihood concerns.
source: Prof. John Gatsi