An Investigation into the Causes of Exchange Rate Volatility in Ghana between the Ghana CediAnd the United States Dollar (1990-2009)

Mensah, Bensah Kafui
국제대학원 국제통상학과
Graduate School of International Studies Ajou University
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Alternative Abstract
The basic aim of this paper is to find the causes of the continuous depreciation of the cedi from 1990 to 2009 which has been of several writers. Ghana like most African countries after independence started on bright note with cedi/dollar exchange rate of ?0.7/$1.00 in the early 1960s. However, from 1960s to 1983, the cedi was devalued under the fixed exchange regime from ?0.7/$1.00 to ?2.75/$1.00. However, by the end of 1990 which was in the flexible regime, the cedi had depreciated to ?350/$1.00. The cedi kept on to depreciate to ?7,321.94/1.00 in 2000 and further to ?14,186/1.00 by the close of 2009 with all major depreciations occurring in the flexible exchange regime. The outcome of the research established the trade balance or BOT as the source of instabilities in the exchange rate. This however was not so visible from 1960 to 1985 because the exchange rate and trade was regulated or restricted from rising hence the trade balance was largely in surplus. The liberalization of trade which saw the abolition of the quota system on imports and other forms of restrictions contained in the implementation o the Structural Adjustment Program (SAP) and the Economic Reform Program (ERP) supervised by the IMF. The structure of the economy of Ghana at that time was fragile enough to be preyed on by stronger external forces. The results as evident from the regression established that the adoption of the flexible exchange rate regime is a major significant contributor to the depreciation or volatility in the exchange rate of the cedi. Analysis of the external structure of the economy after the liberalization of the trade and the exchange rate reveals that the cedi was bound to depreciate. This is because the relative price of major exporting commodities (in terms of crude oil) continued to depreciate since independence to 2009. Hence there was a continuous reduction in the relative price of cocoa and gold which the country depended on since independence throughout the period of the study. This is evident considering the deteriorating deficit in the trade balance and the terms of trade. The liberalization of trade increased exports in the long run and did not yield much rise in exportation because it was not bound to any country to also give equal preferential treatment to the exports from Ghana. The fall in the relative price of major exports led to a loss of welfare and the consumption of imports at the expense of domestic goods which led to the depreciation of the cedi. The depreciation of the cedi against the dollar led to a significant fall in GDP and hence the welfare of Ghanaians.

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