IMPACT OF MACROECONOMIC VARIABLES ON EXCHANGE RATE MOVEMENTS IN GHANA

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ABSTRACT

The study sought to analyze the effect of exchange rate movements on Ghana’s economy (macroeconomic variables); it investigates the relationship these variables have in determining the stability of foreign exchange rate in Ghana, that is, the pricing of the Ghanaian domestic currency relative to the dollar in the context of macroeconomic variables. From different angles and aspect, this study is intended to add to related literature; provide new theoretical arguments and a comprehensive study on reasons underlying exchange rate movements in Ghana. This study examines how macroeconomic variables affect exchange rate movements in Ghana and may help other researchers to undertake further studies  in exchange rates determinants in Ghana and other related topics.

In the era of globalization where the foreign exchange market has assumed a very important role in determining growth in countries around the globe. Most countries have had to adequately manage their domestic currencies in relation to major trading currencies to attain and sustain steady rates of long-term economic growth. This premise is based on the assertion that an appreciation or depreciation of domestic currencies plays a key role in influencing a country’s trade balance (Stucka, 2004; Aziz, 2008) and ultimately its growth (McPherson and Rakovski, 2000).  In  Ghana,  the  relationship  among  exchange  rate  and  macroeconomic

variables are paramount in understanding the depreciation of the cedi relative to

the dollar and other currencies as well as the behavior of the consumer prices and balance of payment in Ghana.

This study uses empirical data from Ghana of some selected macroeconomic variables and employs econometric models’ technique to arrive at findings based on the patterns discovered. The selected economic variables are lending interest rates, foreign direct payment, imports, exports, gross domestic products and inflation.

CHAPTER ONE INTRODUCTION

1.0 Background of study

After passing of Bretton Woods Accord in 1973, countries were led to adopt the floating exchange rate system that allowed for depreciation or appreciation of currencies. The effect of the depreciation of a countries currency from the adopted floating exchange rate system with respect to the trade balance of both developed and developing countries generated increased awareness and renewed interest. Countries have since sought to achieve either an appreciation or depreciation in their domestic currency to attain and sustain some developmental goals.

Most economies in Africa and developing countries such as Ghana have the problem of usually recording a deficit in the government budget and balance of payment. For these economies to have a share in the international market to promote growth they have had to come under undue influence to adopt growth strategies such as import substitution industrialization (ISI) owing to the small and open nature of these economies. The introduction of free-market adjustment program promoted trade liberalization, allowing prices to be set by the interplay of market demand and supply to foster export-oriented development.

Ghana has over the years experienced its share of prolonged depreciation. Countries such as Zambia, Kenya and Nigeria have their exchange rate rise and fall. This is different for Ghana as it’s recording a persistent depreciation of the domestic currency over the years. That is in July 2007, the central bank of Ghana embarked on a redenomination exercise were after the exercise the cedi was pegged at about 1 dollar=0.9000GHS. Currently in April 2019 1dollar=5.1000GHS (Bank of Ghana quarterly economic bulletin 2019). The continuous depreciation of the cedi has been a source of great concern to our policymakers because of how the trade market affects a very important part, ensuring steady macroeconomic performance as well as economic growth. Most of Ghana’s import is inelastic hence continuous depreciation of the cedi may result in an increase in general price levels and may also lead to increased prices of imports, reduction in portfolio investments and problems with our balance of payments.

The central bank’s core mandate of ensuring price stability has led to the adoption of numerous strategies and policies and providing adequate supply to the market  all with the aim of halting or reducing depreciation of the cedi. Despite all these measures put in place by the central bank the cedi continuous to depreciate. Theory suggests that macroeconomic factors affect exchange rate pricing. It, therefore, remains critical to examine the relationship of macroeconomic variables that are in relation to the pricing of the exchange rate in Ghana. The research will heighten

the central bank’s effort to help reduce the depreciation of the cedi by examining the relationship between these variables and prices of the exchange rate in Ghana based on the patterns discovered. The bank of Ghana can then map out appropriate and improved strategies to address some of these concerns.

Exchange rate may appreciate depreciate or remain stable. The currency exchange rate is the most preferred because it fosters and sustains production activities and economic growth, (Chowdhury, 1999). The currency improve strength of the economy may influence trade market in overvaluation, current account issues and cause imports to become artificially cheaper against relative high prices of exports. This will reduce how in competitive a country is on the international level as suggested by (Takaendesa, 2006). Depreciation of a currency can lead to worse terms of trade and cause imports to become artificially expensive while exports remain relatively cheaper. Based on this background, policymakers of the Ghana economy develop and adopt various interventions aimed at achieving and sustaining currency stability.