Tax cuts to deepen cedi depreciation-GN research

Some currency analysts have warned that the government’s tax cuts would lead to a further depreciation of the cedi should it fail to stem the side effects of the policy.

They contend that the ease in tax burden is an incentive for businesses to expand leading to an increased demand for dollars as a result.

“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,” GN Research cautioned.

“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 the volatility of the cedi has largely been driven by an increase in demand without a corresponding increase in 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.”

Government, in the 2017 budget statement announced the scrapping of some eight taxes plus the revision of four others.

The taxes that were scrapped include; 1 percent Special Import Levy; the 17.5 percent VAT/NHIL on selected imported medicines and the duty on the importation of spare parts.

According to GN Research, 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.”

Meanwhile the study has criticized the government for failing to announce any solution aimed at checking the depreciation of the cedi.

It maintains that the high import driven nature of the Ghanaian economy require robust measures to diversify the country’s exports while reducing imports especially for agricultural produce.

In the meantime, the research has proffered the following solutions;

  1. Government policies that will attract foreign direct investment (FDI) inflows to increase the supply of foreign exchange.
  2. A deliberate effort aimed at reducing foreign currency expenditure in the economy.
  3. 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

GN Research