Cedi Gains Not Enough to Lower Prices as Producers Still Recovering Losses – Dr Nsiah-Poku

Introduction

Ghana’s currency, the cedi, has shown significant strength against the US dollar in recent months, sparking hopes of lower prices for consumers. However, industry leaders warn that the situation is more complex than it appears. Dr. Kofi Nsiah-Poku, President of the Association of Ghana Industries (AGI), explains why cedi appreciation alone cannot trigger immediate price reductions, as manufacturers continue to recover from substantial losses incurred during periods of currency weakness.

Key Points

Background

The Ghanaian cedi has experienced notable volatility in recent years, with periods of significant depreciation against major trading currencies, particularly the US dollar. During these weak currency phases, manufacturers faced rising input costs, as many raw materials and production components are imported and priced in foreign currencies.

When the cedi strengthened, expectations grew that these savings would be passed on to consumers through lower prices. However, industry representatives argue that the reality is far more nuanced, with multiple factors influencing pricing decisions beyond exchange rates.

Analysis

The Impact of Currency Volatility on Manufacturing

Dr. Nsiah-Poku’s assessment reveals the complex relationship between currency movements and manufacturing economics. During periods of cedi weakness, many producers absorbed substantial losses rather than immediately passing increased costs to consumers. This decision was likely driven by concerns about reduced demand if prices rose too sharply.

“Now that the dollar price is low, I have to recover the loss,” Dr. Nsiah-Poku explained during his appearance on Joy News’ PM Express Business Edition. This statement underscores a fundamental economic principle: businesses need to maintain profitability to remain viable, and recovering losses is a legitimate business necessity.

The Credit Economy Challenge

Ghana’s economy operates largely on credit terms, which significantly complicates pricing dynamics. Manufacturers typically supply goods on credit and receive payment months later. This delay creates substantial risk when currency values fluctuate.

“This is a credit economy. If I manufacture and give it to my customers on credit, and they pay me in two, three, or four months, and by that time, if the gain has reversed, what do I do?” Dr. Nsiah-Poku asked rhetorically.

This credit cycle means that even if the cedi strengthens today, manufacturers cannot confidently reduce prices if there’s uncertainty about whether that strength will persist through their payment collection period.

Utility Costs and Production Expenses

Beyond exchange rate considerations, Dr. Nsiah-Poku highlighted another critical factor: utility costs. Despite the cedi’s appreciation, electricity and other utility prices remain high, continuing to pressure production costs.

“The cost of utilities is even high, even when the dollar is going down,” he noted. “If the dollar is going down, we expect that utility cost should also be down, because we now have a higher cost, which is balancing the gain in the exchange rate.”

This observation points to a disconnect between currency markets and utility pricing, suggesting that utility tariffs may not be adequately reflecting the benefits of a stronger local currency.

Industry Confidence and Economic Stability

Perhaps most tellingly, Dr. Nsiah-Poku indicated that industry leaders remain unconvinced about the durability of the cedi’s gains. “Industry still does not think that the economy is so robust,” he stated, reflecting broader concerns about economic stability.

This lack of confidence stems from Ghana’s history of currency volatility and the potential for rapid reversals. Manufacturers, having experienced significant losses during previous currency swings, are understandably cautious about making pricing decisions based on what might prove to be temporary currency strength.

Practical Advice

For consumers expecting immediate price reductions following cedi appreciation, it’s important to understand that manufacturers face legitimate business constraints. The recovery process from previous losses, the realities of credit-based business operations, and ongoing high utility costs all contribute to pricing decisions.

For policymakers, this situation highlights the need for a comprehensive approach to price stability that goes beyond currency management. Addressing utility costs, improving payment cycles in the business sector, and building confidence in economic stability could all contribute to more responsive pricing mechanisms.

For businesses, maintaining transparent communication with customers about the factors influencing pricing decisions can help manage expectations and build understanding during periods of economic transition.

FAQ

Conclusion

Dr. Nsiah-Poku’s insights reveal that currency appreciation, while positive for the economy, is just one factor in the complex equation of pricing decisions. The Ghanaian manufacturing sector faces a delicate balance between recovering from previous losses, managing credit risk, and dealing with ongoing operational costs.

While the stronger cedi signals macroeconomic progress, the path to lower consumer prices involves addressing multiple interconnected challenges. For now, industry leaders emphasize that stability and sustainability matter more than short-term currency gains, suggesting that patience and a comprehensive economic approach are necessary for achieving lasting price reductions.

The situation underscores the importance of viewing economic indicators holistically rather than in isolation, recognizing that currency strength alone cannot solve all pricing challenges in a complex, interconnected economy.