The Demand Side of the Exchange Rate

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One of the issues that attracts attention in every political cycle is the management of the exchange rate. In the 2020 general elections, it will definitely have the concerns of the politicians in their campaigns. Its healthy management or otherwise will be the focus of opposition parties.

The exchange rate, in simple terms,and  is the amount of one currency that an individual or an organisation considers as being equivalent to another when either buying or selling it at a particular time. For instance, the amount of Ghana Cedis institutions such as banks and forex bureaus and perhaps in the black market, money sellers consider to be equivalent to the dollar, euro, pounds sterling, yen etc. when buying or selling it at any time is the exchange rate.

 

The performance of the exchange rate is a key issue in the politics of Ghana. It is always difficult to draw a line of distinction between political and economic issues in our country. The performance of the exchange rate affects everyone and almost everything in Ghana.

There are two aspects of the exchange rate. The supply side and the demand side. The supply side deals with the quantity of foreign currencies such as the dollar, yen, euro, pounds sterling etc that are made available in the economy. The demand side, on the other hand, concerns the quantity of foreign currencies that individual businesses, other institutions and the general public desire to spend on goods and services.

The supply side of it, the exchange rate, is often dealt with by generating foreign exchange, contracting loans in the form of bonds, receiving aid including grants (in the form of cash), remittances of the citizens of a country in other countries and others. The continuous depreciation of the exchange rate is caused by demand being more than supply. The economic fundamentals may be genuinely fine, the demand and supply factors are the key determinants of the exchange rate. This is not debatable and ambiguous.

The demand side of the exchange rate in Ghana seriously affects the price at which foreign currencies may be sold or bought. The demand for foreign currencies such as the euro, pounds sterling, dollar, always out-weigh the supply of them. The demand-side factors must be assessed properly in an attempt to solve the depreciation of the Ghana Cedi. The demand-side factors include but not limited to these: capital flight by contractors and multinationals, excessive imports, interest payments, payment of school fees and other services like rent, air travels etc.

Agencies Report.

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