By Professor Dinkum
I get into stitches anytime i hear or listen to this bum and sophistic premise from the NDC activists, predominantly John Mahama. After John Mahama and his stamps have failed to proselytize the marrow of their hokum 24 – hour economy to Ghanaians, they have resorted to palavering over the accrual of their theorized dollar and economic shrinkage. To mantle the foraminous of the policy from their espousers, they have used the extempore upsurge of the dollar to set the Thames on fire. It will be cryptic for me, if the NDC activists don’t know the genesis of the dollar undulation, then i may be a Dutchman ! It is literal that, Dr. Bawumia once said in 2014 ” if the fundamentals are weak, the exchange rate will expose you “. Nonetheless, he expressed on 15th February, 2022 that, although he said, if the fundamentals are weak, the exchange rate will expose you, ” that was true then, and it’s true now, it’s 100% correct ” – ” but it is very worth logic that, if the fundamentals are weak, the exchange rate will expose you, but if the exchange rate looses, you cannot say that, the fundamentals are weak “.
This particular statement uncloaked by Dr. Bawumia is cabalistic _ he admitted that, there were gauntlets that’s why, the dollar has been mushroomed, so one can equate it to the age of John Mahama – concomitantly, there were contretemps, which amounted to this state, however, that scenario will be untoward. Therefore, i will be holistic and objective in glossing the score in that peculiar statement uttered by Dr. Bawumia. In April, 2021, John Mahama avowed Covid – 19 and Russia – Ukraine war have mutilated Africa economies. These were the hair – shirted botherations Dr. Bawumia resonated Ghanaians with. So, it is a sheer gas for John Mahama and his political cohorts to make rasping plaint about the Cedi after having conceived what triggered it _ for, the Cedi was a boffo against the dollar in the famine of those meltdowns.
The erraticity of Ghana’s economy and currency slump is as a result of the Covid – 19 and the Russia – Ukraine war. The effect of the virus has been austerely engulfed by countries such as China, France, Russia, South Africa, Brazil, Italy, India, the United Kingdom, Spain, and the United States. Though the world has beheld many epidemics like the Plague, Ebola, Zika, Lassa fever, etc., the scale and growth pace of Covid-19 makes it unparagoned among them. ‘ WHO ‘ has earmarked it the most draconian pandemic in the last 100 years, and in line with this, Gates (2020) also termed it “the once-in-a-century-pathogen”. The pandemic has manufactured not only a health hole but also an economic and social stew across the globe. The economic activities at the national and global pitch are at a stagnancy as the diffusion of the virus buckled the waving of people and goods.
The slapping of lockdown and social distancing norms ringing disbandment in the movement of people and goods within the national fringes led to demand-supply incongruity and rent the national supply chain. The weighty socio-cultural events and their harmonizing events were put in abeyance in the social sphere, further haunting economic activities. At the global level, the moratorium of economic activities such as international travel, tourism, export, import, etc., dramatically affected the global supply chain resulting in economic havoc. As a consequential effect, Covid-19 has materially struck the scope of social behaviour, income, consumption, spending pattern, travel habits, supply chains with a sequential impact on lifestyle, markets, and economy across the globe. These chains of repercussions manifest how the Covid-19 emanated as a health hazard and spiralled into the economic domain of the countries.
The sequel of the global financial bind in 2009 was so acute that it occasioned to massive structural mutations in the financial and commodity market, causing a squint effect on portfolio allocation, market efficiency, and volatility. While Nwosa (2021) documents that Covid-19 had a more pernicious effect on the market than the 2009 global recession. The Covid-19 pandemic fractured all realms of human beings, creating limbo around the globe as it was anomalous, and there is no explicit panacea available till now to moderate such crisis. As per ILO (International Labour Organisation) report, global working hours were lost at 8.8 percent in 2020 correlative to the 4th quarter of 2019. This working hour erosion is identical to 255 million full-time jobs and approximately four times greater than during the global financial plight in 2009. With the experience of these severe corollaries in economic, social and health fronts, the vagueness among people compounded further. As per the world uncertainty index database2, the WPUI (World Pandemic Uncertainty Index) had reached its all-time high during Covid-19.
The Covid-19 ridden supply chain generated a change in demand and supply for currencies of all the countries across the globe for international trade and settlement, which in turn, initiated an oscillation in the exchange rate of the currencies against the US dollar. As per the CNBC report dated 14th April 2023, when the value of some of the emerging markets’ currency against USD was under stress due to oil price stupors created by overproduction, the eruption of Covid-19 dampened it further as the virus made slackening in the oil demand. Such peril influenced springing markets and other economies as they had knock-on impact due to regional trade links. Hence, given the perilous impact of Covid-19 on every economy across the globe, there is ample ground to figure that, the footprint of Covid-19 has certainly brushed the exchange rate of the economies.
A natural disaster is pondered as salient factor having potential to distort the economic fundamentals of the national as well as global economies (Farhi & Gabaix, 2016). Among all the economic fundamentals, one of the most affected assets price is the exchange rate (Iyke, 2020b). Though Covid-19 is considered to be the direst calamity in the last 100 years, the world has eyeballed many others and encountered their economic implications in real markets as well as financial markets. Such low-frequency-high-impact (LFHI) disasters put a significant menace to the supply chain. The effect of such events cascaded to other aspects of the economy through the supply chain, which is called a ripple effect.
The 2011 earthquake at Fukushima (contributor of metallic paint to global supply chain) and 2011 flood in Thailand (contributor of computer chips to global supply chain) frustrated production within a small geographic and economic expanse, but put its magnified and rippling effect on other economies as such production was highly consequential to the global supply chain. Hence, Wuhan, being a crucial industrial centre in the global map, has impinged on the global supply chain. Further, as the buildout of the contagion has housed practically the entire world, it is speculated to have affected the global supply chain, which in turn must have swayed the real markets and financial markets around the world. Goodell (2020), in his recent study, presented extensive literature on the economic spinoffs of natural disasters such as nuclear war and local disaster or climate change reported that Covid-19 pandemic is creating a never experienced global economic forfeitures.
The analysis of exchange rate behaviour requires establishing the link between the effect of the Covid-19 pandemic and the theoretical underpinnings of the exchange rate behaviour. There are several theories which elucidate the behaviour of the exchange rate. The rational expectation theory of Muth (1961) states that, ” people’s expectations of what will happen in the future cause a change in the value of the underlying assets “. So, the current anticipation of the people about the exchange rate trend has the flair to drive the exchange rate in the future (MacDonald & Taylor, 1992). The happening of unprecedented events modify the people‘s expectations and the exchange rate (Frenkel, 1981). So, Covid-19, being a novel and fortuitous event is presumed to have affected the global exchange rate.
The efficient market hypothesis of Fama (1970) states that, ” in an efficient forex market, the exchange rate reflects all the information concerning the exchange rate “. In line with this, Firoj and Khanom (2018), Makovský (2014), Wickremasinghe (2008), and Frenkel (1981) connote that, the exchange rate behaviour is sentient of available information which regulates the efficacy of the forex market. So, the information on the Covid-19 infection and government intervention in terms of the shutdown, lockdown, etc. across the globe influenced the people’s expectations regarding economic activities, which in turn manipulated the exchange rate of the economies. More also, information plays a pivotal role in the construction of optimal portfolios. In this regard, McKinnon’s (1969) portfolio balance theory postulates that ” any economic event has a direct bearing on the asset return, which compels the agents to revise their asset portfolio for optimising the risk-return trade off “. This behaviour initiated ebbs and flows in the demand and supply of currencies in the international market and consequently, instituted discrepancy in the value of currencies (Dooley & Isard, 1983; Khan & Abbas, 2015).
In an open economy, the value of a currency is grandly influenced by capital flows and any peak and valley in the interest rate causes adjustment in capital flow, steering to exchange rate fluctuation, which is christened as ‘interest rate parity’. Additionally, the inflow of capital begets appreciation of home currency under a pliable exchange rate system. However, under a fixed exchange rate system, the inflow of capital translates into an inflationary climb of the money supply via the central bank’s intervention. During Covid-19, the governments of many countries had escalated the money supply by altering monetary policy to counter the negative repercussion of Covid-19 (Aref-Adib & Martin, 2020). But the change in money supply and the restyling in the prices in the goods market do not move at the same pace, and such mismatch is immediately reflected in the forex market (Aslam et al., 2020). It is because, the exchange rate greets much swifter in the short run than goods market, and such overreaction of exchange rate fades out in the long run as promulgated by Dornbusch (1976) in the exchange rate overshooting hypothesis.
Therefore, the exchange rate is expected to witness more fluctuations due to the emergence of the Covid-19 and the Russia – Ukraine war. Phan and Narayan (2020) divulged that, Covid-19 constituted a greater global shock disrupting the economic fundamentals of nations across the globe, leading to variation in demand and supply of currencies and exchange rate. Such variation in demand and supply of a particular country’s currency emerges from the balance of payment (BOP) condition as proposed in the BOP theory of exchange rate of Allen and Kenen (1980). The above confabulation, pertaining to theories of exchange rate and Covid-19 scenario provides a detailed comprehension as to how the upsets kindled about by the Covid-19 pandemic and the Russia – Ukraine war have led to economic wrecking and the channels through which they have affected the exchange rate agonizingly.
By : Prof. Dinkum.
(The Buzzing Rapine of Erudition)
E – mail : dinkumchoice@gmail.co
