Should Ghana explore the option of Cedis payment in international trade?

 

It is increasingly becoming popular for developing economies to entertain the idea of trading in their domestic currencies rather than the US dollar, and some countries have boldly taken practical steps to make this a reality. A growing number of third world countries are seriously considering the possibilities of reducing their dependency on the US dollar in international trade thus, limiting the avenues the US will have in terms of placing sanctions on them. The subtle change in payment mechanism by countries in global trade has been stimulated in recent times by the response of the collective West to the so-called Russian aggression in Ukraine. Due to the overreliance on the US dollar and euro in international trade settlements, the West have been somewhat successfully in blocking Russia's international transactions denominated in US dollars and Euros, subsequently making it difficult for the country to fully participate in international trade activities. The hegemony of the US dollar, by virtue of its world reserve currency status, presupposes that countries all over the world risk unilateral US sanctions at any point in time. In today’s era of heavy global integration and trade dependencies, sanctions by the US could have a very devastating impact on a country’s economy, more especially when the said economy lacks the necessary structures to make it resilient, and the capabilities to withstand the economic pressure resulting from the sanctions.   

Ghana is a developing country that depends heavily on imports to sustain its economy. The country’s economy heavily relies on imports, especially for oil and other essential commodities. As a result, Ghana must pay for these imports using mostly the US dollar, which can be expensive due to the fluctuating exchange rates. Trading with China and other countries in cedis could potentially reduce the cost of imports for Ghana, however, there are quite a number of hurdles cross.     

Trading in domestic currencies is a process where two countries agree to conduct their trade transactions using their respective domestic currencies instead of a third currency, such as the US dollar or euro. This mechanism is gaining more attention in international trade because it offers several advantages over traditional trade that uses a third currency. Here are the steps that two countries can take to trade in their domestic currencies:

1. Agree on the terms of the trade: The first step in trading in domestic currencies is for the countries to negotiate the terms of the trade. This involves agreeing on the goods or services being traded, the price, and the delivery date. Once both countries have agreed to the terms, they move on to the next step, which is to enter into a currency swap agreement.
2. Set up a currency swap agreement: A currency swap agreement is a contract between the two countries involved, where they agree to exchange a specified amount of their currencies at a predetermined exchange rate. This agreement ensures that both countries have access to the necessary currencies to complete the trade. To facilitate the currency swap, the countries may use a third-party financial institution or central bank to act as an intermediary. The intermediary facilitates the exchange of currencies between the two countries and ensures that the transaction is settled according to the terms of the currency swap agreement. For example, if Ghana wants to buy goods from China, we may agree to swap our local currency, the Ghanaian Cedi, for the Chinese Yuan.
3. Agree on the exchange rate: The next step is to agree on the exchange rate at which the currencies will be swapped. This can be a fixed or floating exchange rate, depending on the preferences of the countries involved. A fixed exchange rate is an agreed-upon rate that does not change during the life of the currency swap agreement. A floating exchange rate, on the other hand, allows the exchange rate to fluctuate based on market conditions. The exchange rate used in a currency swap is based on the prevailing market exchange rate at the time of the agreement, as well as other factors such as interest rate differentials between the two currencies. The exchange rate is usually expressed as the amount of one currency that can be exchanged for a fixed amount of the other currency.
4. Facilitate the trade: Once the currency swap agreement is in place, the countries can execute the trade as normal. For example, if Ghana wants to import goods from China, they can pay for the goods in Cedis, and China can receive payment in Yuan. This eliminates the need for a third currency, which can be costly and subject to exchange rate risks and sanctions.
5. Settle the transaction: Finally, after the trade is completed, the countries must settle the transaction. This involves exchanging the agreed-upon amount of their currencies at the predetermined exchange rate. This ensures that both countries receive the agreed-upon amount in their respective currencies.

In 2013, China and the European Central Bank (ECB) entered into a currency swap agreement worth 350 billion yuan (€45 billion) to facilitate trade between the two regions. The agreement allowed the ECB to provide liquidity to European banks operating in China, while China gained access to euros to pay for imports from Europe. The agreement was renewed in 2016 and increased to 500 billion yuan (€70 billion).

In conclusion, trading in domestic currencies can provide many benefits to both countries, including reduced transaction costs, increased trade volumes, and greater economic ties. However, it requires a high level of trust and cooperation between the two countries involved, as well as careful negotiation and planning to ensure that the currency swap agreement is fair and mutually beneficial.