The Re-Denomination of the Cedi - Caution

The planned July 2007 re-denomination of the cedi has been greeted in some quarters with skepticism, derision and outright opposition. For example, last week, the Committee for Joint Action (CJA) condemned the measure, suggesting that the use of cheques and credit cards are better alternatives. CJA even sees it as an insidious propaganda tool by the Kufuor administration. Such concerns need to be taken seriously because of our own historical monetary experience.

Ghana has meddled with its currency on four occasions since independence and the July 2007 measure will be the fifth. In the past, each meddling created panic, economic havoc and claimed innocent victims, mostly our illiterate folks. The most outrageous fleecing of the people occurred during the PNDC era.

In late January, 1982, the PNDC announced that the 50 cedi note would be demonetized. The public was given barely two weeks to deposit these notes in their banks in return for chits that were supposed to be redeemed later. They never were. Ghana shut its borders for two years. The official reasons were: To mop up excess liquidity in the system to ease inflationary pressures; to crack down on tax evasion; to punish corrupt politicians; and to render useless large amounts of the currency circulating outside the country. The exercise was also intended to crush currency smuggling and thereby shore up the external value of the currency. The government insisted that "the withdrawal of the 50 cedi note was not against the poor or the genuine rich but rather it was meant to withdraw excess liquidity in the hands of a few greedy and corrupt businessmen" (Daily Graphic, Feb 24, 1982; p.1).

Then on February 13, 1982, exactly one day after the deadline for the deposit of the demonetized 50 cedi notes in Ghanaian banks, the PNDC announced that those whose bank balances exceeded 50,000 cedis would be subject to investigative probes to determine their compliance with tax obligations. In one stroke, this inane policy shattered confidence in the currency and dealt a devastating blow to the banking system, from which it took years to recover.

Exactly the same insidious chicanery and deceit were perpetrated on Nigerians with a currency change in 1984. The official reason there too was that "there was too much money in circulation" (West Africa, May 28, 1984; p.1106). The military government of Maj-Gen. Muhammadu Buhari sealed the country's borders, ostensibly to "catch big-time hoarders who had tucked money away overseas" (West Africa, May 28, 1984; p.1108). [Nigeria reopened its borders in March 1986 after two years of closure.] Nigeria's Central Bank director of domestic operations at the time, Chief Nwagu, explained that the change was necessary to demonetize the 2 billion naira illegally acquired by corrupt politicians and held outside the country (West Africa, May 28, 1984; p.1107).

Then when Nigerians deposited their old currency to exchange for the new one, "persons who had deposited up to 5,000 naira were informed they would have to produce their tax clearance certificates, showing that they paid their taxes over the last 3 years, before they would be allowed to withdraw any money" (West Africa, May 28, 1984; p.1108).

To be sure, excess liquidity, tax evasion, corruption, and currency smuggling are serious problems in Africa. But currency changes not the appropriate measures to deal with them. They smack of the ?bazooka approach? in ridding oneself of a termite as they inflict incalculable collateral damage.

First, they destroy confidence in the currency or the banking system and lead to destabilizing speculations. Illiterates, despite their lack of formal education, are no simpletons. In Ghana, when "the news of the exercise (50 cedi note demonetization) leaked out, many people in Accra and other parts of the country went on shopping sprees, before the Feb 12, 1982 deadline to get rid of their notes" (West Africa, Feb 22, 1982; p.536). The demonetization of the 50 cedi notes also prompted speculation that the 20 cedi note would be next and some traders even refused to accept the 20 cedi notes (Graphic, Feb 12, 1982; p.4).

Such speculation and loss of confidence in the currency drove people to hold physical assets and foreign currencies. In Ghana, there was an added impetus because of the odious tax probes of individuals whose bank balances exceed 50,000 cedis. Who on earth would deposit more than these amounts in a bank and invite a tax audit? The public reacted by shunning the banking system and conducting business strictly on a cash basis. The Mirror reported "a sharp drop in the amount of money paid by the public into the various banks" (Jan 22, 1982; p.1). In response, the government ordered that "businesses are to be transacted in checks, not cash" (Graphic, May 27, 1982; p.1). Imagine. Loss of confidence in the cedi and the subsequent flight from the currency drove Ghanaians to hold, among other things, foreign currencies. The results were soaring black market rates, which meant declining external value of the cedi?a result clearly opposite to what the demonetization exercise was intended to achieve, namely, shoring up the external value of the cedi. Within one year, the black market rate jumped from 40 to 100 cedis to the dollar.

Second, the official reasons given for the currency changes (excess cash liquidity, tax evasion, and corruption) were criminally dishonest. The source of the excess liquidity was the government itself, which had continuously borrowed from the Bank of Ghana to finance ever-soaring budget deficits. Its own 1978-79 Budget Statement admitted that "over the past 5 years, more than 70 percent of every budget has been financed by the Bank of Ghana, resulting in the injection of substantial amounts of money into the economy" (p.2; paragraph 6). So how in perdition does a currency change solve that fundamental deficit problem?

Clearly, the currency change was really an attempt to fool the public by shifting responsibility away from the government?s own reckless over-printing of the currency and put the blame on elsewhere. More outrageous, especially in the Nigerian case, was the presumption that the large sums of naira abroad were illegally taken there by corrupt politicians and greedy businessmen. The fact of the matter is, when corrupt politicians, or the elites generally, rape and plunder their countries, they take their booty out in foreign exchange, not in cedis or nairas. Those who take cedis or nairas out of the country are generally illiterate traders and migrant workers. With no access to foreign exchange, they use whatever currency that is acceptable, cedis, nairas or francs, to trade along the West African coast. Now, what had these traders and workers got to do excess cash liquidity so that a currency change is necessary to dispossess them of the cedis or nairas they had worked hard to accumulate? It amounted to robbery.

Finally, a currency change imposes unnecessary, unfair, and exorbitant costs on both the illiterate masses and the country at large. Many illiterate rural folks toil all their lives to legitimately accumulate savings, which they stashe away under mats, in jars, closets, etc. Where they keep their savings is their own prerogative. The government cannot force them to keep their savings in banks; neither can the government force anyone to hold a currency he/she does not want. Civilians are persuaded to do things, not forced or ordered?a fact that is not understood by African military governments. In 1982, many of these rural folks had to search for their savings and then trek miles to the nearest bank in highly inaccessible regions of the country to exchange their money. Missing the deadline meant a whole life savings gone down the river -- literally. Indeed, this was exactly the case in certain parts of Ghana: ?Large bundles of 50 cedi notes were found thrown into the River Aboabo in Kumasi. According to a Ghana Broadcasting Corporation correspondent, several others were also thrown away near the Kumasi railway station" (West Africa, March 1, 1982; p.618).

The country also paid dearly because of poor timing and ineptitude. Before the currency was changed, Ghana had paid Thomas de La Rue of London ?1,266,210 to print 119 million additional cedi notes of the "old" currency. "The currency change therefore meant that the 119 million newly printed cedi notes were worthless and were destroyed on orders of the SMC II" (Ghanaian Times, Nov 12, 1981; p.3).

It took years for Ghana's banking system to recover from the 1982 economic inanity. For more than a decade after the currency change, Ghanaians shunned the banking system, leading to large amounts of cash being held outside the system. Which fool would put his money in a bank and invite a tax audit? West Africa magazine stressed exactly the same point in its May 8-14, 1995 issue:

"No sense putting money in the bank?, says Hilal El-Jamal. "Dig a hole and bury it, or better, build something with it". Some economists estimate that 50 percent of Ghana's currency is lying idle, tucked away somewhere or sunk into partially completed building. For the individual, it is a good investment. For the country it is disastrous . . . "That is what makes the economy worse?, says home appliance dealer Hussein Bakri. "Everybody is hiding their money or using it to build houses. Ghana imports rice, can you believe it? And refined sugar, too?. (p.718)

Consequently, when cocoa farmers presented their government-issued "Akuafo Checks" (Farmers? Checks) to the banks for payment, the banks had no money. In an irate editorial, the state-owned Ghanaian Times (Jan 5, 1995) berated:

An aged farmer of a village near Offinso, Ashanti, collapsed while in a queue at a bank to cash her ?Akuafo Check?. She was rushed to a hospital. According to the Ghana News Agency report, the farmer had been in the queue every successive day at the bank for two weeks up to the day of her collapse without succeeding in cashing her check . . . Farmers in other cocoa growing areas complained bitterly of similar experiences. Some of them journey every day for up to three weeks before succeeding to cash even 200,000 cedis (or $200). . . The bank branches . . . are said to give the excuse that moneys for the Akuafo Checks are dispatched to them in insufficient quantities and late. (p.2)

Cocoa farmers, cheated or frustrated in their attempts to cash their government checks, reacted by abandoning the production of cocoa, the export of which provides the country with 50 percent of its foreign exchange. Such a decline in cocoa exports could be traced to an insane monetary exercise undertaken in 1982 when the government pried into the bank accounts of private individuals. In fact, in the same issue of The Ghanaian Times (Jan 5, 1995), Jacob Frimpong hit the nail on the head: "The practice in the past where private accounts were forcibly revealed to the public should be discouraged" (p.5). I say not discouraged but outlawed. Only then would the public have sufficient trust in the confidentiality of bank accounts for them to deposit moneys in the banking system, which in turn would provide the banks with the cash needed to pay cocoa farmers.

Like their Ghanaian counterparts, the Nigerian public reacted by shunning the banking system. Rather than deposit their savings at banks, "Several people went on spending sprees, buying among other things, cars, airline tickets, anything that could later be sold" (West Africa, May 24, 1984? p.1106). Why should Nigerians keep their savings commercial banks? To survive, the banks had to offer fantastic rates to attract depositors and invest in highly speculative ventures. Many did not make it. In November 1992, the Central Bank of Nigeria declared 46 banks as "insolvent?. By September 1, 1993, literally all the commercial banks in Nigeria were unable to meet their obligations to customers. ?Depositors were in most cases not allowed to withdraw amounts in excess of N1,000 (in some cases, even less), irrespective of their credit balances" (African Business, Oct 1993; p.17). The banking system nearly collapsed.

Given our historical experience, it should be understandable why the public would treat the July 2007 measure with suspicion. As the saying goes: Once bitten, twice shy. There is no doubt that a new currency that lops off four zeroes would greatly ease the cost of transactions and make it unnecessary for Ghanaians to lug around sacs containing millions of the old currency. This was the intention in Zimbabwe, where inflation rages at the rate of 1,200 percent per year. A piece of chicken costs over 3 million Zimbabwean dollars and shoppers have to truck large sums of Zim dollars for every-day transactions. Sounds familiar?

In a bid to tackle hyper-inflation and ease the cost of transactions, Zimbabwe's Reserve Bank slashed three zeroes from its currency on July 31 and set a 21-day deadline for the old notes to be handed over in exchange for new dollar bills. "It returns to us stability and convenience and, of course, this is just one monetary mechanism to help make commerce and everyday life more convenient," said Reserve Bank chief, Gideon Gono (Business Report, Aug 23, 2006; web posted: http://www.busrep.co.za/index.php?fArticleId=3405790). But guess what happened.

BBC News reported that:

?People rushed to shops and banks on the day of the deadline to spend or exchange old banknotes before they ceased to be legal tender at midnight. Supermarket owners in the capital, Harare, reported that business was unusually brisk for a Monday, as people tried to spend their old cash. There were also reports that buses and some shops were already refusing to accept the old notes, and that long queues were forming at banks as people tried to change their old money . . . Fears have been expressed about residents of remote rural areas who may not have heard about the currency change? (http://news.bbc.co.uk/2/hi/africa/5271154.stm)

Critics charge that the measure does not tackle the underlying causes of Zimbabwe's inflation. "There is no way this is going to arrest the economic decline," said James Johwa, an analyst with a Harare-based economic think-tank (Business Report, Aug 23, 2006).

In Ghana, the Bank of Ghana?s statement that ?New notes and coins will be issued to replace the existing notes and coins over a period of at least six months? does not help matters. The six month period naturally begs many questions. Is it a ?deadline? and for whom: The Banks or the public? And what if after the six month period, some old currency is still in circulation, then what? Would the old currency no longer be legal tender after that period? If it will be, then why give a six month deadline? And what to do when traders refuse to accept the old currency after the deadline and the rural folks who may not have heard about the change?

This writer believes that there should be no deadline since the very mention of a ?deadline,? given our history, is apt to raise red flags. If the old currency must be demonetized ? i.e. no longer legal tender ? because of the havoc it wreaks on accounting and computer systems, then its convertibility at banks must be maintained. That is, a person who can no longer use the old currency to purchase goods should be able to take it to any bank and convert it into the new currency. And there should be no deadline for such convertibility.

More importantly, it must be realized that the problem of too many zeroes was not created by the public but by the government and the Bank of Ghana in the past. They must take full responsibility in fixing the problem without putting too much inconvenience on the public. And to guard against any future irresponsibility in meddling with the currency again, we should take a page from Francophone Africa, where the central bank is completely independent of the central government although the central bank is tied to the French monetary system.

Consequently, this region has enjoyed relative price stability and has performed better economically than the rest of Africa. Perhaps not only should the independence of central banks be enshrined in all African constitutions but also the governors of central banks should be rotated within various regions in Africa. For example, governors of the ECOWAS countries (West Africa) may be rotated with say the Ghanaian governor serving a five-year term at the central bank of Nigeria and the Nigerian governor serving the same term in Sierra Leone or vice versa. Such rotation would remove the governors of Central Banks from coming under undue political pressure to print money to accommodate profligate government spending. Only then would currency changes become a thing of the past.