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Feature Article of Tuesday, 18 September 2012

Columnist: Amoabin, Kofi

There is No Freedom Without Bread

The depreciation of the cedi from 95 pesewas to a dollar in 2009 to the current exchange rate of 2.05 Ghana cedis to a dollar means higher taxes, asset depreciation on savings, and a drop in income for the average Ghanaian family; however, the government does not see these problems.

The reasons the government gives for the collapse of the exchange rate of the cedi runs the gamut: it blames used clothing dealers, the volatility of the euro currency, and attempts to boost exports from Ghana. These reasons are false, and the government must take notice, get serious, and seek help in arresting the collapse of the cedi.

Let’s examine some reasons the government gives for the depreciation of the cedi. First, used clothing is not a huge item on Ghana's bill of imports and is not a major source of currency depreciation.

Second, since 2009, the euro has traded in a narrow band against the dollar from a peak of about 1.45 to a low of 1.25 dollars to a euro. The euro has been very stable against a backdrop of political and economic uncertainties in the EU. Thus, the government of Ghana cannot attribute the poor exchange rate of the cedi to the euro.

The stability of the euro means that multinational companies exporting to or importing from the EU can plan and prudently manage their Forex needs.

Finally, in terms of exports, Ghana has traditionally pursued exports of natural resources, such as gold, cocoa, and others, in their raw form. These raw commodities trade on international markets like the Coffee Sugar and Cocoa Exchange in New York, the Chicago Mercantile Exchange, or the London Metals Exchange. Since gold, cocoa, and crude oil are priced in dollars, the exchange rate of the cedi has no impact on the prices of these commodities.

At the beginning of September 2012, the Central Bank of the United States, the Federal Reserve, indicated a policy of shifting towards more easing of rates or additional stimulus to boost the U. S. economy. Consequently, the dollar decreased in value and the price of gold, cocoa, and crude oil surged on the world markets.

So, watching the Federal Reserve policies could help the government of Ghana plan and hedge Ghana's exports of gold, cocoa, and crude oil for more revenue.

Constatine Pleshakov, in his seminal There is No Freedom Without Bread, which discusses the collapse of the Soviet Union, explains how because Mikhail Gorbachev failed to admit problems, he made a bad situation worse. Gorbachev eventually lost power.

"The harvest, transportation, debts, communications, no money, the market falling apart....Oh Tolya," Gorbachev said in private to an aide. However, Gorbachev refused to tell the citizens of USSR that the empire was breaking at the seams. The ruble had dropped from par with the dollar to 32 rubles to a dollar.

As the cedi collapses versus the dollar, Ghanaian workers and children cry in private because they have “no money.” They are feeling the pinch of high prices; queuing for gas because of shortages; and dropping out of school because of high costs of transportation, food, and books.

What Ghanaian workers and children need is a stable cedi. If the government of Ghana can deliver a stable exchange rate for the cedi, companies will invest additional capital in Ghana and create more jobs and wipe out the “no money” syndrome.

The author, Kofi Amoabin, is a futures market analyst with Futures Marketing Enterprises in Chicago. He holds a Master of Science in finance and Bachelor of Science in engineering.

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