'Adongo's ignorant, anaemic FX analysis fatally misleading'– TESCON president

The President of TESCON, Matin Abdallah, has described as sub-standard Bolgatanga Central MP, Isaac Adongo’s recent analysis of Ghana’s foreign exchange regime.

Responding to Mr Adongo’s recent attacks on Vice-President Dr Mahamhudu Bawumia that his FX analysis of the Ghanaian economy was “wack”, Mr Abdallah said: “Hon Adongo engaged in ignorant effusions, shabby analysis, wobbly economic thoughts and anaemic academic presentation at a pristine forum, which was supposed to be used to engage in a stimulating intellectual discourse.”

Below is the TESCON President’s full statement:

AN ACADEMIC RESPONSE TO THE IGNORANT EFFUSIONS OF HON. ISAAC ADONGO

I listened with shock the analysis of the FX by Hon. Isaac Adongo with a surreal conclusion that Dr Mahamudu Bawuamia’s analysis of the FX is wack. He further suggested that Dr Bawumia needs a refresher course to better understand the FX dynamics. While I still hope that Hon. Adongo would take up the challenge to debate me on the economic performance of the current government and on the subject matter of economics in general, I will take a moment to address the ignorance of Hon. Adongo on the FX with a blend of academic prepositions and practical applications.

This statement is a response to a part of the ignorant effusion by Hon Adongo at the forum organised by the Coalition for Restoration. I hope Hon. Adongo will learn some valuable lessons from this and will further submit himself to learn more. Nonetheless, if he has any disagreements to what is contained in this epistle, we should address those through the debate I requested.

The Foreign Exchange (FX)

Exposing the sheer ignorance of Hon. Adongo and positing the discussion for a better understanding of the FX requires a bit of explanation on what FX is. The FX (Exchange rate) is simply the price of a currency – the price of one currency in terms of another. Like any commodity, a currency, too, has a price. And, yes, the currency is a commodity traded in the market, the FX Market. In the FX market, the forces of demand and supply of currency determine its price. A currency is depreciating when a unit of that currency is cheaper than before and the opposite is true for an appreciating currency.

In Ghana and many other jurisdictions, the local currency is usually matched against a vehicle currency, the United States Dollar. The US dollar is a vehicle currency because it is widely used to denominate international contracts made by parties residing outside of the US. This explains why the dollar is relatively a powerful currency. There is a global demand for the currency unlike inconvertible currency like the Indian Rupees, the Ghanaian Cedi and the Mexican Peso.

I took my time to give this background because I want that to be the basis to addressing the fatally misleading statements and intellectually impotent analysis of the exchange rate by Hon. Adongo. The incoherent presentation by Hon. Adongo can be summarised into the following relatively intelligible assertions, as he surmised:



1. The 243% depreciation of the Ghana Cedi calculated by Dr. Bawumia is not founded on any sound economic analysis.

2. Exchange rate is not a goal variable and undeserving of the debate.

3. Exchange rate determinants are more exogenous

4. Exchange rate is a shock absorber for managing volatility.

5. Exchange rate depreciation is not the absence of changes in exchange rate.

6. Average depreciation is a convenient analysis

Indulge me to address these assertions one after another. The assertions are related but their underpinning is greatly misunderstood by Hon. Adongo. A person with a foundational knowledge of economics will not make such assertions.

Depreciation (243%) of the Cedi

Before I address this point, I wish to put on record the NDC lost the debate on this same issue when it was first broached. It beats my imagination why Hon. Adongo will resurrect this issue again. Even with the support of Dr NIi Thompson and Cassiel Atto Fosu, the NDC still lost the argument. But since it has come up, I wish to repeat some pertinent points.

Firstly, to understand why a currency could have lost over 100% of its value is to go back to the basics of exchange rate (depreciation/appreciation). It is the lack of this basic understanding that is making the likes of Hon. Adongo not to understand Dr. Bawumia’s analysis. In the background, I observed that currency is a commodity traded in the market. Let us assume that it use to cost GHS2.00 in Ghana to buy an American candy in Ghana which cost $1.00 in America in 2016. However, in December 2018 the same $1.00 candy cost, say, GHS 5.00. With this intuition, one will appreciate why a currency can by 100% or more.

Also based on the theory of purchasing power parity which states that exchange rate between countries is in equilibrium when the purchasing power between these countries is at par. Thus, when general prices levels in Ghana and the US are at ratio 1, then we experience exchange rate equilibrium. I am sure Hon. Adongo needs to read about the exchange rate and relative prices to appreciate this analysis.



Therefore, for Hon Adongo to have made this assertion gives me an impression that he has a weak understanding of aspects of the exchange rate dynamics even after some 1.5 years have gone by.

• FX is not a goal variable and undeserving of the debate

Another blatantly ignorant statement made to the applause of people who did not really know what he was talking about, I suppose, was when Hon. Adongo asserted that the exchange rate is not a goal variable and that argument/debate about the exchange rate was not necessary. Before, I address the debility of intellect regarding this assertion; I want to remind Hon. Adongo that he (or the NDC) cannot approbate and reprobate. He approbates when the exchange rate is depreciating and reprobate when exchange rate is appreciating.

Hon Adongo asserted that unlike inflation, exchange rate is not a goal variable. I say with certainty that Hon. Adongo rather has a wack understanding of what a goal variable is. Admittedly, inflation is a goal variable and government sets inflation targets, usually a single-digit target. Similar, there are exchange rate targets. If Hon. Adongo cares to learn, one of the six ECOWAS single currency convergence criteria is the stability the exchange rate. This is so crucial a goal to meet before we can come under a currency zone. While government might not set a specific currency volatility band, it does not suggest that maintaining exchange rate stability is not a goal. The most ludicrous of Hon. Adongo’s explanation for why the exchange rate is not a goal variable is because it has no midterm forecast. Really?.

• FX determinants are more exogenous

“The factors that impact your exchange rate are often more external than the economy” Hon Adongo noted. One would have thought Hon. Adongo was making sense with this point until he said, in a rather contradictory note that “…when your exports are not coming is not fundamentals…So the factors are more exogenous”. Any first-year economics student knows that there are inextricably linked indigenous and exogenous factors that determine the exchange rate. I dare say that for a developing country like ours, many of the risks to the exchange rate are domestic. Import-export issues are more domestic economic structural issues and the denomination of contracts in foreign currency, the dollar, is also a structural problem. Considering the Ghana’s developing nature, government’s focus is on building reserves through more exports and working to avoid currency shortages, which, sometimes, spikes the currency depreciation. It really takes skilful economic managers to main a stable exchange rate in an economy, which is structurally import-dependent. But here again, one needs to point out to the approbation and reprobation of Hon. Adongo.

•The Exchange Rate is a shock absorber for managing volatility.

It is unfortunate that Hon. Adongo is the star economist of the NDC. For this to come from him, it exposes that lack of knowledge on the fundamentals of economics. “…And, therefore, depending on the volatility that the economy faces and double-digit depreciation may be the appropriate depreciation…It is a major tool for managing external shocks and external volatilities”, Hon. Adongo stated.

It is telling to observe that Hon. Adongo has completely ignored or completely unaware of the fact that Ghana is not practising a fixed exchange rate system such that we can devalue and overvalue the national currency at will, depending on the shocks. With a floating exchange rate regime, how could he make this a suggestion? Exchange rate is a tool? For managing what? Did he even say “double-digit” depreciation versus “single-digit” depreciation? Which volatility requires single-digit inflation? This understanding of exchange rate dynamic (Hon Adongo) shudders when Dr. Bawumia speaks about exchange? God have mercy! I can say without any iota of doubt and with certainty of probability that Hon. Adongo was absent-minded when he made this comment.

Let me provide a bit of schooling here. The exchange rate is not a tool for managing any shocks as per the FX regime in Ghana. It is the price of an asset/commodity, currency. It is structurally determined based on the interaction of demand and supply of the commodity, currency. You get a good rate or bad one depending on the determinants of demand and supply of the currency. When a rate is not favouring the country, both short term and long-term measures such as export-driven growth, FX regulatory framework, hedging among others are employed to ensure a stable or favourable rate.

• Average depreciation is convenient analysis

Hon Adongo concluded his presentation with a suggestion that the analysis of the exchange rate by the Bawumia using average was a convenient analysis. Let me set the records that daily, weekly, bi-weekly, monthly, annual currency performance match between the NDC and the NPP will still present the NPP as a better performer when it comes to managing the FX dynamics. Hon. Adongo would have done a better job if he had told Ghanaians the best approach either than averages to measuring exchange rate over a period of time. At the end of the semester, a student’s position is based on the average of the scores for various courses otherwise you would not have an idea of the student’s overall performance.

• Conclusion

In conclusion, Hon Adongo engaged in ignorant effusions, shabby analysis, wobbly economic thoughts and anaemic academic presentation at a pristine forum, which was supposed to be used to engage in a stimulating intellectual discourse. His analysis of the economy and economic variables were sub-standard and ones that do not merit a response from even the Technical Assistants to the Vice-President, talk less of his good self. My decision to take up the challenge to debate Hon Adongo was after a cursory examination of his presentation. Considering the quality of analysis and the presentation of his thoughts, I have no doubt I can beat Hon. Adongo when it comes to economic analysis. I hope this write-up will serve as a precursor to the debate with Hon. Adongo.

God bless our homeland Ghana
And make Her great and strong.

Matin Abdallah
President, UG-TESCON