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Opinions of Friday, 14 February 2014

Columnist: Ampong, Charles Horace

Bank of Ghana intervention to stabilize cedi may not suffice

The recent intervention effort by Bank of Ghana to force the cedi to appreciate against the dollar (the world’s reserve currency) may not be sufficient enough to curtail Ghana’s mounting economic problems in the short to medium term. Injecting about $20million into the market and restrictions on trading in dollar currency is not enough. Why? Because such a strategy only resonates with the supply and demand model for exchange rate economics and its impact may be realized in the very long term. The economic hardship of Ghanaians does not stem primarily from the weak cedi because a weak cedi can stimulate the demand for Ghana products and significantly boost Ghana exports. Additionally, it may reduce the country’s import and put a break on the cascading unemployment rate. However, on a negative note a weak cedi will increase inflation as being witnessed right now [2014 January estimate of 13.50%, source:] in spite of high interest rate averagely 16% [2014 estimate; source:] that Bank of Ghana has put in place. Most importantly, it can exclusively discourage Direct Foreign Investment which is the main job creation sector for the country. On the other hand, the quest for a strong currency may not alleviate economic hardships or better still be the breaking force for the “runaway” economy of Ghana. A strong cedi may place downward pressure on inflation yet it may exacerbate the unemployment rate due to promotion of relatively attractive low prices for foreign goods in the country. The other downside of this will be a drag on the country’s economic growth.

So the strength or weakness of a country’s currency is just one of the macro-factors that influence the economic conditions of a country. Consequently, the economic model suggest that weak cedi is not the problem and that a strong cedi alone will also not solve the problem. What the country needs is a stable currency plus government fiscal and monetary policies that will boost investor confidence, attract more Direct Foreign Investment, encourage local investors and create jobs. Pragmatic fiscal and monetary polices that are sustainable, recuperating Ghana’s Global Competitiveness is what the country needs. Bank of Ghana may inject dollar reserves into the system to shift the supply in the country’s favor, putting downward pressure on the dollar and an upward pressure on the cedi. Yet the question Ghanaians need to ask is whether Bank of Ghana has enough reserves to continue doing this. In other words, can reserves of about $2501 million (2009 estimate, source: do the job. If they don’t have enough reserves then I am sorry to say that it may not be able to exert much pressure and sustain the dollar depreciation, fortifying the appreciation of the cedi. In other words, this is not a sustainable strategy so far as there is not sufficient reserve to keep the pressure on the dollar. It is sad to say that very soon market forces would overwhelm and nullify the gains of the cedi appreciation. China, the world’s second largest economy has substantial amount of foreign reserves that it can use to intervene in its foreign market or currency flow in its economy. However, this may not be true for Ghana. China is more experienced in direct intervention of currency and that is what it has used over the years to maintain its premier position as the world’s largest exporter.

There is the need for the Ghana government to focus on boosting exports taking advantage of the weak currency as it seeks to stabilize the Cedi against the dollar. Export driven economy is what Ghana needs. The focus should be on the non-traditional exports a domain of all other export commodities apart from the popular traditional exports of diamond, gold, manganese, timber, cocoa, electricity. There should be incentives to boost non-traditional exports businesses. For a very long time, the foundation of the economy has been built on traditional export which has failed the nation and there is the need for refocus and re-strategizing. Next, the government should review its fiscals by toning down on its spending, effecting some changes in the tax system and most importantly reducing its gross debt or international debt or its negative balance of payment. The VAT system is good but it is having a negative impact on Ghanaians. The VAT system is shifting the “tax burden” from sellers to the buyers. Let me briefly clarify on the issue of tax burden which I believe is deepening the economic woes of Ghanaians. When the government imposes tax on the goods, there are three things that can happen. The price paid by the buyer may rise by the full amount or by a lesser amount or not all. The prices of good have risen significantly since the introduction of the VAT system. That tells me that Ghanaians or the buyers are bearing the brunt of tax burden due to the poorly implemented VAT system.

All said and done, God should not be left out of the model to get the economy back on track. Prayer should be included in the fight to redeem the economy. If Prophet Elijah prayed for the rains to cease for three and half years and he prayed again there was rain then I believe prayer will be a significant tool in dealing with the country’s economic problems. For those who don’t believe in the power of prayer, I have news for you. The bible says in Daniel 4 that God rules in the kingdom of men and that He lifts up nations and takes down nations. The nation needs the hand of God and it is imperative we pray and stop the blame game which only leads to tension and vendetta. It is double standards when we seek the power of prayer to avert civil war in times of elections and dispute the potency of prayer to arrest a deteriorating economy. Members of the clergy should not cease to back the economy with prayers in spite of the disparaging criticisms. God is looking for intercessors in Ghana who would stand in the gap and cause a move of the hand of God. Intercessors who would not rest until they see change. Would you be one of them?
God bless our homeland Ghana and make our nation great and strong.

Charles Horace Ampong
Chicago, U.S.A