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Opinions of Wednesday, 3 June 2015

Columnist: Baafi, Alex Bossman

Let Us Save the Cedi from Collapsing

By Alex Bossman Baafi

One of the major economic challenges facing our country today is the steady depreciating of the national currency, the Cedi. Since 2012, we have seen a sharp fall in the value of the cedi. For example, in the past three months alone, the cedi has depreciated by 15%. There are multiplicities of factors accounting for our currency collapsing some of which have been discussed below;

Inflation

Inflation is consistent rise in general price level in a country. When it happens it reduces the value of money. If there is rampant inflation then the currency will depreciate in value. Since 2012, our economy has been experiencing steady rise in inflation from single digit of 9% in July 2012, inflation has been rising consistently and is now hovering around 16.8% by end of May 2015. This has contributed to the declining value of the cedi. There are a lot of factors that cause inflation but for the purpose of our case I will discuss just a few of them that are relevant to our country.

Excess Liquidity

Money printing does not always cause inflation but inflation occurs when the money supply is increased faster than the country’s growth in terms of real output. This is what the economists refer to as excess liquidity. The central bank of our economy is guilty of this circumstance since 2012. Perhaps what the central bank failed to learn is that the link between money printing and inflation is not straight forward. For example the US uses to increase its monetary base substantially but that does not lead to inflation because of other factors influencing inflation in that country. The structure of our country is different so following US example here will be problematic because we cannot simply increase real output to match the increase in money supply.

Huge National Debt

Huge national debts sometimes forces governments to print money to finance these debts. Such attitude leads to inflation and that is why inflation is rising in our country. The temptation may be to borrow more to pay old stock of national debt as is being practiced by the officials in charge of our fiscal and monetary policies. For example excessive borrowing has been christened as ‘Smart Borrowing’. In my opinion, there is nothing like that, the costs to that are inflation and other dire consequences including depreciation of the currency.

Current Account Deficit

A current account deficit means that a country imports more goods and services than it exports. This is a clear case of our economy today. To finance this deficit requires attracting more capital inflows. Because we are not in the position to attract inflows more institutions including the banks lose money. In a situation like ours, people start withdrawing their savings that leads to capital flows drying up. On the part of the multination corporations, it leads to capital flight. The government is also compounding the problem with excessive borrowing from the banks, crowding out the private sector from getting access to investment funds, causing depreciation in the exchange rate in the process.

Collapse of Confidence

There is collapse of confidence in our economy and that of our financial sector is fast waning. This is influencing outflows of currency because people do not want to lose their money or assets. The collapse in confidence in our case is both political and economic. Political because the excessive taxation policy and high utility tariffs in part had led to high cost of production. It is economic because “dumsor” for example has collapsed many industries contributing to the decline in export products. All of these had compounded the depreciation in exchange rate, hence the fall of the cedi.

Trade Liberalization

The trade liberalization policy has crippled our manufacturing sector. Our local producers could not compete with their foreign counterparts whose goods continue to flood our markets. Our economy is import oriented. We import virtually everything including secondhand clothing and tooth picks in the face of our dwindling exports.

Price of other Commodities

The basic economic reason here is that our economy depends on exports of raw materials and the fall in the prices of these had led to a fall in our export revenue and hence the depreciation in the exchange rate. The country is currently experiencing a fall in the price of our major export commodities including oil, cocoa and gold.

Suggestions

First of all the government must be fiscally disciplined and reduce spending even in the election years. She should endeavour to quickly resolve the dumsor issue and go ahead to give tax incentives to manufactures and farmers to increase production. She could also grant or introduce export subsidies. Government must reduce borrowing drastically. The Bank of Ghana (BoG) must shy away from deficit financing. BoG could also raise the reserve requirements of the commercial banks thereby forcing a contraction of banks’ loans going to the government. BoG could also intervene the exchange market by falling on its reserves and sell say US Dollars and Chinese Yuan in the open market from time to time. This may prove very expensive and may also depend on availability of enough reserves in BoG’s vault. Whatever it takes, I believe we must reverse the declining fortunes of the Cedi now otherwise we will be heading towards economic, social and political chaos.