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Opinions of Friday, 26 January 2007

Columnist: Adjimah, Harrison

Redenomination of the Cedi- The Uncertainty Problem

The timing and the manner of the redenomination program may create uncertainty and instability which could be difficult to correct. The redenomination of the cedi may come with some unintended and unknown outcomes. These uncertainties, post risk and can create different types of problems including speculative attacks, capital flights, sharp drop in remittances from abroad, increased cost of doing business in terms of dual accounting and changing cash handling infrastructure, deterring of potential investment, increased instability and a slow down economic activities. The uncertainties would increase risk aversion. Investors are likely to adopt a “let us wait and see attitude” Investment capital is a coward, it runs away and will not go where it senses risks.

The general uncertainty associated with such monetary system changes, might only be temporary and the benefits of the new policy, if well and swiftly implemented and successful, may far exceed the problems. However, the timing and the manner of the implementation of the program could also create some unintended adverse effects which can be more long term and difficult to reverse. By initiating the redenomination policy when a common currency policy appears to be seriously pursued, policymakers are giving mixed messages, leaving the public to worry about what is to happen until the time to come. We are told the redenomination would facilitate the use, and investment in ATMs, ticket machines and other electronic payment systems. The truth is investors would be mad to make such investments, bearing in mind the systems would have to be replaced sooner or later. In my opinion, it would be helpful to take out of the equation, this bizarre notion of a West African Common Currency which is continuously getting at large.

Attempting to rely on policy surprises and shock on expectations can also create some disastrous uncertain outcomes. The way the redenomination programs were first announced came as a surprise to even the MPs, drawing suspicion of a conspiracy between the Bank of Ghana and the government. Plans seem far advanced. Precise dates are set and bids are already invited for the contract to print the new notes. These create doubts about what would happen if the bill fails to go through parliament or is even delayed. It is important that the issues are given enough time, deeply looked at and other views taken into consideration.

Another worrying source of uncertainty is the dollarisation component of the program. Already important assets are being priced in dollars and many economic agents plan, budget and anchor prices changes on to the dollar. It would be sensible to use the demonetization programs, to rather restore and reintegrate the monetary functions (medium of exchange, measure of value and store of value functions) of the new money. By initially setting the GH¢ to ¢10,000, approximating the cedi to a dollar, and some politicians miss selling the policy, with comments such as, “come July 2007, a cedi would be equivalent to a dollar” we may be regularizing the dollarisation phenomenon. Such forms of dollarisation are always full of uncertainties, instability and often lead to financial crisis.

The ‘good luck’- the strong remittances from abroad and the downward trend of the dollar which have manifested in lower depreciation of the cedi should not be taken for granted. Foreign inflows are also very sensitive. According to Alan Greenspan, the monetary policy guru and ex chairman of the Federal Reserves, the behavior of the dollar too, is like the outcome of tossing a coin.

The need for a change of the monetary unit is there. However the implementation has to be done in a way that the associated uncertainties and instabilities are minimized and the macroeconomic benefits maximized.

By Harrison Adjimah, an Economist in Scotland

Views expressed by the author(s) do not necessarily reflect those of GhanaHomePage.