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Opinions of Monday, 17 February 2014

Columnist: Fekpe, Charles Kofi

The dollarization of the better cedi agenda

By Charles Kofi Fekpe (FCCA, CFE)

Am I a dwarf? No, in fact I am six foot and four inches tall! So what qualifies me to write this article? Well, I suppose that apart from being a Ghanaian professional working in International Development and Public Finance, I am neither partisan nor “tweeaasan” and as such, can afford to be truthful without worrying whether my next pay cheque will be stopped.

The subject of this article is the falling Ghanaian Cedi, and although much has been said, written and debated about it, I feel a patriotic duty, to raise some very core economic and basic public financial management issues in the most non-technical language for all to understand.

The reason for the falling Ghanaian Cedi is not one, it is many. What I can say however, is that it certainly is not the work of a committee of dwarfs representing the regions of Ghana, neither is it an act of God. The issues that have led to the fallen state of the Cedi are very very fundamental and common sense in nature; truth is, it didn’t all just happen. If the entire spectrum of causes is not dealt with or at least mitigated, we will see this happening again and again and again – maybe with different magnitudes, but it will happen again – that much, I guarantee. This is not a prophecy – it is truth. And if I dare be religious about it, well, prophecy comes by seeing only in part – as for truth, it abides. I have attempted as much as possible, to put aside possible externally motivated causes like the USA’s quantitative easing (and tappering) e.t.c. and to rather focus on internal likely cause to the Cedi’s sharp depreciation – causes, that are in our control to manage or at least resolve. So let’s get straight into it shall we?

Misplaced Frontline Responses:
Yes the fall of the Cedi did strike fear into the hearts of Ghana’s economic managers. Not even the toughest economic strategists of world class pedigrees could go soundly to bed in the wake of what has happened – but I fear that as a result, the government has concentrated all its efforts on solving the short-term slump in the Cedi’s value, rather than dealing with the fundamental medium to long-term economic structural failures that the Cedi’s value is merely reflecting. Here is the truth – the Cedi in itself has NO power to determine our economic direction; it is merely an all-inclusive reflection (indicator) of the performance of our underlying economic engine. The Cedi is the light showing on the dashboard to indicate that there is a fault in the engine – no sensible economic mechanic will go after repairing the dashboard indicator light. I’ll leave the rest to my readers’ interpretation.

Self-Engineered Investment Related Pressures
Fundamental Economic law states that if you have a very large quantity of an item, but a very very low demand for it, then in order for that item not to sit there and rot, its price has to be reduced, so it can sell – and vice versa. I still cannot understand this wisdom – The Ghana Investment Promotion Council is tooting its horn on its website, that Ghana attracted about $3 billion into the Ghanaian economy in investments (even though am sure that figure is out of date). That is a hefty sum of money representing approximately 7% of Ghana’s average annual GDP (or total value of Ghana’s Economy). But here is the interesting part of that investment data I just shared – The same GIPC, promotes investment laws which guarantee 100% transfer of profits, dividends, etc. out of Ghana. Coupled with tax holidays and weak transfer pricing regulations, it means that effectively, investors bring in billions of Dollars, and transfer equal billions out of Ghana in the form of profits and transfer prices. What do we expect? These monies (and the profits made from the Ghanaian people) will not be transferred out of Ghana in Cedis – no, they will be transferred in Dollars and other foreign currencies, meaning that the demand on the dollars in the economy will be very high, thereby increasing its value against the Cedi. We created these laws and ridiculous tax holidays. Imagine a tax exemption of 5 years for property development (i.e. no taxes paid for 5 years of commencing business) – does that mean that all one has to do is bring in money, buy your land and build properties within 2 years, sell them off in years 3 and 4 and transfer all the profits and capital out by creative accounting in the first half of year 5? Just asking! That way you keep all your investments and profits intact without paying a dime. We created our own monsters!

The Slack Hand Shall Always Beg:
At some point we were amongst the leaders in the production of Cocoa, then Gold etc. We lost our places. But that’s even not relevant anymore anyway. Fundamentally, this is how it works: Country A sells item A1 and its currency is A2. Country B sells item B1 and its currency is B2. Ideally, in order for country B to buy country A’s items (A1s) it has to buy A2 currencies in order to pay for them. This makes the local A2 currency rise. In order for country A to buy item B1, the same process happens, so that the currency B2 also rises. The effect? – the two “equal” currency rises cancel out each other. In the case of Ghana however, (i) the value of the raw materials we sell is cheaper than the value of processed goods we buy (manufactured items) from other countries. This means that automatically (from the above illustration), the dollar (in which we pay for most of our imports) will be stronger than our Cedi (because we are paying for a higher value item). To crown that – we also accept payments for our exports in mainly USD and other currencies but not the Cedi, thereby "dollarizing" the local economy and weakening the Cedi. We can only correct this when the value of our exports starts increasing and there can only be one way out – we need to increase our manufacturing base – and OUR government knows this. Oh yes, they know it very very well. (ii) Other than cheap cocoa, the ownership rights over the majority of our valuable natural resources like Gold, Timber etc are in the hands of foreigners. Yes they are exported, but the question is, when those exports are paid for, do such incomes come back into Ghanaian bank accounts – no, because although the resources are from Ghana and extracted by cheap Ghanaian labour – they are nonetheless owned by foreigners. The effect? – the countries getting the final payments for OUR Gold, etc can expect their currency to grow stronger at the expenses of the Cedi (iii) About 80% of the high value services we enjoy domestically, like Telecommunications, shipping, air transport, etc, again are mainly foreign owned and the effects are similar – we pay for the services in Cedis, that get shipped out in foreign currencies. Of course it ought to be – their owners don’t expect to get paid in Cedis. I suppose the fundamental premise is this – if we are NOT selling anything of value, we can’t expect our economy to reflect value in the Cedi. Maybe, it wasn’t such a good idea to have sold off Ghana telecom or allowed Ghana Airways to have Gone bust, or Obuasi Goldfields to have been fully taken from Ghanaian interest. Just may be. (iv) Finally, let’s look at our refusal to embrace technology full-steam or to innovate in our education and service delivery. A tonne of cocoa beans sells for about US$2,900, whereas a second-hand car imported into Ghana, or some imported home appliances could sell for US$4,000 and beyond – and YET… and YET… these mechanical or technological equipment we so eagerly import, only take less than one hundredth of the time our cocoa needs to grow, get dried, and exported - meaning that hypothetically, countries we import from, have the opportunity to sell to us 100 times more, for each sale we make. Maybe, we are even lucky, that the Cedi has not been running a hundred fiscal miles behind the US Dollar. You do the maths, I’ll do the economics. Maybe, our governments need to wake up to the fact that what we need to encourage and actively import – is the technological knowhow, to manufacture things ourselves and export valuable surpluses to our vastly untapped regional markets. Maybe what we need to refocus our education on, is to churn out graduates who can innovate solutions to Africa and the world’s problems; solutions whether in the form of services or technologies, that can be sold faster and at higher values than our dearly beloved Cocoa. Impact? – reduce our import linked demand for foreign currency and increase payments to us from our higher-value-faster-turnaround exports.

The Borrower Will Always Be A Slave To The Lender:
If there is anything that has ever baffled me in Ghana’s economic management, I must say, it’s been our ability to take huge loans from the Chinese, the Americans, the British etc. with lifetime interests, to develop mainly infrastructure and yet, agree to contract suppliers from these same countries to carry out works we borrowed the monies for. Let’s see how this works. We borrow $10 billion from the Chinese (for example) for a road project; we contract Chinese company X to build the road; we pay company X a whooping $9 billion from the money we just borrowed from their Government, which of course, they happily take back into the Chinese Economy; years down the line, we repay the loan of $10 billion back to the Chinese government with about another $1 billion in interests. Effectively, we have brought $10 billion into the Ghanaian economy and sent out $20 billion back into the Chinese economy either in Dollars or other currency – the Chinese certainly won’t take the Cedis in payments. Bottom line again, the Cedi falls, because we have to round up all the Cedis we have to buy enough Yens or US Dollars to pay the Chinese Government and her Contractors with – Cedi falls, Yen or Dollars rise.

Bonds of Unity OR Bonds of Entrapment:
So then, there was also the issue of Ghana issuing foreign denominated bonds. At the time it happened, my colleagues thought I was being insane speaking against it. Sadly, now, it is obvious I was right. I wondered then, if we had thought about the fact that the speed with which Dollars and Euros poured into Ghana’s economy as a result of the issued bonds would be the same speed with which they will pour out, thus having a devastating effect on the Cedi. Here is the very simple way it works: when such bonds are issued, investors usually look at a balance between current and future risk on one hand, and returns on the other - the risk in this case is whether the government issuing the bonds, have or would have enough foreign currencies to settle such debts when they became due – and they can become due anytime. This risk, as you will imagine was not a problem for western economies. Comparatively, they were better placed to produce these foreign currencies than Ghana was. The only reason why “some” (and greed is good sometimes) investors chose to buy the bonds, was because of the returns rates they were promised – but they knew very well there was a huge risk question mark hanging above Ghana (i.e. whether or not her Government would deliver the Euros or Dollars when they became due). And that’s where it all went wrong – as soon as US and other European countries raised interest rates, even very minimally, investors started moving out their bond money - FAST. Why? They were happy to take both the small additional interest rate rises PLUS the security (not risk), that these bigger economies offered – Ghana only had one side of the equation – a higher interest rate, but NOT the security. I guess the easiest way to capture it is to say, “investors abr3”. The big effect was that when investors started pulling out their bond money, GoG had to go a-looking to pay off, hence pressure on those currencies to rise against the Cedi. WE, created that pressure, not the investors – we gave them a opportunity to fail the Cedi and they took it. The big question was always this – did our government think Europe and American interest rates and their domestic economic performances were going to remain comparatively weak forever? (or even over the life of the bonds?). If they had thought about it, it would have been very very very clear from the start, that even a nominal change in interest rates or industrial performances in these bigger economies could throw the entire bond-agenda out of the pit. Again, I ask, did they think about it? Or some foreign consultant we employed simply said “Hey!! Let’s issue another set of bonds” and everybody on the economic planning committee (if there is even one) said “hallelujah, Amen”?? Did they?

Political Will – Clouds of Acid Rain:
Finally, and more often than not, several of our governments have allowed misplaced political wills to cloud all judgements on the nation’s economic practicalities. In other words, our leaders will mostly do what is politically correct, than what is economically astute. Sadly however, such displaced political will, is not one exercised as courtesy towards the Ghanaian people – no, it is one exercised towards other governments, gullibly embraced as our “development partners”. There is a fundamental understanding of the New World Order, that most of our political leaders, don’t as yet comprehend and it is this: by all means, lets form partnerships, but lets understand very clearly, that nobody is Ghana’s friend on the world’s economic stage – everybody is patting our backs and shaking our hands for what is in it for them. If we don’t get that, we would be sleeping in bed with economic snakes, pretending they are harmless pet lizards and losing sight of our need to develop our own economic models and solutions that “work for us” as opposed to listening to already made solutions presented us by our development partners.

In Conclusion
I understand the issues raised here are not entirely exhaustive. I understand some of them require medium to long term timeframes to achieve, but the fundamental truth remains that we have to start NOW, and from somewhere and if I am permitted, I recommend we start by being humble enough to stop pretending our economy’s custodians truly understand what they are doing. Look, throughout all of parliament and the heads of the Ministries, and lets ask ourselves this simple questions –
1. “What is our competitive advantage? What is it now, that we can mount a world podium, beat our chest and say to the rest of the world ‘when it comes to this, Ghana is the best at it, and you will never beat us at it’… again I ask, what is our competitive advantage?”.
2. “Are the people in these positions adding value to their allocated units, first, and then to the nation? And if they aren’t, why are they still there”
3. “Do we have the right calibre of critical thinkers, or we have the right calibre of critical hoarders?”