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Opinions of Saturday, 21 July 2012

Columnist: Adjimah & Azila-Gbettor

The weak cedi---Blames and Solutions

Harrison Paul Adjimah and Edem Azila-Gbettor

The cedi has since full financial liberalization been weak and volatile. In a liberalized financial regime, exchange rate stability may largely be outside the control of policymakers. Yet, Minister Duffour, Governor Amissah Arthur and President Mills, if they care, should be having sleepless night as they might as well know this: a weak currency weakens the economy and a weak economy can weaken the government . It is 5 months to the general election, and mind you, exit of ruling governments in both 2000 and 2008 coincided with episodes of excessive depreciation of the cedi.
No wonder both the finance minister and the bank of Ghana are forecasting that the cedi would stabilize by July and from October respectively. These hasty predictions may instill some confidence now but may post policy credibility risks too. Business and consumer confidence in economic policy assessments by the two main economic policy authorities may further suffer.
Senior Ghanaian economists and politicians have all raised their worries on the recent excessive depreciation of the cedi. There is general agreement that it is largely due to the election year capital flight and rising imports. Of course, one fundamental cause of the weak cedi is a very strong and permanently rising import demand in the presence of weak and fragile export growth. What we have not discussed, at least in detail, is the root causes of this fundamental problem and the solutions.
Policymakers, consumers and businesses must all share the blame. The strong and growing import demand is not only due to lack of our competiveness---comparatively high cost of production in Ghana--- but changing taste too. We all, for various reasons, want to live western lifestyles but have failed to build the local capacity to produce the required items. We have acquired tastes we cannot afford. It is nice to switch from coal pots to gas cookers but where is the local capacity to make the gas cookers? Alternatively can we ever be able to export enough to pay for all the growing imports? A lot of policy efforts to expand the economy have been based on export promotion. The “Asian Tigers” might have been successful with export led growth strategy but the reality is that this has not worked for Ghana, and may not work at all, at least not now. We have for far too long over relied on import and export and paid less attention to non tradable sector of the economy.
When your dependency ratio exceeds 1---sum of exports and import exceeding the value of GDP---the economy faces double whammy risks. One the one hand, the economy would be hard hit when there are global shocks and export values fall, on the other hand expansionary policies to stimulate activities rather lead to excessive import demand with resultant excessive and unmanageable pressure on your currency.
It is time the nation takes the necessarily step to expand the domestic subsector of the economy, reduce the dependency on trade and reduce the fragility of the economy. Efforts to expand export production must continue. Yet, we should recognize that there is a limit to what export promotion alone can do and take steps to stimulate demand and encourage domestic consumption of made in Ghana goods---which is actually easier. There is a need for policy efforts to promote and support domestic production of the so call modern goods we all want to use. It is when we have successfully built the made in Ghana brands, at home that we can easily export value added goods.
This article is by no means calling for 1970s style import substitution strategies. In fact, boorish import restrictions would be counterproductive and would not work in the current global environment. What we are calling for is this: innovative policies to boost the domestic subsector of the economy.

A lot of the cedi’s current woes may be coming from lack of proactive monetary policies and past mistakes too. First, too much money — single spine salary arrears -- has been piled up and paid in the last quarter of last year and this year. A lot of these huge sum back pays have ended up increasing the demand for imports. Monetary policy should have been alert to mop up the excessive liquidity. The Bank of Ghana could have raised the treasury bill rates to the current 22% ca., earlier, than it has done after the harm has been caused. The Bank of Ghana should be more proactive, should not fall in love with the political desire to see low interest rates, and must raise rates when they have to in time. The risks of excessive depreciation to the economy, by far, exceed the risks post by market interest rate hikes.

The redenomination of the cedi by a factor of 10,000 was also an ill-considered policy decision. It has increased the basic unit of exchange rate volatility by 10,000 basis point (1 old pesewa to ¢100 (1Gp). One can argue that in the early 2000s when the exchange rate reached ¢9, 000 ca, the cedi stabilized because the changes in the rate by a few old pesewas-- a couple of the basis points a time could occur without much problem. Now, during episodes of strong depreciation and inflationary pressures in the present real time data, market exchange rates move by a couple of the basic units, 1Gp, (¢100s instead of 1pesewa) on daily or even hourly bases leading to the type of excessive development we are seeing. The redenomination quite clearly increased the risks of exchange rate and price developments and volatility to the economy.

Some economists pointed out this at the time and the Bank could have chosen the Yen (GH¢100--$1) or even the Yuan level (GH¢10--$1). Yet, Osu Castle and the High Street at the time were so eager to equate the cedi to the dollar and in the process knowing or unknowingly laid a solid and obvious foundation for the dollarization process, which the redenomination exercise should have rather solved. Are the speculations about plans to crack down on foreign accounts and outlaw pricing in dollars not expressions of concerns over disintegrating store of value and unit of account functions of the cedi? The Cedi is so much aligned to the Dollar. The depreciating cedi means prices have to be adjusted up. All the coppers, and even the 5Gp silver coin, are gone effectively making 10Gp (¢1,000) he least unit of price volatility and this is just 5 years after redenomination.

Another factor that influences short term capital movements and exchange rates, which domestic policy may be constrained to handle is domestic interest rates relative to foreign rates. The European public debt crisis led to rising bonds rates and failure to increase domestic rates immediately might have contributed to the pressure on the cedi. Attracting foreign inflows to improve the balance of payment position may sound attractive. The truth, though, is most types of inflows come with their own problems. FDIs are the best but are hard to get and the few that comes is increasing the claim of foreigners over domestic assets.
The offshore accounts introduced in the 2000s were quite innovative, should not have been discouraged through varying of initial conditions and unnecessary regulation in the name of checking money laundry. Discussions on “diasporan bonds” have been around for a while. Bonds denominated in dollars with interest payable in cedis could still be appealing to overseas working Ghanaians if the rates are attractive.

Harrison Adjimah and Edem Azila-Gbettor are both economists and lecturers in Ho Polytechnic