Feature Article of Thursday, 6 December 2012

Columnist: Lee, Justice

Bawumia/NPP propaganda crashes under cedi stability

by Justice Lee

The country’s cedi currency has started appreciating close to the December elections, dealing a devastating blow to one of the pet propaganda tools of the New Patriotic Party’s (NPP)’s presidential running mate Mahamudu Bawumia.

After observing the Foreign Exchange challenges Ghana was going through as the cedi which used to be exchanged for 1.6 to the U S. dollar dropping close to 1. 98 to the dollar, Dr. Bawumia the former central bank deputy governor, thought he had found the panacea to the “unprecedented” campaign slogan of ruling National Democratic Congress.

The western-trained economist therefore launched a hit campaign, starting from the Ferdinand Ayim Memorial lectures in May, where he asserted that the depreciation of the cedi was the demonstration of eroding confidence in the NDC’s incompetent economic management.

His propaganda became so loud that it created much panic in the Foreign Exchange (FX) market with speculators beginning to hoard the green-backs.

Bawumia and his NPP attributed the falling value of the cedi to the lack of confidence in the economic management style of the ruling NDC government.

He did not take into account the fact that the cedi had maintained its value all through the period of the NDC rule from the middle of 2009 till the end of 2011, when it suffered a nose-dive reaching a cumulative decline of 17.5 percent by end-October 2012.

However, the monetary managers which at the time were led by current Vice President, Paa Kwesi Bekoe Amissah-Arthur knew exactly what was wrong and knew what to do to save the situation.

The Bank of Ghana therefore responded decisively to the buildup of pressures in the foreign exchange market in a number of ways to stem the rapid depreciation of the cedi.

These policies which were mainly to work through the market mechanism included a three-consecutive time hike of the monetary policy rate that culminated in 250 bps increase in the first half of the year and a re-introduction of the Bank of Ghana bills.

Additional monetary policy measures (including reduction in the Net Open Positions (NOPs) of banks, a requirement for banks to keep statutory reserves in cedis only and a 100 per cent reserve cover for VOSTRO balances to be maintained at the central bank were undertaken to reinforce the MPR hikes.

As part of the market interventions, the central bank by injecting part of its 5.4 billion dollar reserves into the market to bridge the supply gap in the market.

These interventions the bank explained was targeted at supporting trade by making available import cover, which is the main reason for accumulating the dollar reserves anyway.

“It is commercial banks that finance trade and it got to a point when there was shortage, causing prices to go up, so we needed to intervene to make sure the price stabilized,” said Dr. Benjamin Amoah, head of Financial Stability Department of the Bank of Ghana.

The cedi based asserts the BOG introduced were also high yielding hence the large patronage as confidence in the economy is high.

These measures which economists and market players believe were pragmatic and effective started yielding results as the market started stabilizing after July.

Confidence in the economy continued to grow as the last government bond auctioned seeking just 500 million Ghana Cedis or 263.15 million US dollars to restructure existing government domestic debt composition, recorded a 200 percent subscriptions hitting 1.58 billion cedis at the close of bids.

Three earlier bonds auctioned in the year saw similar oversubscriptions with off-shore investors accounting for the largest chunk of the subscriptions.

The result of the entire GOB interventions have been very positive with the cedi beginning to hold its own against all major international currencies, and it is expected that cumulative percentage depreciation for 2012 would have dropped to between 11 and 12 percent by December.

This weighs favourably against the over 40 percent depreciation suffered by the cedi under the NPP 2007 and 2008 alone when Dr. Bawumia as the Deputy Governor of the central bank between

Most analysts therefore think blaming the cedi depreciation on the government’s “mismanagement of the economy” is too simplistic and rather attributed the decline in cedi value on the high demand for dollars which was caused mainly by the expansion of the economy with its attendant high demand for the importation of capital goods for the development of infrastructure by the state and investors.

In an interview with this reporter at the height of the Foreign Exchange (FX) market crisis economist, Dr. Sam Mensah of Sem Capitals insisted that the economy was performing creditably with the FX hiccups being the only thorny point.

He attributed the currency depreciation partly to the fast growth rate of the economy over the past few years.

“What normally happens when you have high growth rate is that there is a significant jump in the demand for imports. And our exports are not growing as fast as our imports so there is a current account deficit that is slowly catching up with us; these are the factors,” Mensah contended.

He however warned against depending on long-term solutions to deal with the current crisis, stressing: “It is difficult to deal with a currency crisis with long-term solutions because long-term solutions take time to yield results.”

These challenges notwithstanding, Mensah believed that the economy had so many strong points that must be capitalized on to continue to bolster confidence in the economy.

The recent fortunes of Ghana’s local cedi currency is no fluke, but the result of well thought-out measures implemented to shore up the value of the cedi, Minister for Finance and Economic Planning, Kwabena Duffuor declared here in an exclusive interview in early November.

He believed that with the measures put in place, coupled with the prevailing business conditions in the country, the cedi would remain strong till the end of the year.

As Duffuor boldly emphasized in the middle of November the country’s economic fundamentals remain very strong.

“Improved macroeconomic policies, underpinned by prudent fiscal management and tight monetary policy has contributed immensely to the decline in both the fiscal deficit and inflation since 2008, while the strong build-up of gross foreign reserves has generally supported the stability of the value of the domestic currency,” the finance minister declared in a press release to herald the recent announcement of a further drop in inflation to 9.2 percent for October.

“This is no time for panic, because if in spite of the coming elections, and yuletide season, the FX market is enjoying this level of calmness and foreign investors subscribe to cedi bonds to such a level, it demonstrates the return of confidence in the cedi,” Duffuor insisted.

He prescribed vigilance as one of the measures to ensure the cedi’s current fortunes were sustainable, promising that government would remain within its spending limits so as not to ignite depreciation again, assuring, “Our spending will remain within our means till the end of the year,” Duffuor.

An analyst with New Generation Investments Ltd, Charles Kwame Amoah, agreed with the minister that fiscal discipline in which government had remained within its means was one of the conditions restoring the stability of the cedi.

“A lot of the excess liquidity in the system has been mopped up, and this has complemented the monetary policy in increasing the Prime Rate has also worked in favor of stability,” Amoah averred in a telephone interview.

Many political analysts and economists who have been watching the political scene keenly believe that with the FX market stability and the gradual appreciation of the cedi, another of Bawumia’s campaign has started crumbling leaving him as a drowning man to clutch on to straw. Enditem.

Source: Justice Lee