Banks and the New Cedi in Ghana

As far as banks are concerned the impending currency redenomination is a win, win situation. But to what extent do they deserve this, as far as Ghana's developmental goals are concerned. In many ways banks have left much to be desired. In the advent of last year's announcement of the planned redenomination in July, 2007, many bank representatives showed they were in full support.

The financial sector reform programme which started long ago, about the late 80's particularly in 1988 resulted in the registering of more new banks, opening of new branches by public sector banks, traditional or international banks, rural banks, non-bank financial institutions, Credit Unions and the like in the country. Will the redenomination be a logistics nightmare or all banks and major stakeholders will be involved?

The banks in Ghana should be the least to be rewarded under our current situation and they should know why most business people are saying this. However, the whole nine point reasons for redenomination centred on portability, book keeping, Automatic Teller Machine (ATM) and the like. What will be the role and extent of banks activity in the redenomination programme?

It may also not be totally true that banks will gain after all because during the contract redenomination in Argentina the HSBC (Bank) was reported to have lost over $500 million in foreign currency redenomination. This is about the amount expected to be raised in 2007, by government selling on the international bond market, to help distressed companies in Ghana.

Most of the reasons for redenomination seem to reward Banks in Ghana. Unfortunately, banks have not shown same reciprocity for all that this government has done for the financial sector. This is evident from lesser loans to business and high ratio of interest to base rates amidst lowering prime rates.

The appropriate thing to do is perfecting the use of cheques, e-banking and credit/debit cards; this also means introducing the EFTPOS technology for payment. This will gradually take over main stream business transaction by eliminating too much dependence on currency notes and coins.

A perfect example is that of New Zealand where the EFTPOS penetration is the highest in the world, ATM services at banks operate around the clock. The mobile EFTPOS pioneered by VeriFone has taken transaction payment to a whole new level in the "Kiwiland." What a niche that will open to mobile/telephone companies and to the economy as a whole in Ghana?

The success of this effort in the long term will reduce the pressure on carrying bulky money. Recent reported burglary of ATMs at Legon, Makola and other places in and around Accra, calls for the introduction of security cameras and alarm systems to monitor criminal activity at ATMs. South Korea uses a lot of ATMs with a penetration of 43 and 131 times higher than India and China respectively, but have no problems.

Have the banks brought-in investment finance for business into Ghana? Not that we know of. If at all, it has not been to any appreciable extent. Many new banks have become more interested in the repatriation of profits to parent banks overseas and offering loans at high interest rates.

Although, a few traditional banks have been able to give car credit and mortgage loans; Barclays Bank (BBG) provides funds COCOBOD for cocoa purchases, have credit for West Africa Gas Pipeline, Parliament House, assisting to provide facilities for CAN 2008 and given support to businesses.

It is all like this, the government is saying "I have a vision and a promise" in which Ghana will spend "dollars." This was the campaign message in Accra until the end of 2000. The banks are now telling the government we also have our mission (is profit) evidently this is at variance with the government's agenda.

The Banks saying we are not bothered if government does to make their work easy. It's all about business and profits. Yes, but I think it is all wrong if the law, regulatory committee and contracts do not positively influence the financial sector.

Unfortunately, it seems the Bank of Ghana is not in control but it's just pretending to show off some power. It will make profits on redenomination due to sovernioage in any case. This could be a good reason why the Governor said the Bank of Ghana will pay for the printing of the new cedi notes and mint new coins without relying on money from government. The banks on the other hand do not see that as a threat all.

To be able to come to this conclusion means the Bank knows the cost of redenomination but will not tell anyone. People feel that the issuance of currency notes and coins is but one of the functions of central banks and in fact the easiest of the functions hence, the said posturing is not proper.

The new cedi is actually an interest free loan to government and the authorities that be. It is only a sign of distress that things may begin to worsen. The recent announcement that Ghana is selling bonds (Ghanaweb, 02/20/2007) on the international (London) market is good but, it does depict utter confusion in economic management and a sign of the eminent distress call to save the corporate lack of investment funding.

It is no wonder that the executive seem to disassociate itself from collapsing firms that were hitherto, applauded under special privileges of the Presidential Special Initiatives (PSI) established under the auspices of the Ministry of Trade & PSI. It is becoming increasingly difficult to rationalise the combination of expansionary and contractionary economic policies at the same time.

On the whole, any newly printed money get to be exchanged and assigned short deadlines even make new money go like "hot cake." Where there is so much uncertainty before redenomination, people become desperate, also feel rather helpless. When some people think they may not even get to change all their money.

So please let’s tone down the rhetoric under which everyone tries to pay lip service to the drastic or better still the radical contractionary monetary policy appear so credible. What contraction does in an economy is when redenomination is complete the banks are even going to charge higher interest rates than the levels before redenomination.

The most well known failure in redenomination was Russia with inflation as low as 10 percent spiked to 120 percent a year later, in 1999. Bulgaria's inflation became 10 times (12 per cent earlier) higher just a year after redenomination in mid-1999. Poland on the other hand, after cutting four zeros from the zloty had to increase its interest rates by 600 bps by the year 1996 to send mixed signals about being the most successful stories.

We are all aware about the bad faith exhibited by banks as they continue to charge high interest rates that overwhelmed the private sector, and development efforts of meeting the Millennium Development Goals (MDG). With the high interest rates investment continue to fall, consumption consequently falls and net exports from the country will fall resulting in low revenue and negative balance of trade.

What is even more worrying is the trouble that we will have to put the millions of Ghanaians through to change their money. Many of us in Ghana have just enough to be able to live. This exchange for new cedi is something that no one has asked for but to go about living their normal lives. It requires soft talk and even apologies to Ghanaians.

The untold truth of the exchange is that payment transactions, prices for goods and services will be rounded upwards. Could we imagine that the night before the change begins how many people will not have a good sleep? However gradual the process is there will be time; not even up to a week after the start date of redenomination that sellers will begin to refuse to accept the old cedi as legal tender, trust me on this.

I know it is said that the old currency will run parallel with the new Ghana cedi for about six months. This alone does tell us that there is a limit to the duration for the change. The question is not the limit per se, but what the limit means to the individual and how it will be handled.

Let not our policy makers talk as if they do not live in Ghana. They should be down to earth in this regard at least. It is a rather traumatic situation we have on our hands. All of it needs to be predicted and measured. We will require a good media, psychologists and sociologists to work out some modalities, not just economists.

Whatever time extension is given is immaterial although the longer the better. But the trouble is, why should one go through the trouble of getting the old cedi in say the last weeks towards the end of the programme, only to have to look for the time and a place to change it themselves? The fear is what if the money they are carrying becomes worthless? What is the guarantee that banks and bank officials will not refuse to change the money, wanting to take "something" before, by saying there is not enough or no money in the bank to be changed? Therefore, "come tomorrow and tomorrow never comes," is a common adage we all know in Ghana.

How about when there is pressure on the stock of money especially if we account for any counterfeits that might already be in the system. A culmination of these factors will only result in stagflation in the economy after redenomination. What processes are there to solve all these envisaged problems?

I can tell you that there have been over four dozens of countries that have redenominated since 1963 to date. Many of these countries from Afghanistan, Argentina, Bolivia, Brazil, Romania, Turkey, Yugoslavia and others had inflation of about 600 per cent to over 4,000 per cent in others.

The above statistics shows another perspective of Ghana's intended redenomination which we can talk about another time. If you consider that fact that Ghana's inflation had never been anywhere near 150 per cent in more than two decades hence, gives no course to change our money.

Inflation in Ghana had been below 10 per cent for many years, until the turbulent year of 1983 when deportations from Nigeria, drought and structural imbalances caused inflation to reach 123 per cent. This was the only time in history that Ghana's inflation passed the 100 per cent mark.

It has since been on the decline averaging 25 per cent by mid-80s through the 90s, but spiked to 40.5 percent in the election year of 2000 and has now reached 10.6 per cent in the beginning of 2007.

The least number of times these countries have engaged in redenomination within forty years is as little as two times to others reaching as much as four to five times. So far the highest ranking countries of redenomination are Argentina and Brazil. These countries within the past four decades have on the average had reason to do redenomination every 8 years.

This makes us wonder if it was a solution to the real problem of inflation and improper monetary policy. If so, why should it be done so many times since it might be plausible only after extreme pressure on economies? In effect it has become an unnecessary political, exploitative and retaliatory tool for bad governments.

Cost of "charcoal" Cedi

Money gets defaced or easily torn in Ghana, sometimes blackened by charcoal, soiled by oil or by red soil due to bad handling of the paper money. It will rather be better to use polymer materials in printing the cedi. This major concern of loss of money in the form of mutilations comes at enormous cost to the Bank of Ghana. “The Bank of Ghana on Monday 16, December 2002 put more than 400 billion cedis of the new cedis in circulation.” Every six months the Bank of Ghana spends nine million cedis to remove mutilated currency notes from circulation. We can all see the obvious waste.

Soon after the 2002 issuance of the new 20, 000 cedis for instance in the first eight months of 2003, the central bank told us it spent a total of 244.3 billion cedis to replace 128.9 million cedi notes of various denominations. We need a better to minimise such cost.

Technology for Ghana Cedi

This brings to mind as to what technology is to be used in the new currency in order not to create “dead weight,” prevent counterfeiting and reduce the size of the new currency notes. Currently, Australia and New Zealand use plastic/polymer technology for the Aussie and Kiwi dollar notes respectively, they are the best in the industry which could be looked into.

The use of polymer materials, are advanced in the two countries and the technology have been perfected by China. It will currently be used in the new redenominated won to be released July, 2007 in South Korea (the Republic of Korea).

The New Zealand dollar is printed on polymer materials thus, increasing the life span of their "money." This means a reduction in the cost of, and the frequency of printing new currency notes. Experts from Zhejiang University of China have worn numerous awards throughout the past five years for polymer technology. The University is also organising a polymer conference; The Hangzhou International Polymer Forum in May this year.

However, just as a lady respondent from the Bank of Ghana answered a question on Joy FM radio about the effect on Ghana, by saying there are many researches in the world on redenomination is not good enough. Because the effect on those countries will be totally different from Ghana for all the reasons that anyone may propound. They can only guide our thoughts and purpose to do a better job on our own.

The effect of redenomination on Israel and Zimbabwe could never be the same. So for once we should not accept this mentality of what one has done one can do. If at all, that should be only about the good things in life. Unfortunately, currency redenomination is psychologically and as traumatic as it is, may not be one of those things of life.