28 June 2012

Ghana: The State of the National Currency - the Ghana Cedi - Introduction -

Photo: P. Johnson
A fish vendor in Ghana.


Ladies and Gentlemen, the Ghana cedi has rapidly depreciated in relation to Ghana's major trading currencies i.e. (US dollar, euro, pound sterling, etc) to the extent that not only is it having a very negative effect on the economy, but it has also caused massive increase in the cost of living for the ordinary person in Ghana - and the situation is worsening day-in and day-out. The prices of various goods such as rice, poultry products, cooking oil, sugar, pharmaceutical products, cement, and so on, have risen astronomically. The rising cost of almost all consumer products is the result of the NDC government's inability to keep the currency stable. The government appears to be totally lost as to how to resolve this problem, while prices of goods and services keep rising by the day! This makes untenable the reported single digit inflation as there seems to be a disjoint between cost of goods and the inflation rate. The NPP sees this problem as real and serious and believes that the government needs to confront the problem urgently before the rising cost of living gets out of control.


The erosion in the purchasing power of the Ghana cedi relative to other currencies such as the US dollar, Euro or Pound Sterling is called DEPRECIATION. For instance, in December 2008, US$1.00 was sold at GH¢1.10. In June 2009, US$1.00 was selling at GH¢1.40, in December, 2010 US$1 sold at GH¢1.47 and then in December 2011, US$1.00 sold at GH¢1.64.

As at now, US$1.00 sells at about GH¢1.95. Thus between December 2008 and June 2012, the value of the cedi relative to US$1 has fallen by 77.3%.


There are a wide variety of factors which influence the exchange rate of currencies including the cedi. Some of the factors are listed below:


Any economic activity such as exports, imports, flows of foreign direct investment, foreign loans, and grants, payment of foreign debt, that is, every transaction involving the use of foreign exchange that will affect the supply and demand for foreign currency will affect the price of the nation's currency.


The demand for foreign currency is driven by our desire to fulfill our import requirements, while the supply of foreign currency is largely influenced by our ability to export. In 2011 for example, we imported GH¢15,348.3 million worth of goods and exported GH¢12,844.55 million with a trade deficit of about GH¢2,506.8 million. This imbalance creates a shortfall which affects the value of the cedi to the extent that our trade imbalances persist we expect the cedi depreciation to continue.


The exchange rate is a measure of the relative price of goods between two countries. Higher inflation in one country turns to erode the value of that country's currency. In that circumstance people would like to hold money in foreign currency to protect the value of their cash assets. Conversely low and stable inflation is expected to reflect in a relatively stable exchange rate. In Ghana, whereas, the reported rate of inflation is low and has been stable for over eighteen months, the cedi has seen a rapid depreciation in recent months. WHY IS THIS THE CASE?


If the interest rate in a country is high relative to those in other countries, all things being equal, we should expect capital to flow from the countries with lower interest rate to those countries with the higher interest rate to take advantage of the higher rate of returns.

This will normally result in an appreciation of the currency in the country whose interest rates are higher because of the implied increased demand for that country's currency. Interest rates in Ghana are currently quite high (91 day Treasury Bill is about 21%). Under this condition one will have expected foreign capital to flow in Ghana to take advantage of this high interest rate. If this were to occur, it should result in an appreciation of the cedi. However the observed current rapid depreciation of the cedi tells a different story. WHY IS THIS THE CASE?


Ladies and Gentlemen, loss of confidence in a country's economy can have adverse effects on the exchange rate. Loss of confidence in an economy might arise for a variety of reasons. These include perceptions of poor governance, lack of credibility in state institutions, fiscal excesses in an election year (as has been characteristic of elections in Ghana popularly referred to as the POLITICAL BUSINESS CYCLE (PBC), among others. In this context we make particular reference to the saga of fraudulent payments of "judgement debts" to political cronies. Ghanaians will recall the indecent haste with which huge sums of money have been paid out to Woyome, Waterville and Construction Pioneers, among others. What is even more serious is the public admission by a former Attorney General of the republic that these fraudulent acts were committed with the complicity of other high government officials.

The revelations coming from the Public Accounts Committee and the Courts show clearly, that, there is massive corruption in the Mills-Mahama government.

When such incidents occur it leads to loss of confidence in the economy by both resident and non-residents. Non-residents react by not bringing their investments into Ghana for fear of not receiving fair justice, while residents react by moving their assets out into foreign assets. The cumulative effect is a decrease in the supply of foreign currencies and hence a depreciation of the local currency.

This is because people would not want to hold their wealth in cedis whose future value they are not sure of. The loss of confidence in the currency and the economy generally is buttressed by the Monetary Policy Committee Report released on June 13, 2012, page 2, paragraph 10 "The consumer confidence index, constructed from surveys conducted by the bank, decline to 99.5 in May, from 102.8." Similarly, the business confidence index decreased to 96.4 in March, 2012, from 102.7 in December, 2011. The weakening of business confidence was influenced by inflationary expectations and exchange rates depreciation.


The rapid depreciation of the cedi has serious effects on all key economic actors namely businesses, households and government. As Ghanaians we all feel the impact of a rapidly depreciating cedi in our daily lives. For illustrative purposes therefore we will provide a few examples of how a depreciated cedi affects the various economic actors.


Traditionally, it is believed that depreciation of a currency should have positive effects on exports. It is argued that depreciation increases the demand for domestically produced goods by reducing the relative prices. However, the impact of the depreciation of the cedi has had the reverse effect on Ghanaian exporters. Consider a typical Ghanaian manufacturing exporter such as Aluworks, whose raw materials for production are largely imported.

A rapidly depreciating cedi immediately drives up its costs of production since the firm will need more cedis to buy the same quantity of raw materials. In the short term, the company might stay in production to cover certain fixed costs. But if the fall in the cedi value were to continue this firm may have to halt production with all its attendant adverse effects including loss of jobs, tax revenues and foreign exchange.


immediately drives up its costs of production since the firm will need more cedis to buy the same quantity of raw materials. In the short term, the company might stay in production to cover certain fixed costs. But if the fall in the cedi value were to continue this firm may have to halt production with all its attendant adverse effects including loss of jobs, tax revenues and foreign exchange.


Businesses that import goods into the country are suffering tremendously from the depreciation of the cedi in several ways. First, traders who import are realizing that the goods that they purchased and sold 2 months ago cannot be purchased with the sales that they made on the same goods. This will mean that their working capital is disappearing leaving them bankrupt. For instance, the used car and spare parts dealers at 'Abossey Okai' and 'Suame Magazine' who bought an item from Dubai for US$40 and converted a dollar at the rate of GH¢1.5, used GH¢60 to purchase the item.

If he sold it for GH¢66 making a profit of 10% at the current exchange rate of about US$1.0 to GH¢2.00, he will need almost GH¢80 to purchase the same item. This will mean he will have to find an additional GH¢14 from elsewhere to add to his previous sales of GHS66 to buy the same item he had earlier purchased at GH¢60. Similarly, clothing sellers in Makola, Tema station, Kejetia, Techiman, Tamale, Ho, Bolgatanga, Aflao, Takoradi, Cape Coast and all over the country are seeing their operations negatively affected by the cedi depreciation.

In addition to the cost of purchase, duties and other import taxes that are calculated in cedis but based on the dollar value of the product are all going up tremendously.


The effect of the cedi deterioration is eventually borne by the consumer. This is because businesses that are facing foreign exchange losses and increases in taxes are passing all these additional cost increases to the consumer to make up for the losses they made in previous consignments and also to add enough margin to new consignments to ensure that their working capital is protected. The effect of this is that prices of food such as imported rice, sugar, cooking oil, and other imported goods have all gone up. Furthermore, prices of goods that are produced locally including local foods that need imported raw-materials such as fertilizers, cement have all gone up Even the price of sachet water is gone up because the prices of imported plastic granules are all up.


Government operations are also negatively affected. First, government will have to find additional monies to pay for its dollar denominated statutory obligations such as payment of principal and interest on loans. This additional unbudgeted expenditure will have to be financed through domestic borrowing which crowds out the private sector.

An adverse effect of the depreciating cedi is that it has forced the Bank of Ghana to draw down Ghana's International Reserves from US$5.4 billion to US$4.6 billion equivalent to an import cover of only 2.5 months. This is situation creates an environment which undermines our currency.


It is our considered view that some of the Government's response to the current rapid depreciation of the cedi has not been well thought out and properly calibrated.

Indeed, the government promising to solve the problem within one month, gave would be speculators, if any, the impetus to act swiftly within the period. These kinds of information and subsequent panic reaction of government give signals to the business community among others that all is not well with the economy.

Again, the indirect introduction of fees on Foreign Exchange Deposit Account is one bad policy of the Central Bank to fight the depreciation of the cedi.

This policy is likely to further undermine the confidence in the currency and cause depositors to begin to withdraw their foreign exchange deposits from banks.

The attempt by the Ministry of Finance and Economic Planning to deny the existence of such a policy has turned out to be false since some banks have already issued notices to customers with foreign exchange deposits.

One such letter reads "Effective 1st May 2012, the Bank of Ghana asked Banks to maintain a mandatory nine percent (9%) reserve on Foreign Currency Deposits in Ghana cedis. One effect of this new directive is that the cost of maintaining Foreign Currency Deposits with banks has gone up.

By reason of this increase we are obliged to introduce a monthly fee of 0.17% on all Foreign Currency Deposits held with the bank (being 2 % per annum with effect from June 1st 2012â-'.

This is a bad policy and the Bank of Ghana is well advised to withdraw the directive less we witness a return to the "black market" in the foreign exchange market, discouraging customers from holding foreign accounts can only exacerbate the current situation. Generally, there are two classes of foreign currency deposit holders. Those who use their accounts to service their business transactions and those private savers who want to keep their savings in foreign currency.

The introduction of the fees will drive up the costs of doing business as well as discourage private savings. Ghana certainly needs more savings to be channeled through the official banking system and not outside it. The sooner this policy directive is abolished the better. If people cannot earn interest on their Foreign Currency Deposits why should they lose monthly on them?


Finally, the NDC government has been poor at managing the exchange rate and for that matter the cedi during its tenure in office. Lest we forget, in the year 2000 the cedi lost its value as rapidly as it is doing today.

At that time, the key members of the then government's economic management team were Prof J.E.A Mills, as Chairman, John Mahama as member, Dr. Kwabena Duffuor, then Governor of the Central Bank and Paa Kwesi Amissah-Arthur, the Deputy Minister of Finance and Economic Planning. Today Prof Mills is the President. John Mahama is the Vice President, Dr. Duffour is the Minister of Finance and Economic Planning and guess what Paa Kwesi Amissah-Arthur is the Governor of the Central Bank. Need we say more?

We of the NPP have shown by our record that we are capable of managing the exchange rate. During the first 4 years of the NPP administration, the exchange rate depreciated at an average of 11%. In fact, in 2004, an election year, the total depreciation was only 2.2%. Thus far the NDC government had given Ghanaians 22% average depreciation rate so far. By June, 2012 alone the cedi has depreciated by a whopping 19% and still counting. Indeed, during the period 2001 to 2008 the cedi depreciated on the average by 7.9% as compared to a depreciation of 26.7% between 1993 and 2000.

If you factor out the crisis years of 2008 and 2000 the record is even better. Between 2001 and 2007 the average depreciation rate was 6.1% as compared to an average depreciation of 23.4% between 1993 and 1999. If you look at the crisis years our performance is still better. In 2008 (in the midst of severe global financial crisis) the depreciation was 20.1 % whiles in 2000 (in the midst of another global financial crisis the cedi depreciated by 49.8%). THE JUDGEMENT IS YOURS?

Fellow Ghanaians with such a record we wish to assure you that under the able leadership of Nana Addo Dankwa Akufo-Addo and Dr. Mahmud Bawumia, an NPP government will ensure that the exchange rate is kept relatively stable as was done before.

Thank you and God Bless Ghana.

Ing. Yaw Osafo-Maafo, FGhIE.

(Chairman, Economic Committee, NPP)

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