The Depreciating Cedi and the Ghana Economy

Economic news specifically the depreciating value of the cedi has dominated Ghana's radio and Television discussion in the past month.

The cedi has fallen in value against the major foreign currencies. Presently, the United States Dollar (USD) which used to retail on the local forex market at GHC2.20 in December 2013 now sells at GHC2.60 while the British Pound which sold at GHC3 is now selling at GHC4.20 (as at Thursday, 6th February, 2013). It has fallen about 7% in the first two months of this year alone compared to a 17% fall for the whole of 2013.

Additionally, it depreciated year-on-year by 21.96% against the dollar, 28.88% against the pound, 23.98% to the Euro 25.54% against the Swiss francs, according to the 'Daily Graphic' newspaper.

The extent of depreciation makes Ghana the country with the worst performing currency in Africa, after the South African currency, the rand. It is not limited to Ghana and SA but its an emerging market currency crisis problem, according to explanations by professor George Ayittey. He is a former economics professor at the American University in Washington DC and president of the Free Africa Foundation.   
Prof Ayittey says one cause is "the decision by the US Federal Reserve to reduce “quantitative easing.” To stimulate the US economy out of the recession, the Federal Reserve has been injecting money into the economy at the rate of $80 billion a month. Keeping interest rates at near zero. To get a better return, investors poured money into the emerging markets such as Ghana, South Africa and Turkey". 

He continued, "last month, the Federal Reserve announced that it will reduce the amount it injects in the economy from $80 to $65 billion, which means interest rates will rise in the US. In anticipation, investors are now pulling funds out of the emerging markets and putting them back into the US [economy]. As a result, the values of the cedi, South African rand and the Turkish currency have all fallen as investors pull out of those markets".

Aside the capital flight by investors, the impact of the 8 month Supreme Court verdict meant potential investors were aloof.

Our economy is an import-dependent one. We import everything from processed food, chicken, spare parts, mobile phones, rice, textiles, cars to medicines. We spend about $500million annually to import rice.

Our traders therefore demand for dollars to pay their suppliers abroad of the above-named products. If the demand for it outstrips supply, the value of the cedi will fall, precisely what we are witnessing now.

A low manufacturing and export base, a decline in the value of the country's main exports-gold and cocoa, weak foreign exchange controls all contributed to the problem. Particularly gold whose spot price hit a record $1,900 in November 2012, has plummeted to $1,250 currently, reducing the amount of foreign exchange coming to Ghana last year.

In response to complaints from business people, the Bank of Ghana (BOG) pumped $20million into the economy to shore up the cedi. The regulator also announced the Chinese currency-Renminbi- will become a traded currency to reduce the demand for dollars by traders who import items from China.

But it is the new foreign exchange control regime that has gotten people talking on radio. Under the policy, announced on the 5th of February, owners of foreign bank accounts will only receive their money in cedis. Even that it will not exceed $10,000 and they cannot issue cheques on those accounts except when they are travelling abroad. Secondly a foreign account holder cannot transfer tranfer funds from one account into another.

Forex bureaus cannot exchange curreny beyond $10,000 and they are to automate their operations by the end of April, 2013.

Some analysts say these measures are not akin to Ghana; Kenya, Ethiopia, China, South Africa and so on all have some of these forex control measures. However apart from traders who have complained, some economists have not been impressed either.

An economic consultant, Kwamina Essilfie Adjaye has said in an interview that "let us not do anything that will constrain the supply of foreign exchange, any measures to frustrate or constrain the inflow of foreign exchange accounts are likely to worsen the situation.

Toma Imirhe, an economist and Editor of Accra's "Business Finder" newspaper believes that the BOG does not have the institutional capacity to monitor and track the activities of forex bureaus and commercial banks on these measures.

Mr Kobla Nyaletey, the Head of Trading and Treasury Execution  Services at Barclays Bank Ghana welcomes the new forex policy and thinks the former regime was defective. He said "in my view, these directives are the right thing to do. The solutions to the cedi's problems are long term/structural and short term/current foreign exchange act induced. These new directives seek to remedy the errors in the foreign exchange regime...if vigously implemented".

 

Mr Nyaletey, whose bank is one of the biggest traders in foreign exchange in the country, further explained the inherent problems with the former forex regime.  "Across the [Ghanaian] banking system, the total foreign currency loans are about GHC5billion with total foreign currency deposits at about GHC2billion. The surplus of GHC3billion is invested outside by Ghanaian banks". In simple words, "Ghanaian individuals and companies use their cedis to buy dollars and we use those dollars to fund foreigners in the form of loans".

The structure of the economy cannot change over night. To rectify it in the medium to long term various solutions have been proposed.

We produce very little of the things we consume. As such we have a small manufacturing base. Prof Ayittey captures it by saying "we don't produce anything, [but] importing everything-even toothpicks...we will have to start producing things for ourselves..." Once we manufacture locally, we can export to earn valuable foreign exchange. So our long term growth must be export-driven to enable us gain foreign exchange and reduce our budget deficit position. Toma Imirhe believes that "we have to expand and export our Non-Traditional exports sector".

We also need to ban or limit certain imports. In Nigeria, the government some years ago banned the import of raw sugar, cement, fruit juices and so on in favour of local substitutes. This measure created room for loca entrepreneurs to fill the local demand created by the ban. Entrepreneurs like Aliko Dangote took advantage to get finance and build large cement plants to fill the void. Today he has become a big supplier and he now exports to Ghana and other African countries. 

When Ghana banned import of second hand refrigerators in 2013, German firm Bosch announced that they will set up an assembly plant to assemble refrigerators in Ghana.

We must also seek Foreign Direct Investment (FDI) into strategic sectors of the economy. The capital to establish manufacturing plants in the country cannot be generated internally alone. We must seek investors to invest in this regard.

Remittances from Ghanaians abroad is a key source of revenue for the economy. Essilfie Adjaye suggests "we should encourage non-resident Ghanaians to open foreign exchange accounts in our local banks". He further adds that FX bonds should be floated for them to invest their foreign exchange to be tapped by the banking sector.

Government itself must control its expenditure as it uses a lot of forex to import and pay for services. Prof Ayittey sums it up "government is a huge importer and its expenditures have spiralled out of control..."

Lastly, programs must be designed to seek more tourists who bring valuable dollars into the economy.

Global developments have led to an emerging market crisis. However, prudent long term economic policies to pursue an export-led growth is what will help to stabilise the local currency.