By: Isaac Mensah
The depreciation of the Ghanaian Cedi has been a historical economic problem over decades now. Past governments have tried to provide solution to this economic nightmare as the Cedi in each given fiscal year depreciate against the major trading currencies like the US dollar, Euro, Pound Sterling, CFA and the Swiss Franc affecting businesses and economic activities in the country. To get a sense of magnitudes; the Bank of Ghana in 2002 reported that the cedi depreciated by 15.4% in dollar terms during the year, against an annual inflation of some 15.2%. Again in 2008, the cedi depreciated against the three core currencies- US dollar by 15.8%, Euro by 14.0% and the pound sterling by 6.2% from January to September, this was surely a problem as relatively depreciation in the previous year were only 5.0%, 6.9% and 17.5% respectively. The situation became more persistent and consistent over the years that it was reasonable for the expectation of stakeholders. For example in 2010 speculations in the media generated so much tension that the governor of the Bank of Ghana Dr. Kofi Wampah stated and I quote ?We have a policy that aims at broad stability in the exchange rate. We don?t know the basis of the current projections in the media but we will still continue to ensure that the tight monetary policies we have put in place since the second quarter would continue.? Even in the light of his statement the cedi depreciated by 0.3% against the US dollars by November 2010. The policy as stated by the governor was indeed a stabilizer as the fall was a great improvement of the previous year fall of 11.9% in the first quarter. In 2012, the Ghana cedi against the US dollar showed a cumulative depreciation of 18% between January and August 2012. However, the implementation of more rigorous policy measures by the Central Bank resulted in a slowdown of the monthly depreciation from 5.9% in May to 3.4% in June 0.6% in July and further to 0.3% in August 2012. Currently, the cedi has already seen 7.8% depreciation in January after going down by 14.6% last year. Some analyst have predicted that the cedi would depreciate further in the coming months and would end this year recording its biggest drop in value against the dollar since the redenomination in 2007.
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Reactions over the years
Professor Stephen Adei, the former rector of Ghana Institute of Management and Public Administration (GIMPA) on his presentation during the opening of the Ghana Institute of Surveyors? 9th Week and 45th Annual General Meeting ?themed; ?Good Governance For Effective Development? remarked bad leadership behavior as undermining the economy. He believes that a change in leadership behavior and the adoption of a national approach to governance are pertinent for faster economic transformation. This and other valuable proposals have been made over the years by economists, research groups, trade unions, politicians and other stakeholders with the view of providing long standing solution to the cedi depreciation. The worrying trend is that government regimes over the years only provide short term stabilizing solution to the cedi depreciation through monetary policy restructuring. Again over-politicization of matters of national interest leave the currency depreciation among other pertinent economic problems unsolved. Currency fluctuation is an open economy phenomena and poses a challenge to all economies but with a proper combination of both monetary and fiscal policies with functional public institutions the depreciation of the cedi can be stabilize with the major operating currencies thereby smoothing business operations, generating public confidence in the cedi and achieving economic growth.
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Implications
It is quite evident that short term monetary policy restructuring has not been the best response to the historical depreciation of the cedi. A possible policy mix could be the solution to this long standing economic menace of currency depreciation, but the question one may ask is how? Moody’s Investors Service in its report issued in February this year says that the country?s rating of B1, negative outlook, is constrained by the ongoing weakness in the government’s fiscal position due to ongoing spending overruns on the public-sector wage bill (Single Spine Salary Structure), high interest costs, and the clearance of payment arrears. Other factors weighing on Ghana’s credit worthiness include the government’s deteriorating debt trend; debt-to-GDP ratio is estimated to reach 51.2% of GDP by end of 2014, and the intensification of domestic financing pressures. In the light of a growing fiscal debt, the country is faced with other challenges like overdependence on imported goods which is aggravating the cedi depreciation, collapsing local industries, weakening consumers and investors confidence and the worsening plague of unemployment and inflation. For example in 2013 Ghana failed to meet its inflation target, inflation stood at 11.5% ?relative to the ?9.0% target set by the Bank of Ghana and the West Africa Monetary Institute to be achieved by member states of the zone towards convergence. Over dependence on imported goods couple with the free fall of the cedi as many may called have impacted heavily on the level of prices as inflation stood at 13.80% (according to Bank of Ghana) for the first month this year. Major contributing factors could be pricing inconsistency and challenges importers face (in terms of getting US dollars) in procuring raw materials and finished goods into the country. Most importers turn to inflate their prices of goods and services to compensate for the high cost of their import, this means that there are high possibilities of price changes as more and more goods are imported into the country. High inflation is certainly not the only price to pay as unemployment is on the ascendency. Most local businesses are fading out of business because of the stiff competition they face from other import dominated companies and the situation is worsening because of the government inability to protect these companies. The inability of government regimes to create enough jobs, the loss of jobs due to import activities coupled with high proliferation of private universities with students graduating every half of the year might be the major cause of unemployment in the country. According to 2013 MDG report some 46% of Africa?s workers earn less than $1.25 per day working in vulnerable jobs with low wages and this is true because high unemployment affect labour-market conditions that impact on workers and their real wage. Lack of consumers and investors confidence in the cedi cannot be over emphasized as the Bank of Ghana in years of major depreciation had to add to already existing policies measure to prevent businesses from dollarizing their business operations for fear of further depreciation. Despite efforts by the central Bank to salvage the situation this year, trading activities of some businesses make it practically impossible. For example in February this year, officers from the EOCO had to visit the business site of some hostels, restaurants, shopping malls, universities, tourist centres etc. just to ensure that their prices are not quoted in foreign currency and the directive set by the central bank in stabilizing the cedi are obeyed. This and other compiling issues suggest that there are more untold stories associated with the cedi depreciation which really affect the economy in the long run and its incumbent not only on the government of the day but all policy makers to help provide a long lasting solution to this economic nightmare.
Possible solution to the deadlock
According to the Marshall-Lerner condition, real depreciation leads to an increase in net exports. Thus for the trade balance to improve following a depreciation, exports must increase enough and imports must decrease enough to compensate for the increase in the price of imported goods. The situation is rather the reverse in Ghana; even in the face of high cedi depreciation import is on the rise. The Bank of Ghana in its 2012 annual report stated that trade balance worsened from a deficit of US$3,052.3 million in 2011 to US$4,220.4 million in 2012. Why is trade deficit increasing yearly even in the light of currency depreciation? The inability of successive governments to promote exports and provide sustained demand stimulus for made in Ghana goods could be the principal causes. Over reliance on the export of agriculture products with no value-added has accounted for some loss in terms of potential revenues as these products exported at ?equilibrium prices? are later imported into the country at relatively high prices. The country?s inability to embrace modern technology and to incorporate technological changes into its agricultural production setting may have accounted for the raw state of the sector as it is today. According to Robert Solow a noble price winner in 1987, technological progress is a sure way to achieve economic growth. If we think of output as the set of underlying services provided by the goods produced in the economy, we can think of technological progress as leading to increases in output for given amount of capital and labour. For example China has imported the technology of more technologically advanced countries to pace its recent economic growth. It has for example encouraged the development of joint venture between Chinese firms and foreign firms.? What then is Ghana?s stake? Since imitation is more likely to be easier than innovation, it is better to copy and adapt the new processes and products developed in more advance economies to achieve growth in all sectors, but the question here is, if imitation is so easy, why is it that so many countries do not seem to be able to do the same and grow? Technology is more than just set of blueprints. How efficiently these blueprints can be used and how productive an economy is depend on its institutions and on the quality of its governance. ?Thus until the government achieve added-value to agricultural productions through modern technology, control imports and generate sustained demand stimulus for locally produced goods both in the local and international markets with occasional monetary policy adjustments, trade deficit and currency depreciation might continue to be an economic riddle for the country.
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References;
- Blanchard, O., & Johnson, D., 2011. Macroeconomics Global Edition. 6th ed. London. Pearson Press.
- Jochumzen, P., 2010. Essentials of Macroeconomics. 1st Edition. Bookboon.com.
- Bank of Ghana, 2012. Annual Report. ISSN: 0855-0972, Accra.
- Bank of Ghana, 2008. Monetary Policy Committee-Press Release (October). Accra.
- Bank of Ghana, 2010. Monetary Policy Committee-Press Release (April). Accra.
- Bank of Ghana, 2012. Monetary Policy Committee-Press Release (September). Accra.
- Bank of Ghana, 2014. Monetary Policy Committee-Press Release (Feb). Accra.
- Moody?s Investors Services., 2014. Ghana?s creditworthiness constrained by weak fiscal position, but supported by growth economy?s potential. [Online] Moody?s Investors Services. Available at: < https://www.moodys.com/research/Moodys-Ghanas-creditworthiness-constrained-by-weak-fiscal-position-but-supported–PR_292821> [Accessed 22February 2014].
- Reckless leadership ruining Ghana- Prof Adei. [Online] Available at:????????????????????????????????? ????????????< http://www.myjoyonline.com/business/2014/February-21st/reckless-leadership-ruining-ghana-prof-adei.php>[Accessed 21February 2014].
- EOCO forms task force to implement BoG?s directives. [Online] Available at:???????????????????????????????????? < http://www.ghanaweb.com/GhanaHomePage/business/artikel.php?ID=301381#>[Accessed 21 February 2014].
