Dr. Kwabena Duffuor

Last week the cedi hit an 18-year low against the US Dollar.  This article is to inform readers of the key reasons why this has been the case and to offer solutions as to halting the cedi’s decline.

There have been many debates on radio and TV as to why the cedi has fallen sharply over the past few months.

Many of the commentators who have appeared have blamed everything under the sun from the so-called global financial crisis through to mis-management of the economy.

What these commentators are not telling Ghanaians, maybe they don’t know, is that the real reason why the cedi is falling is down mainly to two things that they have been unable to articulate to the Ghanaian public.

The first reason why the cedi is falling is because of the serious balance of payments deficit that is facing the nation.

Briefly, the balance of payments is the difference between what Ghana imports and what it exports. Because of the “free market” policies that have been adopted by governments since the late 1980s Ghana is a net importer.

What this means in simple terms is that Ghana now imports everything under the sun, from toothpaste to tomato paste through to rice, luxury cars and crucially oil.

Oil is the main import expenditure that Ghana faces but before we tackle the oil issue, food for thought – Ghana used to be a rice producer but due to “free market” policies Ghana has abandoned its once thriving rice industry, in the process leaving thousands unemployed, and is now a chief importer of rice worth up to $US500 million a year in the process giving other people jobs and making thousands of Ghanaians unemployed – just imagine what a fraction of that money could do to the economy of Ghana if it was invested into the local rice industry.

Now oil – because Ghana contrary to what many Ghanaians have been conditioned to believe is not benefitting from its oil find, Ghana has to import billions of dollars worth of oil annually in order to support both commercial and domestic use.

Oil is a major chunk of the importation bill and because oil is priced in US$ it puts a huge strain on the value of the local currency.  Therefore unless as a nation we find innovative ways at reducing our dependency on oil, like harnessing coconut and palm oil, we will always have problems where this is concerned.

Ghana’s main exports that is, what it sells to the rest of the world are gold, timber, cocoa, bauxite and some agricultural products which as the twin result of relatively low commodity prices and low royalty payments means that Ghana receives very little in export earnings.

So since we import virtually everything that has to be paid in US dollars, it is having an enormous strain on the economy because Ghana has to buy US dollars with its cedi to pay the importer.

Therefore, unless we reduce significantly our balance of trade deficit that is currently in the tens of billions of US dollars, the cedi will continue to fall.

Reducing our import bill will also help the local economy because it will create self reliance by creating jobs at home for the ordinary Ghanaian in the case of producing our own rice rather than giving other people jobs by importing rice.

Perhaps the biggest reason why the cedi is falling, and this is not what a single commentator has said, is that as a country we DO NOT have any gold bars in reserves.

In economics it is common that when a country’s currency is under attack, the first thing that a country does to protect its currency is to use its gold reserves.

Just recently the British pound was at a 25-year low against the American dollar and as this was having a massive effect on British exports, which in effect would mean British jobs being at risk, the Bank of England decided to use some of its massive gold bar reserves in order to prop up the pound.

As a result of using their gold reserves we have seen in recent weeks that the British pound has gained some ground on the US currency and as the year goes you will see a continued strengthening of the British pound.

It is ironic and scandalous that Britain which does not have a single gold mine strangely enough has more gold reserves than Ghana which is the second biggest producer of gold in Africa and one of the world’s biggest gold producers – food for thought!!!!

In the case of Ghana, again as a result of “free market” policies adopted by the previous NDC government and the last NPP administration, Ghana virtually sold off all its gold reserves to foreign multi-national gold mining companies.

As a result of this ill-advised policy Ghana virtually has NO gold reserves. This lack of Gold reserves is the chief reason why the Cedi is in free fall because gold is used to strengthen a country’s currency in difficult periods such as what the Cedi is currently facing.

In the absence of gold bar reserves to prop up the Cedi, the government has taken steps such as buying up to one billion US dollars to prop up the cedi which in itself will not help the matter.

So this is the reality that is facing the Ghanaian economy which is why the cedi is in free fall.

Unless as a nation we curve our importation of foreign goods and take active steps to acquire substantive gold reserves, in essence negotiate with greedy western multi-national mining companies, a decent royalty rate for our gold, our currency will always be at the mercy of currency speculators in the money markets and if nothing drastic happens it will not be too long that it will be 2 cedis to the US Dollar.


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