The Cedi is not overvalued: not in theory and not in fact. Be not deceived


I have read the respectable Ken Thompson’s seminal public presentation that the cedi is overvalued hence it be “devalued” in order to support the ruling government’s policy intervention of 1 District 1 Factory. The media has elevated this dialogue in a rather one-sided manner and may deepen the impression that the assertion is a truism.

I issue a sharp rebuttal that it cannot be true at all that the cedi is overvalued at this point in our economic history. Indeed, the cedi does not have the rigorous ‘macroeconomic anchor’ as of now let alone be overvalued.

The suggestion that the cedi or any currency for that matter is overvalued gives an indication of the idea that there’s an ‘ideal’ exchange rate equilibrium point for the measurement of whether a currency is over or undervalued. This is only ‘utopian’ for there’s no evidence of practical currency equilibrium where everyone is happy.

Investopedia for instance contend that “it is quite common to hear people claim that a country’s exchange rate is overvalued or undervalued. … The person might mean the exchange rate is overvalued with respect to purchasing power parity (PPP), or it he may mean the exchange rate is overvalued relative to the rate presumed needed to balance the current account”. Ken’s essay seems to hinge on the purchasing power parity side of the equation, which is what the Economist’s Big Mac index measure anyway.

Yes, in monetary finance discourse, perceived higher exchange rate directly leads to decrease export revenues and lower exchange rates generate increased export sales. The Chinese appear to have seen this financial secret and have exploited it to its optimum. No wonder many republican presidential aspirants in this decade alone have called China “currency manipulator”.

The Chinese Rumimbi (Yuan), is officially low by historical levels and the Communist Party sternly intervenes regularly in the exchange market to maintain a lower currency with stronger arms with the intention of boosting exports and stimulating economic activities. This policy intervention has worked beyond doubt for China with a big but….China has no immediate productivity bottlenecks like Ghana so deliberate devaluation of the currency is good for sales.

In the 1970s, the Busia led administration officially devalued the Ghanaian cedi intended to spur exports and correct the balance of payment deficit. That intervention failed abysmally, and was one of the factors which motivated the late General Acheampong’s coup. It failed because; Ghana had productivity deficiencies and could not take advantage of the devaluation.

Cocoa production couldn’t be expanded immediately, the industrial economy didn’t respond and on record other nations, Ghana’s biggest rivals in the export sphere also devalued their currencies. The net loss was huge to Ghana.

In 2004, the JA Kufour administration undertook a redenomination exercise for obvious reasons. The cedi had become valueless technically, and one needed a lot of cedis for just a dollar. Exports didn’t increase at all on the basis that the cedi was ‘loosely’ undervalued. Economic activities stagnated before president Rawlings left office.

The relevance of our exchange rate history or currency trend is important because it opens up vigorous ideas and fact check whether devaluation is what is needed now in Ghana or whether the economy requires some pre-imminent stabilization policies first. I argue that the cedi is not overvalued and has no need at this point for the politics of “devaluation”.

In any case, Ghana operates a flexible exchange rate regime and is under a set of IMF-sponsored fiscal stabilization programs. How is she going to devalue her currency without approval from the sponsors? Those are weightier matters we ought to remind our good selves.

Beyond that, if the cedi is devalued today, the 1 District 1 Factory program is stillborn, Ghana is weak on the annual global competitive index; inflation is relatively high, interest rate is still double digits, our infrastructural index is so poor, and many structural difficulties abound. Until we can ease these productivity hurdles, and deal with reasonable amount of the structural difficulties, no matter what degree of devaluation we pursue, Ghana won’t profit.

And, so long as you have huge macroeconomic imbalances, rely massively on unprocessed exports for revenues, sell crude oil in its rawness while TOR (Tema Oil Refinery) remains underutilized, and many others, the idea that the cedi is overvalued and requires devaluation of some sort may be a long way away, for it’s not plausible and wise in theory and in fact to devalue as of yet.

The writer is a management strategist and investment banker. Qualifications: with a Bcom (UCC), MBA (Wales, UK) and Part Doctoral (Wits, SA -differed), his areas of interest include finance & banking sector, energy, monetary integration, trade, regional blocks, multilateral organizations, strategy, infrastructural development and industrialization and his passion is servant leadership that transforms lives and society.

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