Economic stability and the cedi’s plight

Over the last few weeks, the steady decline of Ghana’s national currency, the cedi, against major foreign currencies has given cause for worry over its long-term impact on economic stability and growth.

The plight of the cedi made headlines in mid-February 2018, when President Nana Addo Dankwa Akufo-Addo delivered his State of the Nation Address (SONA).

Opposition Members of Parliament accused the president of failing to mention depreciation of the cedi in the SONA, which to them indicated government’s shortage of ideas for resuscitating the national currency. Other stakeholders, like the Ghana Union of Traders Association (GUTA) also expressed concern over the plight of the cedi, and called for action by government to reverse the trend.

In response, the majority of MPs and government officials have been pointing to government’s performance in fiscal policy and macroeconomic performance in agriculture, in particular.

During the launching of a Ceramics factory in Accra last week, President Akufo-Addo admitted that there is indeed pressure on the cedi, and assured Ghanaians that there are initiatives underway to curb the cedi’s decline against the United States dollar.  Perhaps the president’s response stems from his silence on the cedi during the SONA.

Definitely, the president and his Cabinet are worried over the sliding cedi. Equally worried are captains of industry and indigenous businesses, and in fact all well-meaning Ghanaians who in one way or another are feeling the impact of regular price changes. In all, issues around the national currency border on sovereignty, peace and political and economic stability – for which every Ghana has cause to worry.

Exchange rate

In November 2018, the plight of the cedi (Ghana’s currency) was one of the highlights in the 2019 Budget statement of Ghana, which was presented by Finance Minister Mr. Ken Ofori-Atta.

As at May 2018, there were indications that the cedi was appreciating against the US dollar, but by September 2018 it had depreciated by 7.57 percent – largely on account of external pressures, including the strengthening of the US dollar, the US-China trade war, and the US Fed policy rate hikes. These developments resulted in tighter financing conditions and capital flow reversals in some emerging markets and frontier economies, including Ghana. Domestic demand pressures for foreign exchange, as well as speculative trading were also contributory factors, says the Finance Minister.

According to the Finance Minister, the cedi however stabilised in the third quarter, benefitting from positive sentiments on the market as a result of the cocoa syndicated loan inflow. Arguably, our country’s over-reliance on traditional exports like cocoa for foreign exchange has undermined all efforts to put the economy on a solid foundation for accelerated growth. Past responses, in a bid to curb the cedi’s decline, followed the same pattern of pumping more dollars into the economy; which only went into financing imports and production and exports. Over the years, banks having promoting import-financing, rather than production.

Ecowas protocol

Perhaps one negative trend affecting the cedi’s value is the Ecowas policy on free movement of people, goods and services. In practice, this is a protocol that many Ecowas countries are not committed to – except Ghana, which has opened its borders to all kinds of illegal trade practices. One thing our policymakers and implementers have failed to address is the inherent free movement of money across borders.

As people move freely across our porous borders, they have unimpeded access to our foreign exchange (dollars, euros and pounds). They do not buy and sell anything that adds value to our economy, they freely carry their cash across our borders and go straight to our banks, forex bureaux or the thriving black market to buy foreign currencies and take them back to their countries.

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Perhaps Ghana is the only country where people can freely trade in foreign currency without looking over their shoulders. Nigeriens, Nigerians, Burkinabes, Malians, Togolese and other African nationals are making huge gains out of scarce foreign exchange to the economy’s detriment.

The commanding presence of Nigerian banks is probably one of the reasons there appears to be so much dollar-flight out of Ghana. Are there regulations as to how many dollars Nigerian banks can transfer outside the country? Sadly, over the years there has been systemic institutional failure to address the issue, due to vested interests.

Another area to address if the cedi is to rebound and maintain its resilience is the pricing of goods and services in dollars. This is not done in any serious economy. I have been to South Africa several times, and at no point was I allowed to use dollars to purchase any goods and services. On arrival in that country, one is under obligation to change all foreign currencies into Rand before embarking on any transactions. Why, Ghana?

Industrialisation

For once, Ghana must be serious with rapid industrialisation if the cedi is to regain its respect. Over the years, we have paid lip-service to manufacturing and industrialisation, only to record trade deficits year-after-year. No country can stabilise its currency when it imports virtually everything…including toothpicks!

If this trend continues, why would there not be pressure on the cedi? There must be an intentional and purposeful national policy to prop-up, and where necessary protect, some essential industries from unbridled ingress of foreign goods. This is called import substitution.

Import substitution is a trade policy aimed at promoting economic growth by restricting imports which compete with domestic products in developing countries.  The import substitution approach replaces externally produced goods and services with locally produced ones. Let no one tell me that import substitution is an outmoded economic policy.

In the past many countries, including emerging economies like South Korea and China, ignored primary-exports-led growth strategies in favour of import substitution (IS) development strategies. These policies seek to promote rapid industrialisation and, therefore, development by erecting high barriers to foreign goods to encourage domestic production. The package often consists of a broad range of control, restriction and prohibitions – such as import quotas and high tariffs on imports.

Like some developed countries did in the past, import substitution is meant   to ‘protect’ domestic industries so that they can gain comparative advantage and substitute domestic goods for formerly imported goods. This is based on the belief that economic growth can be accelerated by actively directing economic activity away from importing toward manufacturing and exports.

As stated earlier, our policymakers need to be serious with industrialisation, as Ghana is overly-dependent on foreign goods. A weak currency is the obvious result when we develop our tastes on foreign goods. How many of us who are complaining about the weak cedi consume local rice?

Adding value

It is refreshing, however, to note that government of Ghana in the 2019 Budget statement has outlined plans to promote industrialisation through adding value to our primary products. The intention to support development of agro-processing mainly through the One District, One Factory programme – taking advantage of the increased agricultural production engendered by the Planting for Food and Agriculture Programme – is worth every effort and investment.

In fact, the section of the budget on industrialisation is so elaborate that if government is able to implement even half of the policies outlined, the economy will be the better for it.  For instance, leveraging Ghana’s huge bauxite resources to develop a comprehensive aluminium industry, in addition to developing the Petro-chemicals industry could draw more foreign exchange than expected.

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Also, the decision to pursue industrialisation along a 10-point plan that prioritises key industrial sub-sectors for investment is prudent. These include: automotive and vehicle assembly; pharmaceuticals; garments and textiles; vegetable oils and fats; industrial starch; industrial chemicals including fertiliser; iron and steel. Some of these interventions are long-term in nature, but they are worth pursuing.

Building industries often starts with laying a strong foundation through critical infrastructure investments and industrial development. Thus, the One District, One Factory (1D1F) programme and stimulus packages for distressed industrial businesses should also be pursued vigorously.

Agricultural Modernisation

Agriculture and industrialisation are two sides of the same coin, often reinforcing each other. In other words, there can never be rapid industrialisation without modernising agriculture. Blueprint economic successes in Mauritius, Malaysia, China, Thailand etc. suggest that a combination of productivity in agriculture and industrialisation positively impacted the lives of millions of their people, and it can be applied for Ghanaians. If we get Ghanaians consuming and processing most of what we produce, it has a long-term positive effect on employment creation and less pressure on the cedi, as imports of food are reduced.

It is heartwarming to learn that as a result of interventions in the sector, agriculture witnessed a growth rate of 8.4 percent in 2017. This was after almost a decade of poor sector performance with an average growth rate of 3.4 percent. If it turns out that this growth includes the cocoa sub-sector, which over the years has shored-up agricultural growth figures, it will be window-dressing as usual.

The reality is that Ghana still imports many food crops like maize and rice.  While there may have been a reduction in maize imports, Ghana still largely imports rice to feed its population. It is estimated that every year Ghana spends US$1.2billion on rice imports. If only Ghana could cut the rice imports by half, government could save US$600million in foreign exchange every year. This alone could reduce the pressure on the cedi.

Besides, Ghana is known as one of the leading importers of tinned tomatoes. Between 2006 and 2008, it was estimated that Ghana was the second-biggest importer of tinned tomatoes – only second to Germany. We also import onions and fresh tomatoes from Burkina Faso and Niger, two arid countries, when Ghana is naturally well-endowed to produce these essential ingredients for local consumption.

It is the same with poultry. Ghanaians consume more foreign chicken than locally produced ones, because our local poultry industry simply cannot compete with the cheap and subsidised chicken imported from Europe and the US. Government needs to give equal attention to local poultry as a means of reducing the pressure on the cedi. Thus, plans to launch the livestock model of Planting for Food and Jobs called ‘Rearing for Food and Jobs’ (RFJ), with the objective of increasing the production of selected livestock – especially poultry, is equally prudent.

We have everything within our means, as a country to reverse the declining trend of the cedi in the medium- to long-term. The polices are good on paper: but, as usual, the problem remains our collective commitment to implementing interventions. In short, the plight of the cedi is partly self-inflicted by Ghanaians, even though we cannot downplay the importance of external factors.

References

Bruton H. (1989) Import Substitution. Handbook of Development Economics

II: 1601-1644

Edwards S. (1993) Openness, Trade Liberalization, and Growth in Developing Countries.

Government of Ghana (2019) The Budget Statement of Ghana. Ministry of Finance

(***The writer is a Development and Communications Management Specialist and a Social Justice Advocate.  All views expressed in this article are my personal views and do not represent those of any organisation(s). (Email: safoamos@gmail.com.

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