… Any lessons from Ghana’s 2007 exercise?
A few weeks ago I arrived in Sierra Leone (Salone), and while at the Airport I was asked to undertake another COVID-19 test. To my surprise, while the COVID test was US$80, I was asked to pay the equivalent of SLL800,000. Your guess may be as good as mine on what was already going through my mind.
I secretly spoke to myself that before leaving the country I was going to taste the status of being a ‘billionaire’. Maybe I was dreaming in daylight. Why? Assuming that SLL800, 000 was in Ghanaian local currency (i.e. GH¢800,000), that could buy me a mansion at Airport Hills, East Legon in Accra; a family trip to San Francisco or the Maldives islands across the Indian Ocean.
I wasn’t too surprised when the Governor of the Central Bank of Sierra Leone (BSL), Prof. Kelfala Murana Kallon, on 11th August 2021 issued a circular pursuant to Section 30 of the Bank of Sierra Leone Act 2019 as follows:
- The country`s legal tender, the Leone (Prefixed ‘Le’) shall be redenominated by the removal of the three Last Zeros (0s) from the face value of the said legal tender.
- The current legal tender shall continue to remain in force until such time and date that the Bank of Sierra Leone shall by public notice designate.
The breaking news from the Governor received mixed reactions from the good people of Salone. The citizens just couldn’t understand how they will wake up one fine morning only to see their bank account balances and currencies being reduced by some three zeros.
In fact, in an article published on the 17th August 2021 (Vol.10, p7) edition of the Avy Newspaper, an Economist – Jacob Macaulay – described the process of redenomination as counterproductive and said: ‘’Those folks at the central bank of Sierra Leone need to go back to school and study real financial economics theory, not the voodoo economics they are practicing’’. According to him, the BSL is only arbitrarily appreciating the currency without any appreciable assets to back it up, and no explorable resources/assets to improve the balance of payments and its purchasing power.
As anticipated, there is going be a lot of misconceptions, myths around this whole exercise, and the BSL has got a lot to do to manage expectations and calm down the nerves of the citizenry. In this piece, I try to delve into the entire redenomination exercise carried out in Ghana in 2007 and see if there are any best practices to replicate.
Redenomination, what is it?
Modern history has many examples of redenomination, most of which occurred in post-war periods or in developing or underdeveloped countries. Redenomination is basically an auxiliary tool that accompanies a decrease in the money supply and seeks to eliminate the effects of hyperinflation.
It also means a proportional substitution of national currency bills for bills with lower denominations. Simply put, extra zeros are removed. It doesn’t affect the intrinsic value of the currency – the value remains the same
Ghana as a case study
There are several scholarly articles published on Ghana`s currency redenomination some 14 years (July 2007) ago, and there have been lessons learnt on this journey – both from Ghana’s experience and the experiences in other countries.
For example, in August 2018 Venezuela held a major redenomination and took 5 zeros from their national currency. 500 bolivars became the largest bill, but this did not change the situation. Within a year, this bill could buy only one egg, and the minimum wage of 40,000 bolivars as much as two kilogrammes of meat. Zambia recently redenominated its currency, and the rest in history. Countries don’t just redenominate overnight.
There are many reasons and guided motivations why a country may decide to redenominate its currency – ranging from credibility and identity to domestic and international politics (International Monetary Fund, 2003; Mosley, 2005; Martinez, 2007).
As at 2007, the Bank of Ghana (BoG) press-release on redenomination of the cedi (Daily graphic, July 2007) stated the following as reasons that necessitated the redenomination:
- Simplification of accounting records and the ease of expressing monetary values
- Reintroduction of the culture of using coins, which would reduce pressure on bank notes
- Significant reduction in transaction volumes
- Reduction in the cost of carrying large volumes of banknotes and its associated risks
- Efficiency in payment systems such as the use of ATMs
- Facilitating the introduction of using vending machines and car parking meters
- Promoting tourist expenditures
- Significant cost savings to the BoG in the cost of printing banknotes, the Ghana cedi note (Bank of Ghana, 2007).
Given the redenomination sought to deal with inefficiencies associated with the old currency –again, the inconvenience and risk involved in carrying loads of currency for transaction purposes, the deadweight burden of the current cedi denomination, the increasing difficulties in maintaining book-keeping and statistical records, incompatibility with data processing software, and the strain on the payments system – particularly the ATM in an economy – these are some of the reasons for the redenomination (Bank of Ghana, 2007).
Various scholarly and empirical analyses have suggested that redenominations have been very successful in an environment of macroeconomic stability. The declining inflation, stable exchange rate, fiscal prudence and well-anchored expectations of policy credibility call for the redenomination by stripping the prices and values of numbers that the force of inflation has embedded in them, putting a hard-wire around all these economic changes and measures, and lifting the dead-weight burden the existing note regime places on the economy (Addison 2007).
Another reason is that the redenomination has freed the economy to do business in the most efficient way, based on the cedi as a means of exchange; and with continued commitment to prudent and disciplined economic policies, it will serve as a store of value for all both within and outside the banking system (Daily Graphic, July 2007).
According to the Bank of Ghana in 2007, factors such as expansion of the payment system have not only made the currency of the country unattractive but also diminished its reliability as a store of value – which needs reform.
The bank then took advantage of the then present stable macroeconomic setting, which was reflected in declining inflation rates, relative price stability, a stronger growth in Gross Domestic Product, stable exchange rates, and an increase in Gross International Reserves to enforce the redenomination.
The redenomination of Ghanaian currency has helped, in a way, to reduce the increasing rate of pick-pocketing and armed-robbery cases in the country. Ghana joined the League of Nations whose currencies are well-recognised and highly valued in the world (Bank of Ghana, 2007).
What has been the learning curve?
Undoubtedly, redenomination doesn’t occur without its associated challenges; and this is something BSL must carefully deal with to ensure success for the programme. Redenomination is not a challenge-free policy, because in every policy there is a price to pay to make it successful. Redenomination comes with its challenges – which include issues associated with rescaling, cost involved in disposing of the old notes and coins, cost associated with citizenry education, enlightenment, and advertisement of the change to citizens, etc. (Bank of Ghana, 2007).
There are challenges that came with the redenomination exercise in Ghana, notwithstanding the fact that the market women also came out with some benefits of the redenomination; and this is something the BSL must deal with.
Contrary to the belief that redenomination is a simple exercise, it is believed that the exercise poses significant challenges to businesses because business organisations bear enormous cost consequences.
A significant part of the cost will be one-off, but there are other costs which will continue to be incurred until the prevailing currency is completely withdrawn as per a PricewaterhouseCooper’s report published in 2007.
Currently in Salone, it is estimated that in 2018 the adult literacy rate was 43.2%. The adult literacy rate of Sierra Leone increased from 34.8% in 2004 to 43.2% in 2018, growing at an average annual rate of 13.18%. This requires even more education to be done so as to ensure there is clarity in the process without ambiguity.
The costs associated with this exercise may include:
- Upgrade or reconfiguration of business and accounting software
- Organisational staff-training
- Costs associated with adjustments in business policies and practices
- Cost of printing new stationery (invoices, receipt books, cheque books, etc.)
- Cost associated with ensuring timely accurate data collection in both currencies
In the case of Ghana, a majority of the market women faced challenges in using the new currency when it was first introduced. One of such major challenges was exchanging the GH¢50 (highest note at that time) into smaller units, particularly when customers bought goods from them. Customers as well as the market women sometimes rejected the GH¢50 as a medium of exchange for the fear of loss or receiving counterfeit notes.
The market women experienced some difficulties with the lowest denomination, which is the GHp1 – because customers usually refuse to accept it for a change due to its small size. As BSL decides to print new currency, there is a need to take into consideration the highest currency to print.
Another challenge was the reduced circulation of coins in the economy, making it difficult to buy items that have lower prices and are expressed in those terms. Finally, the market women had a serious problem differentiating counterfeit notes from the real notes. BSL must make conscious efforts to clearly distinguish between the old and new currency to meet the market women’s demands.
Though there may have been valid arguments against Ghana`s redenomination exercise at that time, it is commendable to say there has been significant improvement in the macroeconomic indicators and variables; such Gross Domestic Product (GDP), Economic growth, Inflation, Balance of Trade (BOP), foreign direct investment (FDI) and Globalisation index.
The currency redenomination exercise has helped the Ghanaian economy, by all standards. Notwithstanding the immediate issues associated with the exercise and those raised by a cross-section of some citizens, in the long run if managed properly Salone stands the chance of reaping the benefits thereof.
However, though currency redenomination is able to curb inflation and help a country recover from certain losses and get back to its feet, it must be known that this exercise only curbs the problem but does not uproot it. It is therefore recommended Sierra Leone’s government continues to initiate policies which will help boost the economy’s production and increase exports, as well as policies that will boost local production and reduce the importation of locally available products. This will subsequently reflect in a favourable and positive balance of trade.
Thank you for reading.
Disclaimer: The views expressed are personal views and doesn’t represent that of the media house or institution the writer works.
Credit: https://www.researchgate.net/publication/338622869 Miriam Amoako
About the writer
The writer is a Finance and Investment professional, Country Head of Client Coverage with an International Bank in Sierra Leone. Contact: [email protected], Cell: +232 33240467