Overvalued cedi puts 1D1F at risk – Ken Thompson

Ken Thompson

The cedi’s overvaluation makes imports cheaper and exports uncompetitive, which puts a constraint on economic growth, and could actually stifle government’s own ‘One District, One Factory’ initiative, Managing Director of Dalex Finance Ken Thompson has said.

With an over-valued currency, even if these factories commence production, cheaper imports will make their goods uncompetitive locally; and even if they are exported, the gains will not be as much as expected, he told the B&FT.

“As long as the cedi is overvalued, all the proposed industries – including the ‘One District, One Factory’ initiative – will be at a potent risk of failure,” he said.

Using the Economist’s ‘Big Mac’ Index, Ken Thompson has been arguing that the true value of the local currency could be as low as GH¢13 to US$1 – which means the cedi is overvalued by as much as 139 percent.

The Big Mac Index is a light-hearted guide to whether currencies are at their ‘correct’ level. It is based on the theory of purchasing-power parity – the notion that global exchange rates should eventually adjust to make the price of identical basket of tradable goods the same in each country.

Despite the increment of investment in the industrial sector, which led to a growth of 17.7 percent in 2017 alone, a deeper look at the data shows that manufacturing’s growth has been dwindling while other industrial sectors are seeing strengthened growth.

In 2010, the manufacturing subsector grew by 10.2 percent, but that growth dwindled to a low of 2.2 percent, 2.7 percent, and 3.1 percent in 2015, 2016 and 2017 respectively – and is expected to record 4.6 percent in 2018.

Meanwhile, industry in general is expected to reach 9.4 percent on the back of robust growth in oil and gas, mining and quarrying.

“Our manufacturing sector is crumbling due to cheap imports. And the manufacturers resilient enough to continue producing are finding it difficult to market locally or export. Should the cedi be devalued, exporters will be the biggest beneficiaries – and they will be able to expand, create jobs and expand the economy,” Ken Thompson said.

“The cedi needs to be devalued, then we can confidently say the One District, One Factory programme can be sustained over the long-term. Why do you think a major economic player such as China intentionally devalued its currency? It was boosting exports,” he said.

Earlier this year, industrialists told the B&FT that tax waivers on imports and special projects – as well as waivers for the extractives sector- are undercutting them and making the operating environment a lot tougher for them.

Besides, they argue government – which is pushing the establishment of a factory in every district in the country – is shooting itself in the foot by continuously granting tax waivers to importers who, they claim, are also engaged in under-invoicing or under-declaration of their goods.

“The One District, One Factory is too important a programme to be put at risk of failure. We hope that the relevant authorities – such as the programme’s secretariat, the Ministry of Trade and Industry, Bank of Ghana and Ministry of Finance – will see the challenges ahead and address them before it becomes too late,” Mr. Thompson said.