A currency’s strength and or stability is influenced to a large extent by the country’s competitiveness. By this I am referring to its ability to attract foreign direct investment. Also, the investment must be going into the more efficient and accountable private sector and not necessarily government to government enterprises.
Again, the value of your exports is key because receipts from your exports go to shore up your reserves and reduce the pressure on your currency. One must be careful to differentiate between a large foreign reserve and a strong currency, though. The quality of governance also affects the value of a currency. Where a government is seen to pursue policies that are overly welfarist which translates into higher taxes and subsidies on certain vital products such as fuel, that can also affect investor confidence and ultimately, the stability of the currency.
In the specific case of Ghana and the cedi’s current troubles, it must first be pointed out that we have a political cycle in which the cedi’s value is adversely affected in election years. This is as a result of skepticism about the government’s ability to maintain fiscal discipline in an election year as well as uncertainty about the outcome of the election itself. This may lead people to store larger amounts of money in what they perceive as safer currencies and which may be rightly or wrongly, described as speculation. However, it is also true that the current currency difficulties are different from previous ones – this is worse. However there are some explanations for this.
One is that our GDP has more than doubled and because we essentially don’t have an export-leaning economy, there has to be a lot of imports to accompany that growth. The construction sector for instance, which is experiencing that growth relies heavily on cement, the components of which are largely – around 80% – imported. Naturally, this increases the pressure on the local currency.
Increased trade between Ghana and China can also be singled out. An associate of mine gives an example that if we have an estimated 200 people on three separate flights leaving Ghana for China and the Far East with each person carrying an average of USD 10,000 in cash, we obviously have an untenable amount of hard currency leaving the country on an almost daily basis.
Again, once you become an oil producing country, there is increased interest in your country and you have people eager to invest in your country. Ordinarily, this leads to currency appreciation and may make its exports lose value. Unfortunately for Ghana, the hype about an oil boom has not materialized as we have seen estimated daily production of 120,000 barrels drop to 75,000 since production possibly rising to 90,000 by the end of 2012. This has also adversely affected investor confidence and so we do not have the sort of inflows that we should have been having at this stage.
The overriding factor though, is that the Bank of Ghana was unable to accurately predict all of these and take the necessary steps to address the situation. The Bank’s duty is to closely monitor the currency and inject some money into the system or mop up excess liquidity depending on the situation. At the moment, the Bank has taken steps to inject some money into the system but it might be too little too late.
The other thing is that the bank is somewhat hampered by the not entirely necessary requirement to keep a certain amount of bank cash in reserves – usually set at a political bench mark of three months or so for import cover. It would seem as though the Bank was so jealously guarding this and was caught off guard by the currency problem. In the event, the reserve has shrunk anyway because it has had to inject some money into the system but not enough to keep pace with the situation.
In the long term, I would suggest that we consider making Ghana free port. We should be first be clear that a free port will not mean that there will be no charges at all. What this means rather is that we will have our neighbours in the landlocked countries coming here and bringing in hard cash to pay us for the services we will be providing. Again, this will also reduce the cost of production in the country particularly because we import a lot of materials for production.
We should also look at our trade pattern. We need an industrial policy that looks at the cost of local production with the aim to reducing it considerably.
We should also look at processing some of our crude here in Ghana. If we are able to do that, we can make a huge dent in our import bill because petrol imports account for a great percentage of it.
One other thing the Bank can do is to relax its rules that require banks to keep a certain percentage of their reserves in foreign exchange. This will free up the foreign currency in the system and reduce the pressure on the cedi.
I think the government of Ghana and the Bank are doing what they can, legally, to give the various participants the leeway to put some money in the system. I don’t think, however, that the USD 1 billion that the Bank has put into the system so far will be enough. Perhaps, it should think of at least doubling the amount.
We should also look to increase the interest rate in the domestic bond market. Government should increase its bills on the domestic market and at an increased rate because that is the only way to mop up any excess cedis in the system. Once we have these financial instruments on the market and they are attractive to investors – domestic and foreign – then they will show interest in buying them.
My suspicion is that the Bank will increase the forex on the market by pursuing an aggressive marketing programme to push some of its financial instruments and perhaps impose a tax on all forex accounts. We should then see some respite by September.
The writer is the Executive Director of Imani Centre for Policy and Education and the Editor of africanliberty.org