One of the issues that has dominated the airwaves in recent times in Ghana is the worrying depreciation of our currency.
This cedi depreciation issue has been widely discussed with the most affected calling on the government to fix it. The depreciation of our local currency against our major trading partners has a rippling effect on all aspects of the economy from the heavy duty machinery importer to the local subsistence farmer, we all experience an increase in cost of products as a result of an increase in the exchange rate.
CAUSES OF THE RECENT DEPRECIATION OF THE CEDI
One may ask what caused the cedi’s depreciation in recent times. It should be understood that factors that affect our local currency can be categorized into two; namely the external and internal factors.
The recent exchange rate instability can be largely attributed to the external factors. Between February and mid-March 2019, the Ghana Cedi came under intense pressure. The new pressure was due to a number of factors. These factors are;
1 The IMF Foreign Reserves Requirement,
2 Increase in US Fed’s Interest rate and US-China trade issues and
3 repatriation of profit by Multi-National Corporations (MNCs). Let’s try and explain these factors in turn:
4 A. IMF ADDITIONAL FOREIGN RESERVES BUILD UP
5 Ghana’s economy like other emerging economies experienced some external pressures during the second half of 2018. These pressures largely emanated from foreign investors rebalancing their portfolios in the context of a stronger dollar, rising interest rate and volatility in emerging markets. These external pressures led to a significant decline in our external buffers.
6 Under the guidance of IMF, Ghana had to build up our declining foreign reserves. Through the strict supervision of IMF, our international buffers needed to be revamped. This exercise denied the market the needed forex buffer to cushion the cedi. Therefore, other factors in combination with this prime factor caused the cedi’s depreciation this year.
7 B. INCREASE IN US FED’S INTEREST RATE AND US-CHINA TRADE ISSUES
8 Until recently the increase in US Fed interest rates were the major pressures that affected the Ghana Cedi negatively. However, owing to improved reserve position as a result of the improved fundamentals, the BoG successfully slowed down the rate of the cedi depreciation as compared to other currencies.
9 For instance; as the cedi went down by 8%, the Argentines’ peso has lost about 40% of it’s value. Other countries greatly affected include Malaysia, Hong Kong among others.
10 The whole world has become a global economy tilting towards a single market. With this, economic activities happening elsewhere has direct effect on the local economy. In this global economy, technically speaking, capital has become increasingly mobile (flexible Capital mobility). This simply implies that resources can easily move across borders without any major hindrances.
11 The recent increase in interest rate in US meant that, investing in the US economy has become more profitable compared to our local economy. This upsurge in interest rate outside our economy caused investors to sell their local asset in order to reinvest in the more promising US economy. Ghana alongside other emerging markets has suffered from huge capital flights recently, that is, resources in the form of foreign currencies has in large quantities left the local economy. Its accompanied decline in foreign exchange supply on the local economy has adversely impacted on the cedi’s performance accompanied with the US-China trade wars which has now tilted in favor of already developed markets hence negatively affecting emerging economies.
12 C. PROFIT REPATRIATION BY MNCs
13 Over the years, there has been incessant pressure on cedi causing its depreciation in every first quarter of every year. This is partly attributed to the repatriation of profits by MNCs operating in the local economy during this period of the year.
14 Normally, statement of account for these MNCs are stated and profits for the previous year are declared during the first quarter of the year. After this declaration is done in accordance to the law, the declared profits are then repatriated back since owners of these multinationals are foreigners.
15 This huge repatriation of profit has also hugely reduced our foreign currency supply. With the demand for the foreign currency facing an already limited supply has culminated to what we see today.
THE ASSURANCE BY THE FINANCE MINISTER
Despite these factors being the prime causes of the exchange rate instability our economy experienced recently, the government has initiated measures to tackle these slippages. The managers of the economy, through the finance ministry came out to outline the practical short to medium term measures to halt and reverse the trend. The short to medium term measures focuses on immediately increasing the supply of the foreign currency to meet the demand in order to stall the further deterioration of the value of the cedi. This short term remedy involves shoveling up forex reserves from Eurobond proceeds and funds from COCOBOD.
It is expected that in the next couple of weeks, an amount of $900million from COCOBOD, $3 billion proceeds from Eurobond will help to revamp the cedi. There was an immediate bridge finance facility of $750 million. In the short term, these are stop-gap measures has become good news to the market as the cedi has regained more strength better than before.
THE ULTIMATE LONG TERM SOLUTION
Exchange rate instability has been one of the major banes of Ghana’s economic growth and development from 1957. This challenges associated with our economy is largely because Ghana’s economy depends heavily on importation. The structure of our economy over the years has been that of importation of goods and services from the outside world but little export overseas. An economy depending heavily on importation can never escape exchange rate imbalances thereby resulting in the local currency depreciation. To drive this further, such an economy with high dependence on foreign goods and services always put pressure on its local currency as there will always be high demand for foreign currency in order to import.
For instance, the rice importation bill alone in Ghana during 2015 was almost equal to half of all our cocoa proceeds. That is how serious that food importation alone is causing Ghana in terms of foreign exchange.
The table below provides the value of Ghana’s merchandise import from 2012 to 2016. (US$ million)
This attitude of high importation in the Ghanaian economy can be attributed to the character of Ghanaians. That is, Ghanaians have very strong taste for foreign goods despising locally made goods, a behavior rooted from colonialism.
What needs to be done?
1 Structural Changes
2 One of the fundamental means of permanently solving our exchange rate imbalances is a shift in the structure of our economy from importation to production. As the fundamental cause associated with the cedi depreciation rest on excessive dependence on importation, the only substitute measure to address this situation is to locally produce most of these imports that are imported. This will ease the pressure exerted on the cedi of foreign currencies needed to import these goods which can be produced locally.
3 The Akuffo Addo administration has this firmly on the radar and is working at it. Policies initiated to address this challenge include;
4 Planting for Food and Jobs
5 One village one dam
6 One district one factory and other industrialization programmes.
7 Attitudinal Changes
8 To effectively see the success of the above measure of shifting from importation to production, the Ghanaian also has a very critical role to play. That is, the attitude of having strong taste for foreign goods at the expense of locally made goods needs to be eschewed. We must strongly desist from that character of patronizing more foreign goods than locally made goods. The implication of such behavior is that, by patronizing foreign made goods, you are helping to grow the economy of foreign countries as we cripple our own.
9 We need to fully complement the efforts of government’s transformational change agenda by patronizing goods and services made locally. For instance, China as we see today as an economic powerhouse’s transformation to an economy of mass production was complemented by the Chinese conscious effort of patronizing their locally made goods. This act of patronage stimulated further production, expanded production and again stimulated expanded industrialization. This continuous act of local patronage has culminated to what we see today as a Chinese economy competing with the likes of USA, UK Germany and the rest. Other strong economies like Malaysia, Singapore, Brazil are examples of economies that shifted from mass importation to mass production.
10 Let’s commend the president’s effort on this front by being the lead-advocate for Made-In-Ghana goods. Such efforts include the President’s initiative of promoting “Made in Ghana Products Campaign”. The campaign entails proper branding of made in Ghana products, appointing ambassadors for made in Ghana products and other significant reliefs for local entrepreneurs.
11 Through this effort, we will strongly grow our economy, stimulate job creation, earn foreign exchange and more importantly stabilize our ever depreciating cedi.
12 Repatriation law
13 Over the years, the first quarter of every year has seen a periodic cedi depreciation largely attributed to the repatriation of profit by MNCs as explained earlier. That is, there is the movement of large sums of foreign currency outside our economy. This act create a serious deficit in our foreign exchange supply hence the cedi’s depreciation. By extension, this implies that the repatriation of the wealth created within our economy has negative consequences on our economy.
14 Currently there is no law regulating the repatriation of profit. These MNCs are granted huge tax exemptions on their arrival, they make huge profits and then send them back in large sums which creates exchange rate instability in our economy.
15 Therefore, it is of utmost importance that Ghana enact laws to regulate this act which heavily affects the value of our currency. Such a law should guide repatriation in such a way that it will not allow bulk foreign currency to be sent away in a manner that will adversely affect our local economy.
Fredrick Addai Kwarteng