The Political Editor of the Daily Graphic, Mr Kobby Asmah, had an exclusive interview with Mr Alan Kojo Kyerematen, a leading member of the New Patriotic Party, on the declining cedi and its impact on the Ghanaian economy.
Mr Kyermaten called for an urgent national economic dialogue to discuss the falling cedi and other critical issues affecting the Ghanaian economy.
“As a nation, we must move beyond problem analysis to finding solutions to problems in a non-partisan way,” he told the Daily Graphic.
Mr Kyerematen advised that “we must all be concerned about what is happening to the cedi and we should dispassionately discuss the issue because the constant decline in exchange rate is a constant feature of all successive governments since independence”.
He pointed out that the decline was related to the effectiveness and quality of economic governance at any point in time.
Below are excerpts of the interview.
Kobby Asmah: What is your general reflection on the currency exchange crisis in Ghana?
Alan Kyerematen: The instability of the cedi has a negative impact on every sector of the economy. The currency exchange rate is one of the most important drivers of inflation in Ghana because of:-
(i) there is a high level of imported content in local manufacturing and other forms of economic production, which affects domestic prices when there are changes in the exchange rate
(ii) there is also a high preference for the importation and, consumption of finished goods and therefore, fluctuations in the exchange rate have a significant impact on domestic inflation
(iii) the exchange rate is a key component for the pricing of utilities and petroleum products and this explains why there are increases in the prices of petroleum products using the automatic adjustment formula when the cedi depreciates, even when there are no corresponding increases in the world market prices of crude oil.
It must be obvious to Ghanaians now that the depreciation of the cedi is a symptom of major structural deficiencies in the economy, and this requires major structural reforms, rather than short-term policy measures.
Kobby Asmah: What do you consider as the basic reasons for the changes in currency exchange rate?
Alan Kyerematen: Changes in currency exchange rate are often the result of the interplay of a complex set of forces and factors, exogenous and endogenous, all operating at the same time.
This makes it difficult to predict and analyse such changes to determine the causes and effects, particularly in a flexible or market-driven exchange regime such as we have in Ghana. In this regard, any policy decisions and measures taken to address currency exchange issues must be carefully selected in order to avoid any counterproductive and unintended consequences on the economy.
As a matter of general economic principle, the currency exchange rate of any country is influenced by:-
1. The difference between domestic and foreign inflation rates.
2. The difference between domestic and foreign interest rates.
3. Changes in export prices relative to import prices (terms of trade).
4. Changes in the aggregate levels of income in the country.
5. Fiscal deficit and public debt. Large budget deficits are likely to result in higher interest rates, excessive growth of money supply and higher prices.
6. Lack of political stability and poor economic management.
7. Corruption and lack of public accountability.
Kobby Asmah: Any recommendations for addressing the problem of the depreciating cedi?
Alan Kyerematen: Government of Ghana (GoG) and Bank of Ghana (BoG) must move beyond short-term operational and tactical decisions as reflected in the recent policy directives, and focus on strategic decisions of a medium to long-term nature that will respond to structural deficiencies in the economy
In this regard, I will propose the following recommendations :-
1. As a matter of urgency, a forum for a National Economic Dialogue (NED) must be organised to discuss critical issues relating to the economy in general and the depreciation of the cedi in particular. The forum must be a multi-stakeholder platform involving senior government officials, the private sector, parliamentarians, representatives of political parties, civil society, labour unions, gender advocacy groups, academia and think tanks, development partners and the media.
2. The outcome of the NED and the common positions reached on various issues must form the basis for revising the 2014 Budget, within the limits of administrative, parliamentary and legal considerations. Notwithstanding the outcome of the NED, it is clear that some of the fundamental assumptions underlying the current budget have already been undermined even before the end of the first quarter, such as the exchange rate projections and the increase in VAT.
3. A major diplomatic initiative must be launched to engage multilateral and bilateral donor partners to reschedule Ghana’s debt servicing obligations, including the consideration of debt cancellation on terms and conditions to be agreed. This will significantly reduce the outflow of foreign currency and, thus, enhance the value of the cedi. In embarking on this initiative, there has to be demonstrable and sustained efforts on the part of the government to curb corruption in order to convince partners that any gains arising from such an initiative will not be undermined.
4. A high-powered executive team should be established to negotiate with major multinational companies in Ghana to defer the transfer of investment capital, dividend income and other forms of payment, on a case-by-case basis, taking into consideration their own external obligations and the need to maintain their competitiveness. A special package of incentives should be considered for those companies ready to reinvest part of their profits to enhance local domestic production and generate additional employment, particularly where such investments would involve vertical and horizontal integration to their businesses and promote local value chains.
5.The GoG should issue Cocoa Bonds in cedis that can be purchased by individual Ghanaians, as well as institutional investors, to finance the purchase of cocoa since farmers are paid in local currency. The current practice of Cocoa Board syndicating foreign loans for the purchase of cocoa should be discouraged. This will optimise the net foreign exchange earnings from the export of cocoa and thereby enhance the
6.The BOG should reduce its policy rate to a single digit (preferably below 6 per cent) to reduce the cost of capital and drive business investment and employment creation. This will also reduce the cost of domestic borrowing by government and by extension, the domestic debt by lowering the cost of treasury bills in particular. The BOG policy rate is considered as a benchmark for fixing interest rates by local banks, although other factors such as transaction costs, administrative overheads, risk pricing, profit margin, etc are considered.
At current interest rate levels, local businesses will always remain disadvantaged and uncompetitive. Although there may be short-term negative effects of such a bold policy decision, particularly on the level of domestic savings, the overall impact on the economy will be positive.
7.In the medium term, GOG should significantly reduce its dependence on borrowing from local banks to finance domestic expenditure, and introduce other innovative mechanisms for raising domestic revenue. This will, among other things, increase credit and capital available to local investors to expand their businesses.
8.The BOG should review its new directives reinforcing exchange controls, such as placing restrictions on access to Foreign Currency Accounts and Foreign Exchange Accounts. It is business unfriendly, and counterproductive.
9.The BOG with the support of the GOG should have a policy flexibility to inject a significant amount of foreign exchange (not USD 20 million) from its current foreign reserves to support the cedi. The policy of maintaining foreign reserves equivalent to three months of import cover when the cedi is crumbling leaves much to be desired.
10. The GOG should aggressively promote interventions that will enhance domestic industrial production, such as the District Industrialisation Programme (one district one factory), introduced under the past NPP administration, not only to create employment but also reduce over reliance on imported finished products, and thereby save scarce foreign exchange.
11. Over the last hundred years, Ghana has depended almost exclusively on cocoa and gold for over 80 per cent of its export earnings until the discovery of oil under the NPP government in 2007. The GOG should identify and promote new pillars of economic growth that will diversify the export base, and lead the structural transformation of Ghana’s economy. In this regard, strategic interventions for export development undertaken as part of the Presidential Special Initiatives on Textiles and Garments, oil palm, industrial starch from cassava and industrial salt should be actively supported under public private partnership arrangements.
12. The GOG should significantly reduce its budget deficit by comprehensively reforming the tax structure to expand the domestic revenue base, not through the imposition of taxes and levies that increase the cost of production, but rather taxes on properties and incomes with a social protection cover for low income earners. In addition, GOG must adopt expenditure switching options that will reduce government recurrent expenditure and expenditure on non productive economic activities that do not generate direct revenue for the state.
Kobby Asmah: What is the primary goal underpinning all these proposals?
Alan Kyerematen: The primary goal underpinning all the proposals outlined above is to expand the productive sectors of the economy by facilitating business and supporting the private sector, maintain fiscal discipline, enhance the inflow of foreign currency and reduce outflows. It is the consolidation of policy interventions that will contribute substantively to the stabilisation of the cedi.
Kobby Asmah: What do you think is haunting the progress of this nation? What must we do to overcome this haunt?
Alan Kyerematen: We seem over the years in managing our economy to have been haunted by the fear of failure instead of being inspired by the challenges of success. Ghana must adopt bold, practical and result-oriented policy solutions to address challenges facing the nation. The government and the Bank of Ghana must also live up to their responsibilities in providing right leadership for the transformation of the Ghanaian economy, but in addition to this, we all must focus on a common objectives. In general, we must be driven as a country by common objectives and a common vision. If we all work together as a united Ghana, each contributing his or her quota in various ways, the prospects for a brighter future will be realised.