Business News of Monday, 4 January 2016
Businessman Ken Thompson is advocating the devaluation of Ghana’s currency as the best option for a government keen on raising revenue to plug holes created over years of living beyond its means.
“Let’s devalue the currency….we don’t have a choice,” the Chief Executive Officer of Dalex Finance told Joy FM’s Super Morning Show Monday.
How devaluation works
A currency devalues when its value declines in relation to one or more other currencies.
At one Ghana Cedi to three dollars, a Ghanaian mango exporter will sell a crate of mangoes at 300 cedis which will be bought by a US business partner at $100.
In a hypothetical devalued situation, if GHC9 is now needed to buy $1 (that’s a devaluation by 200%), it means the US partner will buy the same crate at $33.3.
The Ghanaian farmer will now be selling the crate of mangoes at GHC900 in the local market but $33.3 on international market.
This means for the US buyer, a crate of mangoes has become cheap and he can now buy more. Buying more means Ghana will export more and make more money.
On the other side, because the Ghana cedi is nine to one dollar, importing goods or services to Ghana becomes expensive. Foreign goods become more expensive for locals, so imports go down.
The party is over
For Ken Thompson, this strategy makes sense because government is faced with a situation where it has to pay its debts either by imposing more taxes or by massive cuts in expenditure including public salaries.
He said governments over the past 25 years have been overspending. When Ghana found oil in commercial quantities, “the party started,” leading to a huge margin of spending more than government earned and building up unsustainable deficits, he stressed.
Government now expends over 83% of its revenues on salaries, statutory and interests payments, leaving very little for development unless it borrows more which will have to be paid back partly through more taxes.
In effect, “the party is over”, “we have to dig ourselves out of the hole,” he maintained.
In recent times, government has introduced an emergency Energy Sector Levy Bill (2015) that will impose more taxes on petroleum products.
This led to consumers beginning the New Year with fresh increases in petroleum products between 18% and 28% with predictable public discontent.
Government is also backtracking on a 1% tax on interest earned by individual on their investments.
Criticizing the rationale behind the tax on investments earnings, Ken Thompson said government is overtaxing the same bracket of tax-paying Ghanaians.
He described it as “killing the goose that lays the golden egg”.
For him, government may have tested the waters by floating the idea to gather public reaction.
“Somebody just floated it…because it just doesn’t add up,” Ken Thompson criticized.
Suggesting an approach to a cash-strapped regime, Ken Thompson says devaluing the currency is the way to go.
It is not a radical idea, he said, pointing out Ghana went the same way under Col. Acheampong’s military junta and again under President Jerry Rawlings.
In the book ‘The Political Economy of Reform in Ghana: Implications for Sustainable Development’ Abdul-Nashiru Issahaku recalled;
“Between 1974 and 1983, Ghana’s currency was devalued only once (from 1.15 to 2.75 cedis to US$1), and this unwillingness to devaluate the currency led to accumulation of external debt”.
“This is because an overvalued exchange rate made production for export less profitable for major exports such as cocoa, and gold. Instead of raising exports to attract foreign exchange,”Ghana had to use its dwindling foreign exchange to import such essential commodities as spare parts, crude oil, and drugs. No wonder Ghana’s debt in 1982 stood at 105.7% of its GDP”.
Is Ghana’s currency overvalued?
Ken Thompson is convinced Ghana Cedi is overvalued. He used the Big Mac Index to explain that if a dozen eggs cost $4, then GHC4 should equally buy a dozen in Ghana.
‘Four cedis cannot buy you a dozen eggs,’ he observed. A crate cost GHC17. Ken Thompson wants government to “allow the currency to reach its true value”.
“The longer we postpone the decision, the more painful it will become”. He said if Ghana does not devalue its currency, in the long run, the exchange rate will.
He said “the only people who benefit from overvalued currency are the elites” because they have dollars enough to import or buy imported goods and luxury items. A devalued currency means Ghanaians will use more cedis to buy the same basket of goods.
Admitting the painful circumstances arising from devaluation, the CEO said as much as it hurts, it is Ghana’s best way out of its nagging financial troubles.
The upside is that Ghanaians will have a financial incentive to produce for export.
He said in previous periods when Ghana’s currency was devalued, professionals including teachers went into cocoa production because export became very attractive.
Ken Thompson wondered why a staple food like maize should experience low production in Ghana and expressed confidence that under a devalued regime, maize production will shoot up.
“I can assure you, maize producers will start producing more.”
According to him, the campaign to buy and export Made-in-Ghana goods stands to receive a great boost if government takes a painful but appropriate decision to devalue the currency.