Introduction of new banknote denominations: Did the BoG get it wrong?

Dr Ernest Addison, BoG Governor

Ghana,
some say, is a very interesting country. But I say the interesting
aspect depends on which lenses you have on to view national
developments.

Even
though many have fondly accused Politicians as the ones who influence
the Bank of Ghana, which is an independent institution, to either issue
new banknotes or put more money in circulation, I will beg to differ.

I
think the central bank has enough technocrats and professional men and
women who have in-depth knowledge of the economy and must at all times
take decisions that will not hurt or destroy the very economy they have
helped to build over the years.

However,
it won’t also be far from the truth, to say that sometimes, depending
on which government is in power, these technocrats who are in charge of
monetary issues make decisions that open them up for criticisms from the
public. This also allows the very politicians who, depending on who is
in power, to either align to their decision or accuse them of
wrongdoing.

When
you check on timing of the decision to introduce new currency
denominations or just managing circulation (which may involve putting
more currency in circulation) since we returned to constitutional rule,
most of them are too close to elections.

Most
times, it is just about a year before the general elections but that is
not even the reason why I am typing plenty today.  I am sure you are
asking: “what then is your problem now?”

Well,
for you who are reading this piece, on “black” Friday morning we all
got the news that central bank or the Bank of Ghana was issuing new
banknote denominations — 100, 200 cedis and 2 Cedis coin.

This cedi on sale on “Black Friday” came as a shock to me given that the Bank had earlier denied the possibility of issuing new notes, even if vaguely.

But
what reasons did Governor, Dr Ernest Kwamina Yedu Addison, assign to
the decision to roll out this new currency denomination? The first point
the governor made was to link the new banknotes to the nostalgic
redenomination of the currency some twelve years ago.

To
quote a few of the things he said while also referring to the upgrade
exercise the central bank embarked on in May this year, the upgrade
exercise retained the design features of the existing series of
banknotes and coins as introduced twelve years ago in 2007, in a redenomination exercise.

The
exercise also sought to recalibrate the currency due to significant
deadweight burden which was a legacy of long periods of high inflation
and currency devaluation.

“At
the time of the redenomination, GH¢1 was equivalent to US$1. The
highest denomination then was GH¢50 and was equivalent to the US$50.
Twelve years after the redenomination exercise, sustained periods of
high inflation and the perennial depreciation of the currency have
eroded, in real terms, the face value of the series of the notes,” the
Governor said.

Cedi Depreciation

Before
I even continue the conversation, I ask this simple question:  per what
the governor is saying, should we now believe the school of thought
that the cedi is overvalued and needed to be allowed to depreciate to
its natural value? How does putting larger notes in circulation resolve
the problem of the cedi when, due to the portability of large
denominations, many experts are of the view that it encourages most of
the illicit (trading) activities that are likely to undermine the local
currency?

Per Governor Addison’s own statement, this means the currency over time had depreciated but the question is “na who cause am”?

The
Cedi in year-to-date, ending November 29, 2019, has performed very
badly. It has depreciated by 11.97% according to the Bloomberg terminal
at the close of trading.

See below the image as captured from the terminal which gives you the Ghana Cedi to the US dollar cross rate.

Fig.1, Shows one-year daily performance of the Cedi against the dollar

Bloomberg Norvan 3

Source: Bloomberg Terminal

Fig. 2, Shows the graphical representation of the performance of the cedi one year.

Bloomberg Norvan 1

Source: Bloomberg Terminal

The
Governor again said, “the new higher value denominations will only
restore partially the dollar value of the higher denomination GH¢200 to
about US$40, not quite close to levels in 2007, but high enough to
significantly reduce the deadweight burden and high transaction cost in
making high-value purchases in a cash-based economy like Ghana.” Thank
goodness, we are being spared another “value is the same, despite the
nostalgia with redenomination.

On
this note, as with the hints on banking sector recapitalization, are we
to expect more milder forms of redenomination in the coming years?
Given the effect of its decisions on the economy and our pockets, should
other government bodies such as Parliament demand regular briefings,
including public hearings, from BOG on the impact of its policies before
implementation?

To
continue, the point made by the Governor is something I disagree with.
In fact, according to the Bank of Ghana [22-Nov-2019 20:02:19 Summary of
Macroeconomic and Financial Data], the Cedi had depreciated by 10.37%
from the 7.83% recorded in October 2018, while in November of the same
year 2018 the cedi had depreciated by 8.12%.

Having provided the above data or figures gives all of us a clear picture of how our currency is doing against the dollar. It is important to note that, with the current depreciation, inflation has remained at single digit even though it looks like some pressures may cause the inflation to go up, even if it remains largely within the band set by the Central Bank, which is plus or minus 8%.

Fig. 3 Year-on-Year Consumer Price Inflation Graph.

Bloomberg Norvan 2

Source: Bloomberg Terminal

But
the question remains: what then is the cause of the Cedi’s continuous
depreciation, which saw it close trading at 5 cedis 66 pesewas at the
close of trading on November 29, 2019, according to the Bloomberg
terminal?

Also
with banks or financial institutions creating money, artificial as it
is, and average interest rate around 23.65% as at the end of October, as
per the central bank’s data, you ask if issuing of the new higher
currency denominations is the best solution to some of the issues
enumerated by the Governor.

Normal Practice, the Governor says

Again,
our learned Governor said during his speech that, “As is the normal
practice in all jurisdictions, Central Banks do periodically undertake a
review of the structure of their currencies with the view to making
sure that they are aligned with macroeconomic conditions and demand. In
fact international best practices requires monetary authorities to
review their currency regimes at intervals of between five (5) and ten
(10) years with the aim of ensuring that demand for banknotes are well
aligned with economic activity, address weaknesses and challenges
associated with the management of notes and coins in circulation, assess
the non-usage of a particular series to ensure efficiency in printing,
and address technological innovations that impact the usage of
currencies.”

Given
that middle income and advanced economies do not print higher
denominations at random and at such short intervals, it seems the
Governor conceding to what other economic managers are refusing to
acknowledge.  I ask if this accommodative policy means that we should
introduce new currency when the cedi becomes weak, as a result of
problems with fiscal and real sector management. If so, will we ever
contemplate the issuing of lower and withdraw high-value notes in
circulation?

Perhaps,
I am so ignorant and cannot read in-between the lines that are why am
so worked out at this move. I avail myself for any education. But until
then, allow me to point to Dr. Addison’s own statement which he said the
central bank has the mandate to ensure that demand for banknotes are
well aligned with economic activity, address weaknesses and challenges
associated with the management of notes and coins in circulation, assess
the non-usage of a particular series to ensure efficiency in printing,
and address technological innovations that impact the usage of
currencies.

But
the practice, I am sure, has been changing with time and the man at the
central bank should not be taking us back into time when things are
changing.  [unclear].

Encourage criminality

Dear
friends, if you know why the US does not issue anything above the 100
dollar bill or note—or why the EU contemplated withdrawing its high
currency denomination—then am sure you would agree that this single
action of the central bank may be a bad move for the economy.

Higher
banknotes are what criminals use in perpetuating their criminal
activities and it seems “black market” activists such as drug barons,
terrorist, smugglers, money launderers er all will have a good field to
undertake their activates.

Let
me take you to the European Union where they ditched the 500 euro bill.
The European Central Bank (ECB) at the time in 2016 said they decided
to stop issuing the high-value note by the end of 2018 in a bid to
tackle money laundering and the financing of drugs and terrorism. “The
other denominations—from €5 to €200—will remain in place,” it said
according to the quartz website.

India
which also was under British rule in May 2018, decided that the Indian
currency which was trading at ₹67.13 against the US dollar, had hit its
15 months low. Narendra Modi, the Prime Minister of India, then made an
unexpected policy move that same year in a televised announcement,
ordered that the ₹500 and ₹1,000 bills would be demonetised.

The
objectives behind this abrupt decision according to theculturetrip.com
were to eliminate illegally obtained cash, get rid of fake currency and
encourage a move towards a cashless economy.

This
then begs the question as to why the central bank of Ghana at this time
will want to issue or print new banknotes. Am sure you have more
questions on your mind than me.

Technology and Innovation

The
bit of the technological innovation brings to mind, the whole talk
about going cash lite. Initially, it began as going cashless but there
was a retreat to say, it was not possible to have a fully cashless
economy. That then meant cash lite which basically means reducing the
monetary transaction from heavy cash to significant terms.

When
this talk began the central bank then set-up the Ghana Interbank
Payment and Settlement Systems Limited (GhIPSS) in May 2007 with a
mandate to implement and manage interoperable payment system
infrastructures for banks and non-bank financial institutions in Ghana.
What this meant is that they were going to serve as the bridge to allow
bank systems to talk to each other and allow seamless transactions, with
one of the aims being to prevent individuals and businesses from
carrying bags of money to make payments of any sort.

Question
is this what has become of the policy?, that today the Bank of Ghana
says we need high denomination banknotes for the business community who
have complained that, they have to carry a lot of money, in sacks and
bags to undertake business transactions.

Why,
is it that those they have to pay do not have banks accounts, or that
they are not part of the financial system? Are we not hoping to even
move and rope in the non-formal sector into the banking system?

I
heard something about the security of the business community for
carrying bulk cash. Am so disappointed in these men and women from both
sides, I mean the central bank and the business community. Even the
banks have shocked me the more but maybe, they don’t want to offend the
regulator which is now eye red and will deal ruthlessly with any of them
if they went wrong.

After
all the funds they have spent on technology and innovations to promote
the cash lite interoperability and GhiPPs agenda, their regulator turns
to introduce new and even higher banknotes. I can recall what the
Governor said during the last MPC press conference and permit me to
quote him verbatim: “In an increasingly digitized environment, the Bank
of Ghana has evaluated its role in a digital economy.

The
Central Bank is in discussion with key stakeholders to explore a pilot
project (in a sandbox environment) on central bank digital currency with
the possibility of issuing the e-cedi in the near future.” Should he
and his team not spend their energies and time plus the taxpayers’ funds
on this than higher banknotes.

I
interestingly Governor Addison was quick to tell us not to misinterpret
the introduction of these high-value notes to mean he and his team at
the helm of affairs were shifting away from the Banks policy of pursuing
a cashless society and promoting the use of electronic modes of
payments.

“While
vigorously pursuing financial inclusion by accelerating the migration
to e-payment platforms, we are also mindful of the relevance of cash in
our day-to-day dealings. Undeniably, cash still remains the 5 preferred
medium of payment by the large informal sector in the country,” is this
not even the more reason why we should encourage those in the informal
sector to have some sort of dealings with the financial system?

Just
to remind the governor that according to his own data, Mobile Money
transactions value as September 2019 was over 26.4 billion cedis with
the total number of active wallets being 13. 6 million. I have not
brought in cheques, e-zwich and internet banking direct transactions.
This tells you even those in the informal sector are all being pulled
along already in the digital agenda.

So
what is the justification really for this high banknotes? If the BOG’s
policies overlap, will the closure of a large number of Savings and
Loans Banks and Microfinance companies, in particular, not worsen the
financial inclusion policy?

If
you want to pay attention to enhancements in the structure, security
features and management of cash within the economy then that was why you
did the upgrade which was fine. However, what is even hurting is till
now you have not told Ghanaians how much is costing you to do all these
important things.

The
business community who the governor and his team say are one of the
reasons for the introduction since Friday have all said the central bank
should spend time to deal with the depreciation of the cedi and look at
how to move the digitization or electronic agenda.

So the question is, what level of consultations and education took place, before the introduction of the new banknotes.

Tax evasion

This
whole process makes diminishes the work being done to rope in more
Ghanaians to pay tax, especially, through widening the tax net with
measures that include the digitization agenda.

You may ask what I mean. A cash-heavy economy encourages and allows people to invade tax.

I
thought at this time we were to back the Ghana Revenue Authority and
the Vice President’s agenda to move the economy from cash to a cash lite
one. This is going to allow the informal sector like our mothers from
the large markets who do heavy transactions and hardly pay tax or don’t
pay at all to continue not to do so.

Education before Introduction of New Currency

Another
thing which is shocking is the lack of pre-education before the
introduction of these set of new currency denominations which use to
happen was entirely missing in this time.

No
one knows why the central bank decided to spring this surprise on
Ghanaians by announcing the introduction and the same day it was legal
tender and must be accepted by all. But interesting money was expected
to be released only on Monday, December 2, 2019, not the day of the
announcement Friday, November 29. 2019.

It’s
shocking and this then allows for the kind of discourse we have
witnessed in the last few days. As I have already stated, I think the
timing of this issuance is wrong and the lack of week’s education which
herald the introduction of new currencies or upgrades was missing.

Conclusion

One
man, I respect Theo Acheampong after the announcement writes “New
higher Ghana cedi denominations indicates our COLLECTIVE INCOMPETENCE in
managing the economy. Same reasons given back in 2007 for the
redenomination exercise are the ones being given today — i.e.
deadweight loss of transactions due to ever-increasing inflation bla bla
bla. We haven’t learned/mastered the art of effective macroeconomic
management.

We
messed up e-Zwich, launched a GPS-based location code generator app
without linking it to proper street names and numbers for a holistic
public address system, and can’t even seem to get simple national ID
cards issued at a go. We’d likely be back to this same table again in a
decade. Look, we pamper our politicos and policymakers too much in this
country. SMH! #GHMusings  #ChangeTheParadigm #AskCriticalQuestions”

Am so sorry Mr Governor and my friends at the Bank of Ghana, you have brought this misinterpretation and suspicion of election money to yourself. No matter how you look at it, you got the timing wrong and you have a whole lot you need to do to win the confidence of the people.

I rest my case.

Source: Ghana | Norvan Acquah-Hayford | Joy Business

This
article contains the views of the writer only and not that of this
platform. You can reach him via the mail [email protected] or WhatsApp
+233264511013.

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