Dr Sam Ankrah (left), Development Economist, being interviewed by Charles Benoni Okine, acting Editor, Graphic Business
Recently, the Bank of Ghana (BoG) announced a raft of measures aimed, among other things, at halting the rate of depreciation of the Ghana cedi against the major foreign trading currencies, particularly the United States dollar.
Charles Benoni Okine (CBO), acting Editor of the Graphic Business, caught up with Dr Sam Ankrah (SA), a Development Economist, to share some insights on the BoG measures. Here are excerpts of the interview
CBO: What’s your assessment of BoG’s response to the depreciation of the cedi and the upward inflationary trend?
SA: The measures that I have heard of are (1) buying gold from the local market in Cedis, (2) increasing the policy rates to encourage savings and dissuade borrowing and spending, (3) asking oil, gas and mining entities to allow significant portions of their revenue to pass through the BoG.
The issue of buying gold, a resource found plentiful in Ghana, in Cedis, is not a bad one. For the government, it is a useful way of hedging government funds – by moving into a commodity that is globally denominated in US Dollars. The challenge is that unless the BoG is going to use gold currency, everyone of those holding cedi, outside the government, is left in unhedged cedi. So, in sum, moving government funds into gold protects the government, it doesn’t protect Ghanaians.
Modulating interest rates to effect market movement is a commonly used tool across central banks of the world. The basic principal is that the lower the interest rates, the more incentive there is to conduct trading, the higher the interest rate, the more conducive it is to saving. However, in modulating the cedi this way, there is a major disconnect from reality. That reality is that almost all activity done in Ghana, be it import for business or consumption or export, is done on a USD basis. Ghana’s economy is dollarised. The effect therefore of raising interest rates in the cedi is to make inflation rise.
Consumption of basic foodstuffs is not a choice and, therefore, you cannot stop people from spending on these items.
However, rice, chicken, tomatoes, sugar, maize, among others. are all imported in large quantities, in dollars. Increasing interest rates just makes it more expensive to purchase these commodities.
It also does nothing to strengthen the cedi in terms of the dollar, because the cedi’s only purpose currently, is as a medium of exchange in Ghana. Value in Ghana is ascribed by the dollar. Modulating interest rates on cedi does little, if anything, to affect strengthening the cedi against the dollar.
The other measure is trying to get extractive sector players to pass their revenues through the central bank. This sounds simple enough but one needs to study the agreements these companies have with the Government of Ghana (GoG) and what they say with regard to the repatriation of profits. One of the key items to be negotiated is the freedom to repatriate revenues offshore Ghana without any interference from BoG.
Getting them to relent on this matter is not straightforward. The other aspect is that, whilst the reserves in BoG may appear to be bigger, the reality is that that money is not for Ghana.
CBO: In your view, what are some of the compelling reasons that allow market forces to determine the real value of the cedi?
SA: I don’t believe there are compelling reasons for simply “allowing” market forces to control the cedi. I believe we would see the cedi fall in value significantly with no bottom in sight. This would irreparably harm citizens of Ghana.
There is a need to transition from the usual way of managing the foreign exchange (FX) rate, which is auctioning BoG dollar into the system periodically to modulate demand, to one where the cedi finds its own level.
This must be the medium to long term strategy and that is realised by ensuring imports for consumption are curved and those commodities/items produced in Ghana, and adding value to exports.
The transition between using USD auctions by BoG to free floating currency must be a national plan that is managed over a 10-year period so as to get the right conditions in place for Ghana to produce what it consumes.
CBO: Do “black market” activities determine the real value of the cedi?
SA: Perhaps. Every cloud has a silver lining for someone. However, it is the volume of people determined to exit cedi positions that creates the conditions for the black market to profit. Retail banks cannot give customers a significant amount of dollars these days. This creates a USD supply shortage and therefore demand increases as does cost of purchase. Where you cannot get USD and the value of cedi is plunging, citizens will go to the black market.
In summary, there is probably black-market profiteering but they are providing a service that is helping citizens to hedge their savings, a situation that the government is either unwilling or unable to do.
CBO: To what extent does the demand-supply dynamic in determining the real value of the cedi help or hinder BoG’s perennial injection of dollars to stabilise the cedi?
SA: Demand and supply of USD is almost the sole determinant of the value of the cedi. The only bullet BoG has to influence the FX rate is the ability to increase the supply of dollars. It, therefore, stands to reason that if the value of the USD is determined by external events and outside the control of Ghana, Ghana will always be susceptible to external shocks. Something positive should dictate that this is not a situation one should allow to prevail.
The extent to which BoG is hampered by trying to manage the cedi/dollar FX rate is not the real question. The question is why we continue to allow ourselves to be susceptible to external shocks.
CBO: What has to be done to boost exports, mindful of the people’s insatiable thirst for imported goods?
SA: Our exports need more value added processes attached to them. However, the real problem we have is not imports per se but imports for basic consumption. Rice, chicken, sugar, etc. and many other staples are all imported.
This has to stop. In stopping these imports, Ghanaians must produce them and patronise these products. This will give the cedi a value; not just being a medium of exchange. It will become a store of value. Value that will not be impacted by external shocks that impact the dollar and thus the FX rate.
CBO: Your closing thoughts
SA: BoG should be holding the government to account for its expenditure. It should not encourage overspending, it should not be printing money at the blind side, thereby exacerbating inflation.
BoG should be managing the international reserves carefully and transparently and should be telling the government that there needs to be long term fundamental changes.
But the truth is, at this present moment, they only have one bullet. FX auctions.
Watch the full interview on our Facebook Live page on dailygraphicghana