Cedi Wahala: A Tale Of Chasing The Tail

I hate to appear to be flogging a dead horse, but now that the cedi has seen some level of appreciation and or stability against most internationally traded currencies, I believe this is the time for us as a country to take steps to guard against a repetition of the free fall that we witnessed in the first three quarters of the year. Whereas I understand clearly some of the arguments or reasons given for the abysmal performance of the cedi over the first eight months of 2014,I think most people are ignored or intentionally overlooked the proverbial “elephant in the room”.

Sometimes it is good to use first principles (basic principles) in our approach to diagnosing problems and also finding solutions to problems. Using first principles, without getting too technical, exchange rates are determined by simple demand and supply forces in an economy. If we have more cedis chasing fewer dollars (or foreign currency) the cedi will depreciate, conversely when we have fewer cedis chase more dollars (or foreign currency), the cedi will appreciate.

Given this background, the situation Ghana finds itself in is a simple case of excessive demand for foreign currency. The logical question then is, how did we get here? Na who cause am? For how long can we continue to run to foreign institutions for money to effectively support our currency? Our how many more national assets can we sell to support the cedi?

We got here as a result of several years of lack of appropriate policies, implementation of bad policies and rent seeking. We have over the years almost completely mortgaged our economy to foreigners and their agents and now we are beginning to get the 'dividends' of our actions and inactions. Let's take a look at the some of the reasons why the demand for foreign currency is much higher than the supply of same.

First, the structure of our economy is such that we are not self-sufficient in most sectors. We do not control our economy. From the agriculture sector to the financial services sector we have to import (services and products) to supplement local production. One may ask, why should Ghana be importing plantains, onions, tilapia or tomatoes? Or why should we have foreign owned and foreign operated microfinance firms? Governments and government official have the penchant for thinking 'foreign investors' are the solution to all our problems; and thus bend backwards to satisfy the needs of the foreign investor. As a result we put more pressure on the demand for foreign currency because these “foreign investors”, after getting all the tax holidays and establishing in Ghana, there comes a time that they constantly demand foreign currency in order to repatriate their earnings to their home countries.

Second, with the growth of the Ghanaian economy comes along with it the increased requirement for energy to fuel the same. The problem is that the largest proportion of Ghana's fuel requirement (crude, gas and refined petroleum products) is imported. This puts a lot more pressure on the demand for foreign currency.

Third, the insatiable haste to award major contracts to foreign companies is probably one of the top three reasons why we find ourselves in this current predicament. When we take foreign currency denominated loans to finance projects which are awarded to foreign owned companies, it is certain that we will find ourselves in a situation of increased demand for foreign currency. Most of the time, there is very little local content requirements in the contracts we sign with foreign companies. So these contractors procure almost all the inputs; materials and sometimes labour; needed to execute the projects, from outside the country and at the end of the projects, they repatriate all their earnings to their home countries. Some people may argue that taking foreign loans to pay foreign contractors to execute projects in the country do not affect the demand and supply balance of foreign currency; but I disagree with that assertion. The effect is only delayed; because when our government makes payments on the loan, it requires foreign currency in order to make the payments, thus tilting the demand and supply balance for foreign currency.

Forth, similar to my previous point, the elephant in the room, is that most sectors of the Ghanaian economy is controlled by foreign interest, these include the telecom sector, banking sector, technology sector, manufacturing sector, organized food and beverage sector, retail sector, oil & gas sector, etc. In fact it is very difficult to identify one industry that is dominated by Ghanaians; not even prostitution! One may ask how does this affect the depreciation of the cedi?

One, most of these companies connive with Ghanaians to make a mockery of our local content and Ghana Investment Promotion Centre (GIPC) regulations; they import raw materials and consumables that could easily be procured locally thereby putting added pressure on the demand for foreign currency. Two, at the end of every fiscal year, these foreign owned companies pay dividend to their owners who are non-Ghanaians hence the dividend must be converted into foreign currency and repatriated. Three, there are allegations that some of these foreign owned companies illegally move money out of this country without accounting for it and paying the appropriate income taxes. If that is true, then we can just imagine the enormous pressure that will be on the demand for foreign currency.

Fifth, crime has a very significant effect on the excessive demand for foreign currency in this country. The two obvious crimes that may affect Ghana's exchange rates are corruption and money laundering. Many Ghanaians and foreigners who engage in organized corrupt acts are quick to move their illegally acquired wealth out of the country so as not to leave any self-incriminating evidence. The same way criminals and drug dealers find very creative ways to launder (clean) their money after which they move it outside the country. For these two groups of people they are willing and able to bid up the exchange rate to whatever level in order for them to get as much foreign currency as they require.

Finally, with all the pressure on the demand side of the country's foreign exchange needs, the nature of our economy is such that the sectors that bring foreign currency into the country (earned through exports of cocoa, gold, timber and recently crude) are unable to bring nearly enough to ensure that there is a balance between the demand and supply of foreign currency. In other words Ghana's economy has a huge trade deficit which is not shrinking as one would have expected.

Over the past several months various people have prescribed different solutions to stem the free fall of the cedi; the good news is that most of the suggested solutions have economic basis. The not so good news however is that most of the prescriptions are short term in nature. They may give the cedi a pause from the free fall but in the long term the problem will recur; we will end up going through cycle of free fall, followed by temporal stability then another free fall. Government should start thinking long term now that the cedi has seen some stability.

Unfortunately the demand for foreign currency is so high that whatever amount of foreign currency government may put into the economy to shore up the cedi will be mopped up over time by the various actors in the economy as stated above. The sad truth is that the stability of the cedi we are enjoying is only for the short term in the long term local currency is very likely to depreciate again unless we change the structure of our economy.

The long term approach will require the government to empower and support local investors, entrepreneurs and professionals to play active roles and take over majority ownership in the various sectors of our economy in order to reduce the endless repatriation of foreign currency to outside destinations. Government must for instance consciously support agriculture (using a 'home grown solution') to ensure that we stop the voracious importation of farm produce such as green beans (from Togo), onion and Tomatoes (from Burkina Faso), potatoes, pig feet, turkey tail (from Europe), etc.

As part of the solution, the ministry of trade for instance must put in place policies that will make it unprofitable for people to import things such as tooth picks, toilet rolls, fruit juice etc. into the country. Policies should be put in place to provide funding and professional support for local industries and entrepreneurs for them to provide the products and services that we currently import. Some of these products when produced locally could easily be exported to other West African countries to earn foreign currency. Our tax policies must also be made more entrepreneur friendly so that future Ghanaian multinationals do not die on arrival only for us to keep importing products and services from outside Ghana.

Government must have a five or ten year program that will empower local contractors and companies to be able to execute very large projects, including those that are funded with foreign loans.

Government and parliament as a matter of urgency must consider setting up a Local Content Authority (LCA) that will be tasked with coming up with local content policy that is applicable to all industries/sectors of the economy. The LCA will also have the authority to enforce all local content laws/policies and punish appropriately person or companies that violate the policy. In this regard Ghana has a lot to learn from Nigeria in terms of local participation in industries such as the Financial Services industry, the Telecommunication industry and the Oil & Gas industry etc. Governments must take note that operating a liberalized economy does not mean granting an unbridled access to one's economy.

Finally, we cannot ensure the stability of the local currency if we do not pay particular attention to economic crimes. The EOCO must be empowered with resources and legislative authority devoid of political influences to do its work without fear or favour.

We must face the truth (devoid of politics) about the exchange rate and take actions that will lead to a long term stabilization of the Ghanaian currency.

Prosper Kwesi Acquah

Business & Financial Analyst,

A pro-poor advocate.