The Kenkey Economist: How We Are All Contributing To The Cedi’s Depreciation

The steep depreciation of the Ghanaian currency has caused a lot of media speculation on what may be causing the cedi to fall and who is responsible for it. The President, Finance Minister, Bank of Ghana and mostly politicians have been easy targets. Some have talked about “strange things” happening to the cedi, and some esteemed men of God are praying for the cedi to resurrect without realising how their own consumption choices contribute to the downward trajectory of our currency. I am yet to see any article where the writer has identified his own contribution to the cedi's downfall.

Every Ghanaian has a part to play in the depreciation of the cedi. The cedi is depreciating for two main reasons 1. Ghanaians are consuming more foreign currency to import goods than they earn from exports, creating a short supply of foreign currency. 2. Recent increases in global interest rates have made it more difficult for countries like Ghana, that are living beyond their foreign exchange earning ability to borrow internationally. The impact of this adjustment is being felt not just in Ghana but all across the world. In an increasingly globalized world, one cannot examine key economic shifts in any country in isolation. Over the past year, currencies of South Africa, Turkey, Brazil, India, Indonesia, Argentina etc have also depreciated by 20-30%. Just like Ghana, these countries have been living beyond their means. They have been spending more foreign currency on imports than they can afford from their export earnings and have become dependent on foreign borrowing to plug the hole. On the flip side, other emerging market countries that have lived within their foreign currency earnings ability such as Nigeria, Mexico, Poland etc have enjoyed much more stable local currencies over this volatile period. Indeed, Ghana's foreign currency shortage (current account deficit relative to GDP) is one of the highest in Africa and the rest of the world. This means that the degree to which we live beyond our foreign exchange earnings ability far exceeds almost every other country in the world.

Just like any other commodity people buy in the market (e.g. tomatoes), the price depends on demand and supply. If there is not enough supply in the market, the price goes up. Let's take the cedi-dollar exchange rate as an example. The value of the cedi in relation to the dollar depends on the amount of dollars we need to pay for imported goods compared to the amount of dollars that we generate in the country from exports, remittances, foreign aid etc. As we import rice, fruit juice, wine, chicken, medicine, computers, cell phones, cars, equipment for industries etc we are creating demand for dollars to pay for these goods. We also earn dollars from exporting our cocoa, gold, oil etc. The shortage of dollars only arises if we spend more dollars to buy imports than we earn from exports. The shortage causes the dollar to appreciate while the cedi falls in value. This is because we desire foreign goods so much that we are prepared to pay more in cedis to obtain these goods.

It does not have to be this way. If we lived within our means and constrained our consumption of imported goods to the amount that we can afford with our foreign currency earnings from exports, the cedi is likely to be more stable. Indeed, over the past decade Ghana has generated significant growth in exports and foreign exchange earnings. Our exports have grown from about $2bn in 2002 to an estimated $13bn dollars in 2013. This impressive increase in foreign exchange earnings allows us to import more goods. However, our appetite for imports have grown far beyond this tremendous growth in our foreign currency earnings.

We are living beyond our means. So how have we financed this excess demand for foreign currency? Exactly the same way people who live beyond their means get by i.e. depending on external financing. Over the past decade, Ghana has benefited from international borrowing and foreign investments, which has brought in foreign currency to support some of our excessive import consumption. However, over the past 12 months, external conditions have changed dramatically. Improving economic conditions in Europe and the US have caused steep increases in global interest rates. This means that savers and companies in foreign countries are finding more attractive investment opportunities at home and are less willing to finance countries like Ghana, that are living beyond their means.

While the root cause of the cedi depreciation is clearly based on our insatiable demand for imported goods, individuals and the government are not owning up to their role in this situation. The government is busily trying to borrow from abroad and the Bank of Ghana has enacted a number of measures that have recently proved to be unsuccesful in other countries with the same problem (e.g. Argentina, Turkey, India etc). If we are living beyond our means, any solution that does not deal with adjusting our consumption to our affordability is unlikely to work. Ghanaians need to know and hear the truth. In this case, the depreciation of the cedi has much more to do with our unsustaniable spending habits and lack of an effective government policy framework to deal with this structural problem than with the politics and policies of today.

Essentially, because we as individuals and our government have not been prepared to take responsible steps to correct our unsustainable lifestyle choices, our currency is losing value. The currency depreciation is a signal to every Ghanaian that our appetite for imports is unsustainably high and we need to reduce it. As the cedi depreciates, imported goods become more expensive and our affordability declines. Goods produced in Ghana may also become more expensive as a result of the currency depreciation because they often use some imported raw materials, equipment and spare parts. By making imported goods more expensive, the cedi's fall by itself is a corrective mechanism which curbs our affordability and forces us to reduce our appetite for imports. However, this blanket increase in the cost of every imported item may be a less optimal way for Ghanaians to address our excess import consumption situation. A better result could be achieved through effective government policy aimed at reducing excessive import demand by favouring imported items that are likely to be of most benefit to the average Ghanaian like medicines, agricultural and industrial equipment that encourage local production, and at the same time imposing more punitive measures (e.g. special taxes) on those imported items that may be nice to have but least necesary for the average Ghanaian (e.g. imported drinks, furniture, luxury cars etc). The objective of an effective policy should clearly aim at matching our foreign currency needs to what we generate from exports and has to be continually tightened until such a balance is achieved. This balance will help sustain a structurally more stable currency.

Consuming more than one earns is not sustainable and the rising cost of imported goods will compel us to reduce the amount we consume. Over the long term, individual choices and government policy measures that help to grow exports, encourage local production of goods and discourage excess imports will help us reduce this imbalance. In the meantime, we all need to be more conscious of the fact that every time we decide to eat imported rice rather than kenkey, buy Italian made furniture in a country where wood is abundant, upgrade to more expensive luxurious and bigger cars etc we are doing our bit to pull the cedi down. We are all responsible for the fall of the cedi but the government also bears responsibility in telling us the truth and coming up with policies that help us live within our means.

Author: The Kenkey Economist ([email protected])

The Kenkey Economist is a Chartered Financial Analyst , a graduate of Brown University (USA) and Oxford University (UK). He is currently an Investment Director specializing in Emerging Markets in a leading UK investment firm.