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10.02.2014 Feature Article

Why the Cedi is losing its value

Why the Cedi is losing its value
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There have been many debates on radio and TV as to why the Cedi has fallen sharply over the last 7 months or so.

Many of the commentators who have appeared have blamed everything under the sun from the so-called Global financial crisis through to mis-management of the economy through to the change in government.

What these commentators are not telling Ghanaians, maybe they don't know, is that the real reason why the Cedi is falling is down mainly to two things that they have been unable to articulate to the Ghanaian public.

The first reason why the Cedi is falling is because of the serious balance of payments deficit that is facing the nation.

Briefly, the balance of payments is the difference between what Ghana imports and what it exports. Because of the “free market” policies that have been adopted by governments since the late 1980's Ghana is a net importer.

What this means in simple terms is that Ghana now imports everything under the sun, from toothpaste to tomato paste through to rice, luxury cars and crucially oil.

Oil is the main import expenditure that Ghana faces but before we tackle the oil issue, food for thought - Ghana used to be a rice producer but due to “free market” policies Ghana has abandoned its once thriving rice industry, in the process leaving thousands unemployed, and is now a chief importer of rice worth up to $US500 million a year - just imagine what a fraction of that could do to the economy of Ghana if it was invested into the local rice industry.

Now oil - because Ghana for now is a non-oil producing country, Ghana has to import billions of dollars worth of oil annually in order to support both commercial and domestic use.

Oil is a major chunk of the importation bill and because oil is priced in US$ it puts a huge strain on the value of the local currency but the oil has become a burden rather than a blessing as the vast receipts from oil go outside the country.

Ghana's main exports i.e. what it sells to the rest of the world are Gold, Timber, Cocoa, Bauxite and some agriculture products which as the twin result of low commodity prices and low royalty payments based on biased and greedy one-sided deals by western multi-national means that Ghana receives very little in export earnings.

So since we import virtually everything that has to be paid in US dollars, it is having an enormous strain on the economy because Ghana has to buy US dollars with its Cedis to pay the importer.

Therefore unless we reduce significantly our balance of trade deficit that is currently in the tens of billions of US dollars, the cedi will continue to fall.

Reducing our import bill will also help the local economy because it will create self reliance by creating jobs at home for the ordinary Ghanaian in the case of producing our own rice rather than giving other people jobs by importing rice.

Perhaps the biggest reason why the cedi is falling, and this is not what a single commentator has said, is that as a country we DO NOT have any gold bars in reserves.

In economics it is common that when a country's currency is under attack, the first thing that a country does to protect its currency is to use its gold reserves.

Just recently the British pound was at a 25 year low against the American dollar and as this was having a massive effect on British exports, which in effect would mean British jobs being at risk, the Bank of England decided to use some of its massive gold bar reserves in order to prop up the pound.

As a result of using their gold reserves we have seen in recent weeks that the British pound has gained some ground on the US currency and as the year goes you will see a continued strengthening of the British pound.

In the case of Ghana, again as a result of “free market” policies adopted by the previous NDC government and the last NPP administration, Ghana virtually sold off all its gold reserves to foreign multi-national gold mining companies.

As a result of this ill-advised policy Ghana virtually has NO gold reserves. This lack of Gold reserves is the chief reason why the Cedi is in free fall because gold is used to strengthen a country's currency in difficult periods such as what the Cedi is currently facing.

In the absence of gold bar reserves to prop up the Cedi, the government has taken steps such as acquiring finance from the IMF/World Bank to buy US dollars to prop up the cedi.

Another reason why the cedi is falling rapidly is that as a country we do not make anything – in the days of Ghana's first president Osagyefo Dr. Kwame Nkrumah, Ghana had over 500 factories that was producing, radio's , televisions, fridges, toothpicks, watches, floor tiles, tyres, shoes and so forth – because of the inability by Ghanaians to manage these industries properly coupled with nefarious so-called trade liberalization economic policies imposed on Ghana by the Breton-Woods institutions post 1966, Ghana is now a net importer of these very goods that it was once making.

So as a country we MUST begin the re-industrialization process and start to make things for export that would bring in much needed foreign exchange and more importantly create much needed employment for our people and in the process significantly reduce the teeming unemployed.

Also capital flight is another issue that is affecting our currency. This capital flight is when multi-national companies take their massive profits outside of Ghana and put them in off shore accounts, thus denying the Government of Ghana urgent foreign exchange revenue.

So this is the crisis that is facing the Ghanaian economy which is why the cedi is in free fall.

Unless as a nation we curve our importation of foreign goods, start to re-industrialize Ghana by producing goods and services, stop capital flight by taxing some of these multi-national companies and take active steps to acquire substantive gold reserves by getting more revenue from our gold, our currency will always be at the mercy of currency speculators in the money markets and be in terminal decline and there is nothing the Bank of Ghana can do about it.

Kwame Osei, Dr.
Kwame Osei, Dr., © 2014

The author has 116 publications published on Modern Ghana.Column: KwameOsei

Disclaimer: "The views/contents expressed in this article are the sole responsibility of the author(s) and do not necessarily reflect those of Modern Ghana. Modern Ghana will not be responsible or liable for any inaccurate or incorrect statements contained in this article."

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