The Politics Of The Ghana Cedi Fluctuations With The USD (United States Dollar)

The politics of Ghana’s exchange rate with the USD and other major trading currencies can be likened to the case of a toad groping about in search for new aquatic abode, following the drying up of its previous home. It is jubilant when it finally lands a dam and thinks that is the ultimate eternal abode. The dry season sets in and is rather prolonged and the dam also begins to dry up. At this moment, it realises that the search for the ultimate solution to its perennial problem is far from over.

Barely a month ago, the Vice President of the Republic, Dr Mahamudu Bawumia, famously declared that the government had essentially “arrested the cedi and given the keys to the IGP”, to which the Finance Minister, Ken Ofori Atta noted that it was out of deliberate calculative attempts by government which saw the appreciation of the currency. The finance minister’s assertion echoed some confidence to the public to the effect that we had finally found a solution to our currency problem.

This was particularly reinforced by the apparent sustainment of such incremental gains of the cedi in a space of about 2 months. Data from the Bank of Ghana show that on March 8, 2017 when the cedi began to appreciate, a unit of the USD was equivalent to GHS4.6 while that of the GBP (Great British Pound) was GHS5.6. By April 28 (the peak of appreciation), a unit of the USD traded at GHS4.18 while the GBP traded at GHS5.41. This shows a 9.2% appreciation of the cedi over the USD compared to a 3.4% over the GBP. While the gains could be attributed to the USD247 million trade surplus recorded in the first quarter of 2017 (the first surplus since 2011), the fact that the appreciation only began towards the second week of March makes this argument less persuasive.

Admittedly, the trade surplus may have contributed, but the most likely source of the appreciation came from the 2.25 billion bond issued by the Government of Ghana earlier in the year. The fact that the cedi made more gains on the USD than on the GBP makes this view compelling, given that Franklin Templeton, the US-based investment company that purchased about 95% of the bond, came in with United States Dollars and converted to Ghana cedi to buy the local currency denominated bond. The cedi’s relatively weak performance against other foreign currencies further supports this argument.

As of the time of writing (May 30), a unit of the USD trades at GHS 4.295, while the GBP is traded at GHS 5.42. This is a manifest confirmation that this approach to stabilizing our currency is not sustainable. And soon enough, it would become clear that we are yet to find an eternal fix to the currency depreciation problem and the magical wand of the Economic Management Team is fast losing its appeal.

How do we find an everlasting solution to our currency depreciation problem? Strictly speaking, the solution lies in correcting the balance of payment constraint. This formed the basis for the government’s premature announcement that they were curtailing the depreciation of the currency in a deliberative manner. However, correcting the balance of payment challenge by borrowing externally, albeit in local currency, is akin to deferring payment of your utility bills. The gains made on the currency will begin eroding gradually when interest payments streams start to kick in.

A standard approach to solving the long debacle is by looking at the exports - imports structure of the Ghanaian economy. We either need to increase exports and/or decrease imports. The latter is rather welfare reducing to the Ghanaian people and could end up being at a cost to the domestic economy and its citizens, as it would involve such anti-trade policies such as quotas and import tariffs. For an economy whose citizenry is heavily dependent on manufactured imports, such tariffs and quotas are unlikely to reduce, in a significant measure, the importation of such products.

The former (increasing exports) is a more realistic approach, but how do we increase the incomes from our exports? The standard neoclassical prescription will be to promote efficiency gains in the exports sector, in line with our comparative advantage. This would entail increasing the production and/or increasing value for our exports. In this view, we should focus on increasing production of gold, cocoa, cashew, diamond, bauxite, etc., to keep up with our balance of payment needs.

However, Hans Singer (1949), and subsequently Raul Prebisch, has shown that the net barter terms of trade for primary products will continue to deteriorate, and we have to continue increasing production of our primary exports more than proportionately to keep up with our manufactured imports demand. This is especially true if we consider that the net barter terms of trade of manufactures would continue to rise. As pointed out by influential authors such as Thirlwall (2011), Chang (2008), Lin (2010), etc., this neoclassical view assumes short term efficiency gains for long term sustainability, and would only prove useful in the short term. In the long-term, the near-impossibility of increasing production of primary products indefinitely makes efficiency gains less attractive as a cogent and coherent solution.

The bulk of evidence show that price fluctuations and terms of trade deterioration renders commodity export led growth unsustainable and subjects the local currency to sustained depreciation. The solution to this constraint lies in diversifying into the production of manufactures and moving up the value chain through industrialization. And just as the World Bank (1993) in its Miracle study of East-Asian Economies admitted to the significant role of moderate financial repression to the success of South Korea, while at the back end, advocating financial liberalization to us (to which I will return some other time); so would it acknowledge the role of industrial policy and industrialization to our success in the future if we are foolhardy enough to bite the bullet now. And while industrialization offers no straightforward path, and even its ardent proponents are sharply divided on whether it should be comparative advantage conforming or comparative advantage defying, what is clear is that industrial development is the way to go. This does not only provide a path for resolving our long currency debacle, but offers certain prospects for improved macroeconomic stability and employment creation.

As Arthur Lewis (1956) points out industrial development provides an opportunity for engaging the labour of those who are released from the agricultural and rural areas to the industrial urban centres. Without creating opportunities in the industrial urban centre, the bulk of the youth released from the rural areas are rendered jobless and become conduits for crime and social vices in the urban centres. This is sad not only because able-bodied persons are unemployed and finds life challenging, but also because cheap labour that could be put to use for industrial progress and national economic development is wasted. This is why urban unemployment is on the upward trajectory.

Whilst infrastructure remains a fundamental prerequisite for development, the real challenge for the governments of our fourth republic resides in extending beyond the foundation to painstakingly undertaking industrial policy – a slow costly adventure which does not yield immediate political gain. In the context of our political economy, the way to go is to charter a bipartisan path, where we agree on what industrial policies to pursue and elicit commitment from the various political parties, so that there is continuity irrespective of which party is in government. This is particularly in view of the long-term nature of industrial policy.

In my feeble estimation, this should be the litmus test upon which both present and future governments be measured. And while many of us have short memory, it will nonetheless be remembered that it was in this government or that president’s regime that systematic industrialization drive was started, which marked the beginning of real economic development in Ghana. God bless our homeland Ghana.

By; Abdul-Mumin Ahmed
[email protected]
Student, MSc Economic Development
University of Glasgow, UK.
Suggestions, comments and criticism are welcomed.