The Cedi And Its Strength
Perhaps, the single most important factor that could derail Ghana's ability to advance to high middle income status is weak fiscal governance; fiscal management in Ghana has not been consistently strong. Poor revenue collection built upon an inadequate tax base and low tax compliance have combined with expenditure pressures particularly in election years leading to large and continuous public sector borrowing.
The strength of the economy and finances of any individual, groups of individuals, entities and even nations primarily depends on how much one generates out of his economic activities and how much one spends on other economic and related activities. The financial state of households is based on the interplay of the income of the household and its related expenditure. Any individual whose expenditure consistently outstrips his income risks being indebted throughout his life. To create a balance in one's financial situation, it is imperative for the individual to either work extra hard to generate additional incomes to meet his expenditures or cut down his expenditures to balance his incomes. But the question is: which of the expenditures should be cut?
Nations, the world over, are confronted with the income and expenditure problem. Internally, governments have huge responsibilities of varied nature to deliver to their citizens. From health, education, roads, water, housing, clean environment, food production and others. These require huge financial outlays to achieve them. On the other hand, government must generate the revenues from its own citizens themselves in their various economic activities and revenues from trade relations with other nations.
Since the natural resources and the capacities and competences differ from nations to nations, there are exchanges of goods and services among nations which, as we all know, are called international trade. International trade is basically exchange of goods and services across borders. However, unlike internal trade where the local currency is the medium of exchange, international trade involves the use of agreed currency.
When Ghana exports more goods and services to another country, all things being equal, Ghana as a nation earns more in foreign exchange than the other nation. This is what is called the Balance of Trade Surplus. There are instances where a country can export goods and services in huge quantities relative to what it imports from its trading partner and yet earn less foreign exchange than its trading partner. This depends on the monetary value of what we export to the other nation and what we import from the other country. In the history of this country, we have exported primary commodities. That is raw cocoa beans, timber, bauxite, manganese, gold, diamond and the rest.
As a developing country, our imports in the early days of our independence had been finished products, pharmaceuticals, capital equipment, educational materials and others whose prices were far higher than the prices of primary commodities we have exported all our lives. Such situations created and I believe still have unfavourable balance of trade surplus conditions for us.
To control imports into the country and save foreign exchange (reserves) and strengthen our currency, the nation used the import license regime to largely determine imports into the country. In other words, as far as I know, the Ministry of Trade issued import licenses to importers before those imports would be financed by the Bank of Ghana as far as foreign exchange is concerned.
This policy at a point in time created a lot of shortages of needed raw materials for local manufacturing industries and other daily consumables popularly called essential commodities since the nation's extractive raw materials for export decreased in volume and value. Many such industries produced far below their installed capacity and deepened the shortages in the economy at the time. Critical construction items like cement and iron rods were seriously in short supply for such a long time that government agencies were in charge of the distribution of the limited supplies. Private property development as well as government infrastructure development were at a standstill for such a long time. The economy virtually grounded to a halt in the late 1970s and the early 1980s.
The Third Republic under President Hilla Limann attempted to address the acute shortages confronting the country then by introducing the Special Unnumbered License (SUL) regime but the policy was short lived when his government was abruptly removed through a coup d'état. When the country in 1983 decided to swallow the bitter pill of the IMF prescribed Economic Recovery Programme (ERP) and its twin sibling of Structural Adjustment Programme (SAP), the policy of Import Licensing was eradicated and in its place, an unbridled liberalization of the economy was put in place.
While the liberalization policy, among others, saw basic and essential goods and services on the market, the financial implications for this country has contributed in no small measure to the unstable cedi whose fall relative to other currencies all of us moan about. Without any regulations to deal with what comes into the country which involves a foreign exchange expenditure, this country has become a dumping ground for all manner of rejected items in other countries. Some of the items are nothing more than filth that occupy precious spaces in this country and make us unhealthy.
Take a walk into the market places and observe the kinds of things our policies have allowed their importations into the country, and you will ask whether we have any cause to complain about the persistent fall of our currency, the cedi all these years. Chicken has become an important protein on our tables, yet no direct and deliberate policy has been fashioned to improve, support and increase poultry production locally to reduce significantly the importation of poultry products, some of which might be years old in the freezers of the exporting nations.
I understand that rice imports sometimes takes as much as US$800 million in a particular year when the land and the climate are available and conducive for us to produce a lot of rice for local consumption. This amount of money on rice imports alone constitutes about a third of the nation's foreign exchange earnings from cocoa exports. Perhaps our governments are comfortable receiving the import duties on these produce and products which duties constitute the biggest chunk of government's revenue.
It is also very pertinent to observe that each time there is a change of government, the cedi falls sharply within a very short period of time. A typical example is what happened to the cedi in the first quarter of 2017. Politicians and other business people who have made millions of cedis through illegal means quickly convert those monies into foreign currencies and hide them in their homes rather than keeping them in the banks for fear of being found out.
The recent fast depreciation of the cedi, aside from the events on the international arena which has affected Turkey and pushing Argentina on the brink and sending Venezuela into the abyss, the poor communication on the part of the Bank of Ghana in respect of the 7 collapsed universal banks is part of it. The confidence of the Ghanaian in the banking sector is dwindling and many depositors believe that 'smaller' banks are on the verge of collapse just as the others. There are panic withdrawals from banks which have not been pointed as being on the same line with the collapsed ones. A bank like the First Allied Bank which has no information in the public domain as going bust, has been a victim of the silence of the Bank of Ghana.
Depositors are instead buying foreign currencies and not saving, thus putting more pressure on the cedi. It is true that the last quarter of the year experiences some amount of pressures on foreign exchange because of the rush to import goods for the yuletide; this rush for foreign exchange has nothing with that. The Bank of Ghana must not just be looking for foreign exchange to prop up the cedi, but more importantly allay the fears of Ghanaians that the Commercial Banks are still the safest places to keep monies.
From Kwesi Biney
Disclaimer: "The views/contents expressed in this article are the sole responsibility of Kwesi Biney and do not neccessarily reflect those of Modern Ghana.