CAUSES AND EFFECTS OF CURRENT CEDI DEPRECIATION AND SUGGESTED MEASURES TO CURB IT.
ABSTRACT:
The national currency of Ghana, the Ghana Cedi, has recently undergone
a high appreciable fall in value against other major international currencies
with the US Dollar in perspective. Basically, for the purpose of this
assignment we are going to deal with the recent history of the depreciation
value of the Ghana cedi and the meaning of exchange rate, all in the
introductory part of the work. Then we will critically explain the causes of
depreciation of cedi, the effects of this depreciation of the cedi on the
Ghanaian economy and finalize on some of the suggested ways that can be enacted
as measures to stabilize the currency and the economy as a whole.
INTRODUCTION:
The Ghana cedi has been on a free fall
against the major foreign currencies since January this year, after firming up
against the currencies for the most part of last year. As at Monday 7th
February, 2011 commercial banks’ indicative prices quoted by the Bank of Ghana
revealed that $1 was being sold at GH¢1.54, compared to GH¢1.45 at the
beginning of the year.
So far, the depreciation of the local currency is the highest value drop since it was redenominated in July 2007. The rising dollar is attributable mainly to a rebound in the US, UK and European economies and also the increasing importation of goods into the country as against low exports. The rising crude oil prices appear to have also mounted pressure on the cedi with respect to the dollar.
So far, the depreciation of the local currency is the highest value drop since it was redenominated in July 2007. The rising dollar is attributable mainly to a rebound in the US, UK and European economies and also the increasing importation of goods into the country as against low exports. The rising crude oil prices appear to have also mounted pressure on the cedi with respect to the dollar.
Furthermore, analysts believe a recent
proposal by US President Barack Obama to cut corporate taxes and boost spending
for education, innovation and infrastructure in the world’s largest economy, in
addition to creating jobs and spurring growth might be reasons for the dollar’s
increase in value. However, Paa Kwesi Amissah-Arthur, Governor of the Bank of
Ghana, has assured investors that the current decline in the value of the local
currency is temporary.
According to Mr. Amissah-Arthur, the minimal impact is indicative that the measures put in place to counter the effect are working. Razia Khan, Regional Head of Research, Standard Chartered Bank PLC, told Joy Business on the Monday that the depreciation of the cedi, since the year began, is very significant though he expressed the hope that the Central Bank would find a remedy for the situation. Collins Appiah, Head of Research of Gold Coast Securities, also expressed confidence that the fall in the cedi will not last long.
According to Mr. Amissah-Arthur, the minimal impact is indicative that the measures put in place to counter the effect are working. Razia Khan, Regional Head of Research, Standard Chartered Bank PLC, told Joy Business on the Monday that the depreciation of the cedi, since the year began, is very significant though he expressed the hope that the Central Bank would find a remedy for the situation. Collins Appiah, Head of Research of Gold Coast Securities, also expressed confidence that the fall in the cedi will not last long.
As at the close of trading Monday, the
cedi had depreciated by 4.05, 8.34 and 6.20 percent respectively against the
dollar, the pound and the Euro. Some traders, including rice importers and
spare parts dealers, have already indicated their intention to pass the burden
onto consumers. This means the price of items will go up accordingly. An
exporter, Blue Skies, has also expressed worry about the losses among others.
It noted that anytime the local currency fell, it posted losses.
Raw materials imported from overseas by manufacturing firms would also impact on prices on the local market. Consumers therefore stand at a great disadvantage as they would need more money to buy goods. An unstable exchange rate will also prevent foreign investors from putting their capital in Ghanaian equities, since they will record losses at the time they would be retrieving their investments.
The free fall of the cedi impacts on both importers and exporters and could trigger inflation hikes. Prices of goods tend to go up anytime the Ghana cedi falls against the US dollar especially since the local currency is pegged to the American currency. It is also likely the phenomenon could affect the Gross International Reserves position of the Bank of Ghana or the Balance of Payment of the country, most analysts and market watchers have indicated.
At the end of September 2010, the cedi had appreciated by 2.1, 7.8 and 15.4 percent against the dollar, pound and euro respectively. This is mainly attributed to an improved Balance of Payments (BOP) which is largely supported by the International Monetary Fund (IMF) and gross international reserves then at 3.1 months of Import Cover.
Raw materials imported from overseas by manufacturing firms would also impact on prices on the local market. Consumers therefore stand at a great disadvantage as they would need more money to buy goods. An unstable exchange rate will also prevent foreign investors from putting their capital in Ghanaian equities, since they will record losses at the time they would be retrieving their investments.
The free fall of the cedi impacts on both importers and exporters and could trigger inflation hikes. Prices of goods tend to go up anytime the Ghana cedi falls against the US dollar especially since the local currency is pegged to the American currency. It is also likely the phenomenon could affect the Gross International Reserves position of the Bank of Ghana or the Balance of Payment of the country, most analysts and market watchers have indicated.
At the end of September 2010, the cedi had appreciated by 2.1, 7.8 and 15.4 percent against the dollar, pound and euro respectively. This is mainly attributed to an improved Balance of Payments (BOP) which is largely supported by the International Monetary Fund (IMF) and gross international reserves then at 3.1 months of Import Cover.
FOREIGN EXCHANGE RATES AS AT FEBRUARY 9,
2011
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[Source: Bank of Ghana]
An
exchange rate between two currencies is the price of one currency in terms of
another. For instance the exchange rate between
Ghana cedi and America dollar is the price of the dollar in terms of the cedi.
The exchange rate between two currencies in a country is predominantly
influenced by the forces of demand and supply of the currencies in that
country. Thus, if more cedi have to be used to buy one dollar in Ghana, it
simply means that the aggregate demand for the dollar in Ghana is greater than
the aggregate supply of dollar in the Ghana. Since colonial time and
independence, Ghana has mostly depended on the export of natural resources
(cocoa, timber and minerals) in their raw state so as generate the supply
foreign currencies in order to manage the country’s balance of trade and
balance of payment.
It has been this same primary effort which
we have always used to basically manage the exchange rate between the cedi and
other international currencies such as America, the British pound, the euro and
the CFA. As the demand for a particular foreign currency in Ghana tends to be
continuously greater than the supply, the price of the foreign currency 9in
terms of the local currency) or the exchange rate tends to be rising; and in
this situation it is said that the local currency’s value is depreciating in
its relationship with the foreign currency. Since independence, the Ghana cedi has
been depreciating in relation to several major international currencies such as
CFA, the American dollar, the British pound, the EURO, the Japanese yen and
many others.
THE GRAPH BELOW INDICATES THE FLUCTUATION OF THE CEDI
AGAINST THE US DOLLAR AS AT SEPTEMBER, 2009
[Source: Bank of Ghana]
CAUSES
OF THE DEPRECIATING VALUE OF THE GHANA CEDI
Indeed, the cedi started sliding against
the dollar since it redenomination and is still depreciating as of now .. This
situation is attributable to the negative impact of the four interlinked
crises; food and fuel crunches accompanying and intensifying a financial one,
which in turn became a global economic recession that rocked the world in the
year 2008. The following are the reasons why the cedi is depreciating against
the dollar;
Ø THE TIMING OF THE REDENOMINATION OF THE CEDI
Since the introduction of
the Ghana Cedi, it has witnessed significant depreciation in its value. This is
because before its introduction, the economic fundamentals (balance of
government finances and foreign reserves) that were necessary to support the
value of the cedi at its appropriate level were all very weak .The composite
index of economic activity was showing significant negative growth. Between
July 2007 and December 2007, the central bank was reported to have released
USD288 million to prop up the currency. Despite this, the year 2007 ended with
the new Ghana cedi having depreciated by 5.1%. As of that time, it was in
circulation with the old currency. The year 2008 was characterized with a
continuous sharp depreciation and currency propping by the central bank.
Throughout 2008, USD918 million was used by the central bank to prop up the
cedi. Due to the weak economic fundamentals, namely high spending by the
government and the associated growing fiscal deficit, surging monetary growth,
rising inflation, and declining foreign reserves that continued to exist in the
economy, the cedi depreciated by 25.3% against the dollar in 2008. The
implication of this is that by December 2008, the cedi had seriously been
weakened, causing it to further depreciate by 13.6% in the first quarter of the
year 2009.
Ø LIBERALIZATION OF THE
CAPITAL MARKET TO FOREIGNERS.
Due to the liberalization of our capital
market foreigners are allowed to buy and sell bonds in the country. As a result
of this by December 2008,
foreign investors were holding 46% of Government of Ghana 3-year fixed bond and
87% of 5-year fixed bonds. The risk associated with foreign investors
participating in the capital market is that, when they sell their bonds to
local participants, it has serious foreign exchange obligations for the local investors,
which tend to put pressure on the value of the domestic currency. Since the global financial crisis
emerged in October 2008, foreign investors have offloaded a total of USD145
million of their bonds to local investors. There is also evidence that the
sharp depreciation of the cedi in 2008 contributed significantly to the foreign
investors’ withdrawal from the government securities market, thus causing
further decline in the value of the cedi (source: MINISTRY FINANCE AND ECONOMIC
PLANNING).Perhaps the biggest reason why the cedi is falling 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 the
country does to protect its currency is to use its gold reserves. As a result of free market policy adopted by
the government Ghana has sold all its gold reserves to multi-national mining
companies .This lack of Gold reserves is the chief reason why the cedi is
depreciating, because gold is used to strengthen a country’s currency in
difficult periods such as what the cedi is currently facing, but Ghana as a
country we have none.
Ø HIGH IMPORTATION BY BUSINESSES
The
Ghana cedi again depreciated in value recently. It follows a string of losses
that has seen the local currency depreciate by almost 3 percent against the
dollar. Since the beginning of the year 2011.One would need 1 Ghana cedi 4941
pesewas to buy the dollar as of 9th of February, 2011. This is the lowest value
drop in the value of the currency since it was redenominated in 2007.Another
reason why the cedi is falling is because of the serious balance of payments
deficit that is facing the nation. 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. Ghana used to be a rice producer but due to
“free market” policies, Ghana has abandoned its once thriving rice industry now
imports rice, in the process leaving thousands unemployed. Now, Ghana is a
chief importer of rice worth up to $US500 million a year. Just imagine what a
fraction of that could do to the economy of Ghana if it was invested into the
local rice production. Oil is the main import expenditure that Ghana
faces, although it has started producing oil. Ghana has to import billions of
dollars worth of oil annually in order to support both commercial and domestic
use. Oil is a major chunk of the importation bill and because oil is priced in
US$ it puts a huge strain on the value of the cedi. Therefore, since we import
virtually everything that has to be paid for in US dollars, the economy is
experiencing an enormous strain, because Ghana has to buy US dollars with Cedi
to pay the importer.
Ø THE DUTCH DISEASE
It
is a situation by which a new natural resource has been discovered in a nation
and as a result of that people’s attention, resources and commitment have been
shifted to that particular natural resource to the neglect of the production of
basic goods and services. Also, it is a phenomenon that usually plagues new
entrants in the league of oil producing countries .As Ghana discovered oil and
gas they shifted their attention to the oil and gas industry to the neglect of
the production of basic goods and services and therefore imports everything
into the country. And to import, we need more of foreign currency (dollar) to
import which lead to the depreciation of the cedi.
Ø FALLING OF COCOA AND GOLD PRICES
The Ghanaian cedi would continue to
depreciate to the US dollar through the first half of 2009, analysts at Gold
Coast Securities (GCS) have said. They explain that the major factors that have
given rise to a steady run down of the local currency are beyond the control of
monetary and fiscal policy in the near term. Speaking in an interview , Collins
Appiah, Head of Research at Gold Coast Securities explained that excess demand
of the dollar in the local economy and the subsequent sharp depreciation of the
cedi to that currency have been aggravated by falling cocoa and gold prices on
the international markets. He noted that the fall in the prices of these major
exports has meant a reduction in the inflow of foreign exchange.
Ø INFLATION
Inflation has a negative
relationship with the value of money. Whether cost push or demand pulls
inflation, the rate at which the value of money (Ghana Cedi) depreciates
depends on price increments. The higher the price increment, the lower the
monetary value (Depreciation of the currency).This problem is experienced even
now in Ghana. Among the prominent factors that cause inflation include; low
productivity, high population growth rate, excess money supply, imported inflation
example the current fuel price hike on the international market, high demand
against lower supply of goods and services, and high government expenditure
especially capital investment. Also, the implementation of the Single Spine
Salary Structure by government is likely to be one of the major causes of
depreciation of the country’s currency (the Ghana cedi). This excess supply of
money in the economy is not backed by corresponding growth in output and the
result is more money chasing fewer goods in the country.
EFFECTS OF THE DEPRECIATING VALUE OF THE GHANA
CEDI ON THE ECONOMY
The
depreciation of the Cedi has numerous effects on virtually every sector of the
economy most especially the financial sector, industrial sector, agricultural
sector, just to mention a few. Beneath are some of the effects the fall in the
value of the Cedi to the Dollar poses on the economy at large.
Ø
BALANCE OF PAYMENT DEFICIT
The balance of payments is the value 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. It 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. As a result of this, the
country has to import billions of dollars worth of oil annually in order to
support both commercial and domestic use. So since we import virtually
everything that has to be paid in US dollars, it has resulted in enormous
strain on the economy because Ghana has to buy US dollars with its Cedi to pay
the importer. Ghana's main exports (Gold,
Timber, Cocoa, Bauxite and some agriculture products) which generate low
commodity prices and low royalty payments means that the country receives very
little in export earnings. Ghana’s
overall balance of payment has deteriorated sharply in the last five years,
plunging into a huge deficit of US$940.8 million — the equivalent of 5.8
percent of GDP in 2008, according to the Think Tank, Centre for Economic Policy
Analysis (CEPA). This balance of payment deficit exerts pressure on the country’s’
foreign reserves as it is sometimes used to offset the country s debts.
However,
the discovery of the oil in Ghana is believed that in less than no time would
overflow and perhaps solve the issue of Ghana importing high Barons of oil from
other oil endowed country.
Ø INFLATION
A fall in
the exchange rate makes imported goods and services more expensive in Ghana.
Even though, government subsidies most of our imports to reduce the full impacts
on Ghanaians but this does not cover it out rightly and therefore by nature of
the inelastic demand of this imported products, Ghanaians has to bear the cost.
This especially manifest in the prices of petroleum products. The recent fuel
price hikes has virtually affected every economic activities in the economy
ranging from transportation sector, agriculture and even the manufacturing
sector. Producers may then pass on higher costs of imported components and raw
materials onto consumers. This fuels “cost-push" inflation. Wages may rise
in response to this triggering off the possibility of a wage-price spiral. The
extent to which a depreciation of the Ghana cedi causes inflation depends on
how producers price their imported commodities and how they extend the cost to
final consumers.
Ø ADVERSE EFFECTS ON THE MANUFACTURING AND INDUSTRIAL SECTOR
The cedi has over the past two months, been
depreciating to the major currencies, causing some concern in business circles
in the country, especially the manufacturing sector which mostly imports its
raw materials. This development has become a source of worry to the business
community, especially as some offshore investors are selling government bonds,
recouping cedi and converting them into dollars - thus putting pressure on the
cedi, which was stable within the 1.42 - 1.44 band for most of 2010.
Many companies,
including those in the informal sector, are worried that the erratic nature of
the Cedi value will cause a decline in their profit margins. The main trait is
that as the cedi depreciates, companies - especially those that have to account
for some inputs in foreign currency - are left with exchange losses in the
translation from the cedi to dollars. Posting exceptional items such as
exchange losses in financial statements is nothing new, but where this becomes
extremely significant and goes out of control - even after making contingent
provisions for its occurrence in budgetary allocations - accountants and
business managers find it difficult to plan for the future.
Also, high oil prices have fuelled the
depreciation of the currency by increasing import bill and for that matter, the
cost of imported raw materials for the manufacturing subsector. This invariably
causes increase in production costs. Industries have no option but to pass the
cost to consumers in the form of high prices of local manufactured products.
Again these manufacturing firms are not able to compete with foreign industries
who produce similar product as a result of their low priced goods as against
the higher priced product locally produced. When this persists for long it may
lead to winding up of these industries.
Ø THE ADVERSE EFFECT ON GOVERNMENT AND THE AGRICULTURAL SECTOR
The agric sector in Ghana is the highest
contributor of employment and revenue in the country. It is needed to fuel
growth in the other sector in the economy. Statistics about the sector from the
past years depicts that, it remains a mainstay of the economy accounting for
more than one third of formal employment. The major contributors in agric
foreign exchange earnings are cocoa, timber and nontraditional agric export.
The government invests in the agric sub-sectors like crops, livestock and
fisheries, cocoa and so on. Nevertheless, the fall in the value of the cedi to
the dollar causes the government to invest a relatively higher proportion of it
revenue in the agricultural sector since it is the major contributor to the
growth of the economy. However, the industrial sector in Ghana are not
resourced enough to process the raw material hence, they are exported in their
raw state which does not lead to high revenue generation. Therefore, the
government spends more in the sector but generates a relatively less rerevenue from it. Furthermore, the decrease in
the value of the cedi will cause the major input of the production to increase
and thus, making it difficult for many poor smallholders who dominate the
sector to afford them. This in turn has implication on productivity and hence
the producer transfers their high cost of production to final consumers which
affects the general standard of living.
Ø LOW INVESTMENT AND UNEMPLOYMENT
Depreciation of the cedi and unstable exchange
rate with respect to other major currencies decrease the confidence of both
local and foreign investors due to the anticipation of higher losses. These
reduce investment in the country and thereby making it difficult for more jobs
to be created in the country. At the end it contributes to high unemployment in
the Ghanaian economy.
Ø POSITIVE EFFECT ON EXPORTS
It should however be noted that the
depreciation of the Ghana Cedi against other major currencies can have a
positive effect on the export of goods and services. This is because as
importers are discouraged from importing more goods from foreign countries, it
serves as an opportunity for local producers to increase their supply in order
to supplement the demand of goods, and eventually export some to other
countries.
Also, exporters after selling their products
to other countries, they gain foreign currencies (such as the US$) which when
converted to the Ghana Cedi is a huge amount of money for exporters. This
increases the capital base of exporters which can be re-invested in order to
enhance their productivity.
MEASURES TO HELP STABILIZE THE GHANA CEDI
AND THE ECONOMY AS A WHOLE
Due to the effect of the depreciation of
the Ghana Cedi against other major international currencies (especially the US
Dollar) on the economy, we therefore suggest the following measures to be put
in place in order to help stabilize the Ghana Cedi and subsequently, stabilize
the economy as a whole:
Ø INCREASE EXPORTS AND CURB
IMPORTS
Since the balance of payment account of
Ghana has been indicating a deficit balance of Ghana’s involvement in
international trade it stands to reason that we spend more Ghana cedi to
exchange for other foreign currencies
before trade is made possible and hence a fall in the relative value of
our currency. One way this problem can
be solved is to put restrictions on excessive importation of goods and services.
Government can adopt international trade policies such as tariffs, embargos,
quotas, voluntary restraint agreements (agreements in which countries voluntarily
restrict their imports), Regulatory Trade Restrictions (government- imposed
procedural rules) and the establishment of efficient import substitution firms.
All these measures make imports relatively expensive and limited thereby
encouraging local entrepreneur to invest in the profitable ventures that
enhances the ability of government to getting revenue. This also promotes the
exportation of both traditional and non-traditional commodities with added
value that commands high prices in the international market hence inflow of
foreign exchange that are used on infrastructure and other developmental
projects in the economy. The government can also make a Nationalistic Appeal
such as ‘Friday wear promotions’, ‘Buy made in Ghana goods’,’ Ghana in me’ and
so forth to inform Ghanaians about the value to patronize our locally produced goods.
All this go a long way to prevent the chronic balance of payment deficit that
put downward pressure of the value of the Ghana cedi. The following ways
basically explain the ways of increasing export and reducing import:
1. Export Taxes and Subsidies
Export duties and subsidies provide a means for protecting an economy from internal instability that would be caused by variation in exports and they can have an important effect on international reserves. For example, when foreign demand for a nation’s export is rising the imposition of export tax will divert to the government some of the extra income which would otherwise go into private hands. Conversely, when foreign demand declines, the reduction of export taxes lessens the fall in private incomes and this tend to sustain internal incomes and economic activity. Export subsidies may be used both to increase domestic economic activity by expanding export incomes and to increase foreign currency earnings for balance of payment reasons. Some economists argue that sometimes higher inflation is associated with rapid economic growth and structural changes in the economy. This is true; however, I believe that, in a developing economy, when constant higher-inflation is being experienced, then the country could be heading towards economic, social and political chaos. In the light of this the policy makers must leave no stone unturned to get on top of the situation now before it is too late.
Export duties and subsidies provide a means for protecting an economy from internal instability that would be caused by variation in exports and they can have an important effect on international reserves. For example, when foreign demand for a nation’s export is rising the imposition of export tax will divert to the government some of the extra income which would otherwise go into private hands. Conversely, when foreign demand declines, the reduction of export taxes lessens the fall in private incomes and this tend to sustain internal incomes and economic activity. Export subsidies may be used both to increase domestic economic activity by expanding export incomes and to increase foreign currency earnings for balance of payment reasons. Some economists argue that sometimes higher inflation is associated with rapid economic growth and structural changes in the economy. This is true; however, I believe that, in a developing economy, when constant higher-inflation is being experienced, then the country could be heading towards economic, social and political chaos. In the light of this the policy makers must leave no stone unturned to get on top of the situation now before it is too late.
2.
The Demand Side Exchange Rate Management
Even though several governments have
noticed that the reliance on raw materials exports was never enough, not
sufficient efforts have been made to improve the supply of foreign reserves
through diversification of income sources and the need to add value to our raw
materials- a knowledge known to many of us since the 1960s. When it became
obviously clear that we could not depend on the supply of foreign currency from
exports in order to meet our country’s developmental needs, successive
governments have resorted to substantially depending from bilateral sources
from countries such as Britain and USA. Tactically in the literature of Ghana’s
economic management, one recurrent feature has been the widely known about 40%
of the countries annual budget have being funded by donor inflows. It can be
inferred from the above that our exchange rate management practices have mainly
focused on the supply side of foreign currency. The lingering worry for this
heavy emphasis on the supply side (especially via donor support) is the fact
that its sustainability cannot be guaranteed at all times. The question is how
long can we continue to depend on such donor sources in order to halt the
depreciation of our local currency in relation with the major international
currencies? There is therefore the need for the country to begin a concerted
effort to ‘walk on two legs’ by putting in place some strategic initiative to
handle the demand-side of exchange rate management.
It was indicated that the exchange rate is
influenced by the forces of demand and supply. Whilst continuing to emphasize
on the supply factors, this country should also begin to look at the demand
side in order to reap the associated consequential benefits. Focusing on the
demand side of exchange rate management as a nation involves putting in place
policies and measures that will de- emphasize the aggregate demand for foreign
currencies. Putting in place appropriate policies and measures that will de-
emphasizes the aggregate demand for foreign currencies will entail an import-
substitution strategy for the nation. The first President of Ghana, Dr. Kwame
Nkrumah, had an import- substitution plan for this country but it was derailed
with the 1966 military coup. An import- substitution strategy that has the goal
of reducing aggregate demand for foreign currency will generally call for the
development of substitutes for items that are being heavily imported into this
country. Once the substitutes are available and they are well patronized, the
aggregate demand for foreign currency will decline and subsequently, the price
of the foreign currency (the exchange rate) will begin to swing in favor of
Ghana.
Ø REVIEW OF FISCAL AND
MONETARY POLICIES
This deals with actions to be enacted by
the government and other institution involved in stabilizing the economy due to
the appreciable fall in the Ghana Cedi against the US Dollar and other
international currencies. This can be
inferred from the words of the Chairman of FABAG (Food and Beverage Association
of Ghana). The FABAG Chairman called on government to review the fiscal and
monetary systems just not of the cedi. The chairman said “we FABAG also advise
government to dig deep into their economic arsenals in order to avoid the
economic recession that hit the world especially Europe between 2007 and 2008.”
Mr. Moukarzel the chairman of FABAG added that government should increase
investment in the production of staples such as maize and yam in order to
reduce the importation for Ghana to emerge as a major food production country on the
continent. Below are the bodies responsible for the fiscal and monetary
policies as well as what they can do to help solve this situation:
1.
GOVERMENT
The government on her part must reduce her spending. A decline in domestic spending will induce some fall in prices which may assist the process of balance of payments and adjustment. Exports products will become more attractive to foreigners because of lower prices. Domestic substitutes for import products become more attractive also to residents because of their low prices. One may argue that the success of this action to induce favorable movement of the nation’s current account depends upon the elasticity of demand. That is, if foreign demand for the nation’s export is inelastic, the decline in the price will lead to a smaller total foreign expenditure on the exports and that the physical volume of exports will not rise large enough to offset the unfavorable effects on the volume of exports resulting from the fall in their prices.
Conversely, an elastic demand means a more than proportionate increase in the physical volume of purchases as prices fall so that foreigners’ total expenditure for the export rises. I must say that even if the foreign demand for export is inelastic, the balance of payment position will improve if the value of imports falls even more than the fall in the value of exports. The government therefore must encourage exports for example in the area of nontraditional products.
Again the government should give incentives to our farmers and put in place an attractive package to entice investors both home and abroad to invest more in our agricultural sector. This is very critical and holds the key to impact positively on both the inflation and the price of the cedi (exchange rate).
The government on her part must reduce her spending. A decline in domestic spending will induce some fall in prices which may assist the process of balance of payments and adjustment. Exports products will become more attractive to foreigners because of lower prices. Domestic substitutes for import products become more attractive also to residents because of their low prices. One may argue that the success of this action to induce favorable movement of the nation’s current account depends upon the elasticity of demand. That is, if foreign demand for the nation’s export is inelastic, the decline in the price will lead to a smaller total foreign expenditure on the exports and that the physical volume of exports will not rise large enough to offset the unfavorable effects on the volume of exports resulting from the fall in their prices.
Conversely, an elastic demand means a more than proportionate increase in the physical volume of purchases as prices fall so that foreigners’ total expenditure for the export rises. I must say that even if the foreign demand for export is inelastic, the balance of payment position will improve if the value of imports falls even more than the fall in the value of exports. The government therefore must encourage exports for example in the area of nontraditional products.
Again the government should give incentives to our farmers and put in place an attractive package to entice investors both home and abroad to invest more in our agricultural sector. This is very critical and holds the key to impact positively on both the inflation and the price of the cedi (exchange rate).
2.
BANK OF GHANA
The Bank of Ghana recently increased the prime rate from 17 to 18.5 percent in this period of Global Economic Downturn. Perhaps the objective behind this critical step is to reduce the supply of loan able funds and control excess liquidity (more money in circulation) in the system.
A major question concerning this monetary policy is whether or not higher interest rates are an effective restraint on spending. Some argue that the interest rate is a small part of the cost of doing business and that, higher interest rates have little effect on investment and therefore little effect on spending and borrowing. Others minimize the effectiveness of higher interest rates on the grounds that borrowers’ expectation of continually rising prices will offset higher interest charges as far as profit expectations are concerned, thus there is little incentive to reduce borrowing.
Whatever be the case, have we taken the pain to analyze this policy’s far reaching implications on the private sector businesses and investments? I believe that the measure has the potential to crowd out the private businesses more especially the small and medium scale enterprises.
We live in a developing world where the government cannot boast of a lot of income because of the structural – cum administrative problems in revenue mobilization. The role of private sector investments cannot be overemphasized. We therefore must encourage the private sector to champion investment to create more jobs for our jobless people as our own home grown stimulus package to get out of the poverty trap in which we find ourselves. We can achieve this by lowering the cost of borrowing while at the same time public unproductive spending is checked by the government.
The Bank of Ghana recently increased the prime rate from 17 to 18.5 percent in this period of Global Economic Downturn. Perhaps the objective behind this critical step is to reduce the supply of loan able funds and control excess liquidity (more money in circulation) in the system.
A major question concerning this monetary policy is whether or not higher interest rates are an effective restraint on spending. Some argue that the interest rate is a small part of the cost of doing business and that, higher interest rates have little effect on investment and therefore little effect on spending and borrowing. Others minimize the effectiveness of higher interest rates on the grounds that borrowers’ expectation of continually rising prices will offset higher interest charges as far as profit expectations are concerned, thus there is little incentive to reduce borrowing.
Whatever be the case, have we taken the pain to analyze this policy’s far reaching implications on the private sector businesses and investments? I believe that the measure has the potential to crowd out the private businesses more especially the small and medium scale enterprises.
We live in a developing world where the government cannot boast of a lot of income because of the structural – cum administrative problems in revenue mobilization. The role of private sector investments cannot be overemphasized. We therefore must encourage the private sector to champion investment to create more jobs for our jobless people as our own home grown stimulus package to get out of the poverty trap in which we find ourselves. We can achieve this by lowering the cost of borrowing while at the same time public unproductive spending is checked by the government.
Ø ADOPTION OF A FIXED
EXCHANGE RATE SYSTEM
The fixed exchange rate policy involves
the situation whereby the government is committing to holding the exchange rate
at a specified rate. Government can pass a law outlawing international currency
having and prohibiting the buying and selling of foreign currencies except at
the rate determined by the government. When this happens, international trade
becomes difficult since the currency cannot be freely exchanged with other
currencies – non convertible currencies. The rate of the non convertible
currency does not respond to shift in supply and demand. Often the only legal
way to get the currency (GH¢) is to buy it from the government and any other alternatives
become illegal. Such capital control-prohibition on outflow and inflow of a
country’s currency-will help avoid making the economic adjustment that
international consideration will otherwise force upon Ghana.
·
Long run exchange rate
policy is currency stabilization (the buying and selling of a currency by the
government to effect temporary fluctuations in demand and supply for
currencies). With this, government does not change the long run equilibrium but
tries to keep it at that long run equilibrium. Successful currency
stabilization calls for government ability to choose correct long run equilibrium.
However, if government runs out of reserves, it must embark on using other
indirect methods affecting its economy in order to affect private supplies and
demands. Thus, adjusting its economy to the fixed exchange rate.
·
Strategic Currency stabilization-
the process of buying and selling at the strategic moments to affect
expectations of supply and demand can also be used to stabilize the Ghana
Cedi
Ø CONTROLLING OF EXCESSIVE
INFLATION
Inflation which is the continuous and
appreciable rise in general prices of goods and services also needs to be
tackled if we want the value of the Ghana Cedi in the international market to
rise (appreciate). There is an inverse relationship between price and the value
of money. If the price is high the value of money is low because the same amount
of goods and services cannot be bought with when price increases given a
constant income of the consumer. Since the country faces a higher rate of
unemployment coupled with this price hikes, most of the goods and services are
imported with an inflationary effect being imported into the country, there is
therefore the need for attempts to be made to control if not totally eradicate
the various economic variables that cause this problem (inflation) in Ghana
especially since the rise in prices are not equivalently off-set by higher
output, lower unemployment and more growth.
Excess liquidity(money supply) which is
derived by the government expansionary monetary and fiscal policies to expand
the economy embarking long –term capital Investment in areas such as education,
health, security, transportation and
among other strategic sectors of the economy whose benefits are not ripped in
the short term must be controlled. Investment in productive sectors, increase
in direct taxes, granting of subsidies in productive sectors and other measures
are prominent means to control this inflation problem in the country. Since
exchange rate are determined by supply of and demand for a country’s currency
it is better for government to initiate policies that reduce pressure for
demand of foreign currency and at the same time strengthen the demand of local
currency (Ghana Cedi) by foreigners. For instance, statistics show that in 1978,
the money supply was approximately ¢4 billion but rose to ¢9 billion in
December 1984 subject to the ever increasing wage or salary bills in 1982 by the
National Redemption Council (NRC) as well as construction of the Kpong
Hydroelectric Pump (1974-1976) to augment the power supply from the Volta Dam
sparked the inflation rate to as high as 40.5% (Source: GCB Quarterly Economic Review, January- December)
CONCLUSION:
Conclusively,
the above analogy basically shows that
the causes of the depreciation of the cedi are the timing of the redenomination
of the Cedi, liberalization of the capital market, high importation by business
men, the Dutch disease, the falling of cocoa and gold prices, and the
inflation. Analytically, the effects of the depreciation of the Ghana currency
against comprise; negative impact of the Balance of Payment (BOP) that is
Balance of Payment deficit, Inflation, Agricultural Sector, Industrial sector
and manufacturing firms. In a nutshell, the measures enacted to curb the depreciation
of the cedi and to stabilize the effect of the depreciation of the cedi on the
economy are; increasing exports and reducing imports through establishment of
subsidies and reducing of exports taxes, review of the fiscal and monetary
policies, controlling excessive inflation and adoption of a fixed rate exchange
system.
REFERENCES:
v Institute
of Statistical, Social and Economic Research (ISSER), University of Ghana,
Legon- Ghana. (2009).The State of the Ghanaian Economy in 2008.
v Ernest
Aryeetey (ISSER, University of Ghana) and Ravi Kaubur (Cornell University). The
Economy of Ghana: Analytical Perspective on Stability, Growth and Poverty.
Woeli Publishing Service, Accra.
v http//:www.ghananewsagency.com/feb.09,2011/.php
v http//:www.bankofghana.org.gh/otherpages.aspx
v David
C. Colander. Macroeconomics (3rd Edition).Irwin McGraw Hill
Companies.
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