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Feb
09

IS THE CEDI CAUGHT BETWEEN THE DEVIL AND THE DEEP BLUE SEA?

IS THE CEDI BETWEEN THE DEVIL AND THE DEEP BLUE SEA? By CAMERON DUODU

Currencies are like women: once they lose their reputation, they can never get it back.

That is why Central Banks do everything possible to protect their currencies. Above all, they do not talk loosely about their currency, nor do they act rashly when it is in trouble. For rash action can create a loss of confidence in a currency, and trigger attacks on it whose effects are sometimes worse than the crisis the Central Banks tried to prevent in the first place.

Many people think that the measures implemented by the Bank of Ghana this week to try and strengthen the Cedi against foreign currencies, were rash.

In their their cumulative effect, the measures give the impression that Ghana is reintroducing exchange control by the back door. And in the modern world, investors and traders loathe exchange controls above almost everything else. That is why countries like Ireland and Greece chose, in the past few years, to undergo the humiliation of submitting their national economies to the supervision of the European Union – in effect, one EU member, namely, Germany – so that they could continue to retain their ability to trade freely with the power of the Euro and become attractive to investors again.

If Ghana was in the Euro zone, what the EU would be telling it right now would be this: if you want to continue to be allowed to use the Euro, you must (1) cut down your budget deficit and (2) close down or severely prune your unproductive enterprises.

Not only that – the EU would like to know how the budget deficit occurred. The first document it would try and get hold of is the Auditor-General’s Draft Report for the current year! The EU is not interested in economic history. So it would like to know what is going on, Now! and it would ask to see documents from the Accountant-General’s Department, set them against the Draft report of the Auditor-General for the current year , plus outgoing remittances by the Bank of Ghana in respect of expenditure recently incurred by the Government.

And that would be where the fun would begin. Forensic investigators would soon uncover, for instance, whether (1) there are any monies that are still going to the companies that have obtained contracts to supply goods and services to GYEEDA. They would stop such payments at once, on the reasonable assumption that they are tainted by corruption and/or cronyism.

  1. Whether there are projects going on that are being financed locally on the basis of promised loans from overseas; for instance, loans from China.

    And (3) whether there are any “frivolous expenditures” by the Central Government in respect of which down-payments

have been made but on which further payments can be stopped. Such as payments related to aircraft purchases.

Such steps would amount to a loss of financial autonomy by the Ghana Government. But that would be the price to be paid for being frivolous with the people’s money.

Unfortunately for Ghana, there is no supra-national body like the EU that can impose financial discipline on its spendthrift Government. So we find that the same Bank of Ghana whose incompetence has been amply demonstrated in no uncertain terms by, say, the payments to Woyome and others in judgement debts (which have helped to create our huge budget deficits) or the dubious circumstances under which the sale of the Merchant Bank to Fortiz was effected, is the self-same body that is trying to save the Cedi from further depreciation!

Indeed, how can one criticise those who think that to entrust to the Bank of Ghana alone (which, after all did oversee the virtual death of the Cedi in the 1980s and -1990s) the task of saving the Cedi from depreciating again to dangerous levels today, is “like asking an unethical doctor to carry out an HIV test on a woman that the doctor has just raped!”

More important than the comments from sarcastic Ghanaians is how the outside world will view the BoG measures. The London Financial Times, which is the paper most overseas investors get their news and views from, reported the measures thus:

Ghana imposes forex controls in effort to stop currency decline….

Ghana’s currency has lost 3.8 per cent of its value

Ghana’s central bank has introduced a string of foreign exchange controls in a bid to halt the depreciation of the national currency, the cedi, resulting from chronic trade and current account imbalances.

The new measures limit access to foreign exchange and restrict trade transactions to the cedi within what was until recently one of Africa’s top performing economies and most popular frontier markets….

The cedi fell 1.2 per cent to 2.49 to the dollar by Tuesday afternoon.

Analysts said that, while the controls might slow the pace of the cedi’s decline, its course could only be altered if the government takes tough decisions to rein in public spending….

Some business people worry that the measures would choke off foreign investment in an economy which grew at double digit pace following the start in 2010 of oil production in newly discovered offshore fields….

The government ran a budget deficit of 10.2 per cent of GDP in 2013, and may miss its pledge to reduce this to 8.5 per cent this year.

Under the new regulations, foreign-exchange and foreign-currency account holders must provide documentation for transfers outside Ghana and will only be able to withdraw up to the equivalent of $10,000 for travel abroad. Offshore currency transactions by resident Ghanaian companies will be “strictly prohibited”, the bank said, and exporters will be required “to collect and repatriate in full the proceeds of their exports to their local banks within 60 days of shipment.” Banks would then have five working days to convert the proceeds into cedi.

Razia Khan, head of research for Africa at Standard Chartered bank, said ….“Restricting access to foreign exchange is not going to be great for confidence” .

If Ghana had chosen to shoot itself in the foot, it couldn’t have done better than allowing foreign investors to read this type of report. The worst part, of course, is that it’s all true!

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