This week the cedi has been on the verge of re-entering the kind of exchange rate free-fall last experienced in 2014 and the first half of 2015. During that period an array of administrative measures introduced by the Bank of Ghana failed because they did more to further deflate confidence in the cedi than they did to stem the speculative trading in the currency which had emerged on the back of a widening trade deficit and consequent foreign exchange shortages on the local forex market.
This time around the circumstances are somewhat different. Ghana is enjoying a sustained merchandise trade surplus but its capital and financial account is suffering a widening deficit brought about largely by the strengthening of the dollar and rising interest rates in the Western hemisphere, but also partly by rising foreign exchange obligations on Ghana’s public debt, both external and domestic debt segments inclusive.
Political criticism over the incumbent administration’s failed promise to stem the cedi’s depreciation is valid but un-helpful. To all but the political opposition which now sees an opportunity to score political points that do little to improve the dire situation facing the citizenry who are getting fed up with the political manipulation employed by both sides of the political divide. What the electorate need now is decisive, effective action, rather than another blame game characterized by “political equalization.”
To be sure, there is little the monetary authorities can do to stem the ongoing situation beyond what it is already doing: letting medium to long term interest rates rise to retain the patronage of foreign portfolio investors while trying to beat down the short-term interest rates which benchmark the short-term lending rates that affect the inordinately credit-driven corporate Ghana. If the BoG’s ongoing efforts at steepening Ghana’s yield curve work it may help to cushion the cedi’s current fall.
But beyond this there is the need for the fiscal authorities to devise solutions of its own, now that its political campaign talk has run its course and reality has set in. Here it needs to accept that the trade surplus Ghana is now enjoying is simply not big enough to negate the fiasco that is afflicting the capital and financial account. The trade surplus direly needs to get bigger if the cedi is to stop its accelerating depreciation.
To this end we suggest that government immediately takes steps to replace the much abused and ineffectual framework of tax exemptions with fiscal incentives for enterprises that engage in import substitution for both their production inputs and for finished goods. For instance, tax relief for beverage producers that replace imported barley hops with sorghum, maize or rice. Or similar tax relief for processed food producers that use local rather than imported packaging materials.
To be sure, significant changes in import duties are difficult to introduce in this era of the common tariff structure for ECOWAS countries and regional trade agreements such as the one between ECOWAS and the European Union. However, there are all sorts of ingenuous administrative measures available to government to discourage imports.
Japan, for instance used such measures in the late 1960s and the 1970s to churn up a trade surplus against the United States, despite the justified protests of the latter, on the basis that the end justifies the means. Today’s China is doing much the same thing in its foreign trade dealings.
The hard truth is that Ghana’s willingness to play “fair” in order to retain the goodwill of its development partners and thus their development assistance is at variance with its stated objective of a “Ghana beyond aid.” Playing fair will ensure that it cannot win through its trade and investment activities with the developed world, and thus will ensure that it will always need aid from those countries.
The cedi’s slide should be a wake-up call for Ghana to start changing the rules immediately rather than emphasizing increased exports which can only be achieved over the long term and taking more foreign exchange financing which sooner than later would translate into net outflows of capital which indeed is a major cause of the cedi’s current travails.