The Cedi’s Malaise; Far From Fixed

The Cedi’s Malaise; Far From Fixed

Special-storyIs there finally a puff cushioning the free falling Cedi? Since the beginning of the year, when the Ghanaian currency took a nail-biting nosedive from its gliding descent of the preceding months, there finally seems to be some let up, thanks to a rather controversial directive from the central bank, issued on February 4.

But if the Bank of Ghana’s (BoG) subsequent backflip directive, a couple of weeks later, which it claimed was a clarification to the earlier one, succeeded in staving off the rage of Ghanaian business people who feared losing their foreign exchange holdings with local banks, recent complaints by the Association of Ghana Industries (AGI) and the Ghana Real Estate Developers Association (GREDA) shows all is not yet quiet on Ghana’s financial front.

The BoG, by its February 4 directives, was seeking among other things, to limit withdrawals of foreign exchange from customers’ foreign currency accounts (FCA) and foreign exchange accounts (FEA) to US$10,000, or its equivalent in convertible, per person, per travel,  while also preventing transactions within Ghana in foreign currencies, especially the US dollar.

The beef of the two organisations is that the measures undermine the smooth operations of their members, thereby greatly reducing their competitiveness and, therefore, they should be exempted.

“We will engage the central bank to see how these directives can be looked at again,” said Mr. Sammy Amegayibor, Executive Director of GREDA signaling their determination to have it reversed or modified.

It is unlikely that the BoG will shift its stance. The Cedi, whose steep decline started in December 2013, and depreciated by a whopping 7.8% against the US dollar in January alone, compared to 0.2% in the corresponding period in 2013, arguably turned the corner late February after the BoG issued the directives.

The Bank attributes the Cedi’s woes to both external and internal factors. In its February 2014 Monetary Policy Statement, the central bank noted that the policy of tapering in the US, coupled with economic restructuring by some major economies was undermining the strength of currencies of emerging markets, as well as commodity markets.

While the Bank projected cocoa prices, one of Ghana’s top three exports, to pick up in 2014 after its decline in most of 2013, for the other two, oil is expected to average US$104 per barrel, down from US$108.4 in 2013, while gold drops to US$1,292 per ounce, from the 2013 price of US$1,411.

On the domestic front, it noted that the economy continued to experience fiscal pressures and cost-push inflationary effects from higher petroleum and utility prices.

Fiscal consolidation for 2013 was slower than anticipated, while Inflation expectations heightened and headline inflation ended 2013 at 13.5%, way above the targeted 9%, and subsequently hit 14% at the end of February, 2014. The overall budget deficit was provisionally estimated at 10.2 percent of GDP against a target of 9.0 percent, following a deficit of 11.8 percent in 2012. But even as expenditure was broadly on target, revenue was significantly below target, resulting in the fiscal slippages.

So the domestic pressures, together with the developments in the advanced countries, especially in the US, increased the risks to inflation and exchange rate.

The Bank therefore reasoned that; “the uncertainties in the outlook and weakened domestic fundamentals underscore the need for measures that would reduce the country’s vulnerability to shocks,” therefore its decision to introduce the foreign exchange control measures.

Captains of industry openly kicked against the measures, which the Bank claims it used effectively to stabilize a similar situation in 2012.

Economist Kwame Pianim, who until recently was the board chairman of the United Bank for Africa (UBA) Ghana, said the central bank’s measures would fail, even though, it will help control the stock of foreign exchange in the country, it would disrupt the flow of hard currency into the country since; “every businessman would rather keep his earnings of hard currency in London or New York and issue checks there for their transactions.”

Foreign exchange controls, he said, would spawn a thriving alternative underground market; a situation that was evidenced by the heightened black marketeering that occasioned the announcement of the BoG directives.

Concurring, Mr. Reginald France, Managing Director of Boulders Advisors Limited, a specialized consulting firm providing investment banking services, says the controls could be circumvented; “by a smart entrepreneur coming up with a service that allows foreign currencies to be loaded on a smart electronic card which can be used in foreign countries without being subjected to the controls of the BoG.”

Not too surprisingly, at least one bank has, weeks after the directives were issued, introduced a credit card that offers services akin to France’s suggestion.

But perhaps the more eloquent challenge to the central bank’s reasoning and consequent directives was articulated by the CEO of the Private Enterprises Federation, Nana Osei Bonsu, who observed that the directives are really not new, in that they are in the Foreign Exchange Act, 2006, which allows the governor to impose these restrictions; “but the format and the timing of, and some of the parts that were included, actually infringed on contractual obligations between private sector partners,” he said.

The foreign currency account, he said, is permissible. People were solicited to open this account with the understanding that they withdraw in the currency they deposited in, if there was any reason at all that the governor would want to hold on to that money for a longer time, the approach should not be to usurp the right of people under that contractual arrangement.

It also undermines confidence. These monies, Nana Bonsu argued, came from outside sources, so the BoG measures, if implemented, would erode the confidence of people to respect contracts because they wouldn’t know what might come up next and under what conditions government would permit contracts to be usurped.

“It is comforting, to a large extent, that the clarification of the directives by the BoG sought to restore things back to the status quo,” Nana Bonsu said, explaining that businesses strategise.if, for example, they intend to retool in the next six months, they will hold on to their money till they are ready.Changing their foreign currency into Cedis before reverting to foreign currency again will be costly to them.

“Some of our member institutions, especially in the insurance industry, underwrite policies in foreign currency for multinationals within the country, they also do business in some of these countries and save the monies they accrue from those countries, in Ghanaian accounts.

“Such accounts should be allowed to be maintained without any infringements on their right of movement because, after all, they earned it overseas; and not from the government or the central bank. And once the money is in the banking system, it is available for use by local partners including the government. It therefore makes no sense for them to convert their foreign currency into Cedis.”

The stiff opposition to the BoG’s position notwithstanding, there was general agreement, perhaps with the distinct exception of GREDA, that pricing of goods and services should not be in foreign currency and should always be quoted in cedis, including government services.

“However, if anything is going to be done on the private sector, the same angle should be applied to the government sector; the same restrictions or opportunities must be available to both sectors,” says Nana Bonsu.

“Government should not be allowed to quote and charge in foreign currency. Their charging structure at the harbours for incoming  goods should change to the local currency,” he said.

The pugnaciousness of the private sector’s reasoning against the BoG’s measures obviously also stems from them being much incensed by the impression created by some government functionaries that they were the culprits responsible for the Cedi’s hemorrhage.

“When foreign direct inflow was coming in, one key principle was that they could make money and repatriate their profits and capital; we don’t think that has changed. If that is the case, then the foreign institutions should not be blamed for the underlying deficiencies in how we’re managing our economy.

“We should look at the underlying factors that brought us here in the first place and focus on addressing them: the runaway inflation, the runaway spending gaps, the bulging debt load, the government debt that are denominated in the foreign currency,” Nana said, questioning the prudence of government raising foreign debt, locally, in foreign currency.

The private sector, he says, looks to the situation where  there are gradual drastic reductions to government’s debt burden denominated in foreign currency, so as to minimize the pressure on it to acquire, accrue, or to set aside foreign currency for debt servicing.

While most analysts agree on the need for more prudent fiscal management by government, many more are arguing that a truly sustainable stabilization of the cedi requires fundamental shifts in the structure of the Ghanaian economy.

Assertions that Ghana’s economy has not changed very much from colonial times, in that it is dominated by primary activity, is debatable as evidenced by the fact that the services sector, which lagged far behind industry and agriculture in that order has, since 2009, taken over as the largest contributor to GDP.

The growth of the services sector has been phenomenal. In 2010 the sector contributed US$22.1 billion to GDP, the second year in which it took over as the biggest contributor to the national economy. Its total contributions subsequently ramped up to US$26.8 billion and US$33.2 billion in 2011 and 2012 respectively. With a total national GDP value of US$ 67.3 billion, the services sector alone accounted for about half the value.

Agriculture and industry registered total contributions of US$15.4 billion and US$18.5 billion respectively in 2012.

Industry has been doing well thanks to booming construction and a nascent oil and gas sector, but manufacturing has just been trudging along. Agriculture, on the other hand, despite employing more than half the total national labour force, is struggling to catch up with the other sectors.

Notwithstanding the fact that the growing sectors of the country’s economy have created much needed job opportunities for Ghana’s bulging unemployed labour force, the foreign exchange generated by these sectors, largely in the extractives of mining and oil drilling, and the service industries of finance and telecommunications, are largely repatriated owing to sweetening contractual arrangements when big multinationals were being enticed to invest in Ghana.

With the inflow of foreign exchange from such big ticket investments in the service sector presently tailing off  and the maturing ones repatriating their earnings, the country is experiencing a shortfall of hard currency supply, even as demand for it to support imports and other infrastructure projects escalates. This is worsened by the consistently falling world market prices of Ghana’s commodity exports.

The BoG observes that Ghana’s fiscal imbalances and the external pressures resulted in a current account deficit of 12.3% of GDP up from 12.1% in 2012. This was on account of the worsened terms of trade, and a significant decline in net current transfer receipts.

Tellingly, the Bank notes that individual remittances, in particular, declined by 4.3% year-on-year to US$1.7 billion, right on the back of worsening cocoa and gold export receipts, which declined by $1.3 billion in the year. The overall balance of payments deficit of $1.2 billion thus remained the same as in 2012.

Ghana’s gross international reserves as at the end of 2013 amounted to US$5.6 billion, still hovering around the three months of imports cover at the end of 2012.

Dr. Nii Noi Ashong, a former economic advisor in the Kufour administration and current Deputy Rector of GIMPA, says the current foreign exchange predicament should force a rethink of our agricultural policy and its role in national development.

“Whilst our exports have remained virtually the same for a very long time, our imports have varied over time and now include substantial agricultural produce that are for both human consumption and  industrial production” he says.

Siting the sorghum project promoted by the Venture Capital Trust Fund towards the end of the last decade, Dr. Ashong argues that most agricultural produce imported as inputs for processing purposes could be substituted with local staples thereby helping to cut down on their imports.

Sorghum, until 2006, was produced mainly for consumption as food. Smallholder farmers’ yield per hectare was 0.8 tonnes and total output was about 100mt, with each farmer earning an average of GH¢30 annually. In August 2006, the VCTF got involved in the Sorghum Value Chain Project, where it provided about GH¢360,000 to seven nucleus farmers in an out grower scheme in the four northern regions of Ghana for the production of sorghum for Guinness Ghana Brewery Limited (GGBL), in replacement of imported barley, which the company uses as raw material to brew beer and other beverages.

It was the first of a five-year financing package to farmers, to locally produce the sorghum variety used by the brewing company. This was expected to eventually lead to 80% substitution of imported barley by GGBL.

Initial results were stunning. In the 2006 season, the Fund’s investment assisted the farmers to supply GGBL with 903.4mt sorghum, a whopping nine fold increase in output, in just one year, compared to the previous year’s 100mt output. Sale in the sorghum industry increased from GH¢35,000 to GH¢373,000, creating a net income of GH¢102,000 to the farmers and a collateral income of approximately GH¢36, 000 to other incidental industries.

In 2007, the 1.7 mt/ha yield of sorghum production in Ghana exceeded the world average of 1.5mt/ha for that year, despite floods in the country’s northern regions, with farmers delivering 1,270mt to GGBL.

Lessons learned from the Sorghum Value Chain Project were transferred to similar projects in soya and yellow maize to supply feedstock to the country’s beleaguered poultry industry.

Unfortunately, the sorghum project has stalled.

“If serious efforts are made to revamp the project, not only will foreign exchange be conserved, but jobs created in the farming regions would help stall the alarming drift of rural populations, comprising largely of the most productive labour force, into urban centres in chase of non-existent jobs,” Dr. Ashong says.

Beverage producers have, in recent times, resorted to the use of locally produced cassava in the production of beer as a substitute for imported raw material inputs, leading to a boost in the staple’s production.

Talks of GGBL acquiring majority stakes in the Ayensu Starch Factory is a direct outcome of this new development.

Dr. Ashong says efforts to revamp rice and sugar production in the country are all in line with this new thinking that in the not-too-distant future could reverse the perennial ritual of demand for foreign exchange outstripping supply, which in recent times has assumed a chronic character.

Obviously, the focus of big ticket investments in the country’s economy will have to be more and more directed towards imports substitution. Government’s fiscal management, as well as its drive for increased FDIs will have to be cognizant of this emerging situation

Foreign direct investments have undoubtedly aided Ghana’s economic expansion and diversification in a number of ways, but judging by the country’s foreign exchange situation and its impact on the local currency, its effect has not been the most desirable.

Additionally, Ghana’s private sector operators believe that increasingly, monetary policy is losing touch with the present reality and its response to emerging challenges have been more of a kneejerk reaction than pragmatic measures to find lasting solutions.

“Why do you increase the Bank of Ghana Monetary policy rate way above inflation, by 200 basis points to 18%, when inflation, at the current 14%, is rising fast based on cost-push factors,” queries Nana Bonsu who explains that this will cause inflation to rise some more, in coming months, thereby further undermining the cedi’s strength; the very trend that the BoG seeks to reverse.

Obviously, the current crisis of the cedi has diverse causes, from poor fiscal management to low tax collections, through external shocks and a humpty-dumpty-ish economic structure that allows for an uncontrolled outflow of foreign exchange, worsened by speculation in a thriving black market.

Taken as a whole, however, the crisis is serving as a late alarm bell from a system that has been flawed from the beginning and requires drastic realigning. The current central bank measures show it is still a long way from being fixed.