“We told all of our students in Harvard that morality was relative, yet when they go to wall street and live as relativist and our pension funds are blown to smithereens, then we want to put them in jail” – Ravi Zacharias.
The impact of the Cedi’s depreciation is felt by everybody who earns income in this country. Currency depreciation increases the cost of living and the cost of doing business. Its impact this year is so severe and pervasive that literally every trader on the street of Accra has an opinion on what the cause, and even the remedy, of this depreciation plague is.
What is even more frightening than the fact of the cedi’s recent tumbling is the utter lack of confidence and cynicism we, as Ghanaians, have developed towards our own currency. Today, not only do we continue to price in dollars, despite the Bank of Ghana rules, we hold our cash reserves in dollars to hedge against the Cedi’s depreciation. Our own actions are contributing to the Cedi’s fall.
A stable currency is the foundation for sustainable economic development. Over the years, different governments have employed monetary policies to achieve short term stabilization to the periodic rapid downward spiral in the Cedi. Yet, in my opinion, there is no sustained and focused campaign to cure this problem over the long-term. Maybe, over-politicization of matters of such major national interest has left the currency in this awful state. It is this subjective yet real and critical matter of public confidence and leadership responsibility that is the focus of my article. I believe that we all have individual and collective responsibility to halt this nosedive in the Cedi’s value and chart our way out of this challenging situation. Before sustaining this position, let’s cover some basic terrain about currency depreciation.
What is currency depreciation?
Exchange rate is the price of a currency relative to another, and depreciation is a loss in this price. When a currency depreciates it is worth less than it was before. As an example, at the start of this year, one (1) USD was selling for GHC2.5, meaning the GHC/USD exchange rate was 2.5 (or 2.5/1). However, today, six months later, the same one (1) USD is selling for GHC3.2. We would say that the GHC has depreciated (by 28%) over the past six months because we need more of it (3.2) to buy 1 USD today, compared to the (2.5) we needed six months ago.
Depreciation impacts various market transactions differently, yet ultimately, all of us, as consumers feel its impact since it reduces our purchasing power. In broad terms, the impact of depreciation is transmitted through the pricing value chain in three stages; from producers, transporters and retailors then finally to the end consumer. First, our overwhelming dependence on imports has increased input prices for production. Next, all types of transportation cost have also increased since the exchange rate is a major component of the pricing of petroleum products. This transportation linkage is what makes the impact of depreciation pervasive. Finally, the retailor passes on all these costs to consumers. Even government, is not immune from the depreciation disease since they will need more money to pay for their dollar denominated statutory obligations such as loan interest and principal.
Causes of currency depreciation
Many different factors cause a currency to depreciate. Generally, when a country’s economic fundamentals and policies (fiscal and monetary) are strong, business and trade policies together with its political and legal conditions are favourable, it promotes investment. Investors, both foreign and local, will like to hold their currency for investments. This demand will increase the value of the currency. The opposite is also true. Unfavourable policies and weak fundamentals discourage investments. This makes investors sell their assets denominated in that currency leading to excess supply of that currency resulting in its depreciation. The loss of confidence by investors has not only resulted in the on-going cedi depreciation but also caused the downgrading of Ghana’s sovereign credit rating.
In June this year, Moody’s Investors Service downgraded Ghana’s sovereign rating by one notch from B1 to B2 and forecast a negative outlook on the rating. According to Moody, the key drivers of Ghana’s downgrading are two-fold. First, Ghana’s deteriorating fiscal strength, as reflected in the rising debt level and worsening debt affordability amid persistently high fiscal deficits. Secondly, the increase in Ghana’s vulnerability to shocks, given its large debt-refinancing needs and wide external imbalances. To my mind, Moody’s assessment simply means that Ghana as a nation is in financial crises. Our need for cash is big, our debt load is growing at an unsustainable rate and we stand the risk of defaulting on our debt obligations. Indeed, the “near-broke” signs are written all over the wall judging from the daily media headlines: unpaid public sector workers, unpaid contractors, and overdue payments to our BDCs, unpaid students in Cuba, and even unpaid feeding costs for public basic boarding schools.
Unfortunately our structural issues have been compounded by massive overspending, abysmal revenue collection and allegations of widespread corruption. All these challenges require strong and decisive leadership to tackle them simultaneously. Herein, in my opinion, lies the first moral dimension of our currency depreciation. Leaders should first tell us the truth about the state of the Ghanaian economy. When the pass mark for a test is 5; it does no good to indicate that a failing mark of 3 is greater than 2. The reference to 2 is a denial of the fact of failure and aimed at providing a false sense of comfort. This unhelpful tendency of not calling a spade a spade is no different from masking the black stars failed 2014 world cup campaign by saying that they were the only team that the Germans did not beat. The second moral dimension of our currency depreciation is our loss of confidence in the Cedi. How more clearly is this demonstrated when we have to fly USD cash to pay our fellow Ghanaian footballers on national assignment; when we transact business within the country and among ourselves in foreign currency and when on our streets, in broad daylight, foreign currency is traded, even by foreigners.
The Way Forward
There is general consensus that urgent action is needed to arrest this on-going rapid decline of the Cedi. And here is where all of us have a very important role to play in pulling the economy and therefore the Cedi out of this crisis.
Leadership responsibility
I am a firm believer that Ghana as a nation does not lack intelligent leaders; rather, we lack selfless leaders. Our actions seem to indicate that we are more focused on, “What the nation (a project) can do for me, and not what can I do for the nation (this project)”. Our worsening economic situation evidenced by our depreciating Cedi and declining credit rating, is not primarily because finances are not coming in, but rather, our ill- planning and selfish motivations result in their misuse. On top of all this, in dealing with cases of financial loss to the state, the wheels of justice grind ever so slowly it appears no one is held accountable for any obvious abuse.
We need visionary leadership to set a clear agenda, aimed at righting the economic ship and rallying the entire nation on a course to nation building and restoring the cedi’s fortunes. Our leaders must demonstrate, by tangible action, their commitment to restore fiscal discipline, check revenue leakages, expand the tax net, and effectively tackle corruption and control rising imports and significant election year spending. For starters, our ports and business service centres/revenue collection points must be sanitized. A friend described these entry points as the “mouth of the nation”, meaning they are key points that determine income flows into the country. Unfortunately, rather than serve as significant revenue collection points and facilitators of foreign investments for this nation, they are seen as points of serious inefficiencies, financial leakage and frustration for foreign and local investors. The experience of foreigners, particularly investors at these “mouths of the nation” sets negative expectations and raises the cost of doing business in Ghana. These negative experiences translate to business risk that is initially priced into their investments and ultimately impacts the value of our Cedi.
Everybody’s Responsibility
Many of us, for various reasons; including travel experiences, media influence and increased wealth, want to live western lifestyles, yet we do little to build the local capacity to produce these items. We have acquired tastes we cannot satisfy from local production, and therefore depend on import. Today, we import everything from rice to toothpick. When it comes to those few items we produce locally, we often fall short of excellence so that we ourselves tag made-in-Ghana goods and services with low quality. Sadly, we also do not take criticism positively and see them as a personal attack that must be defended at all cost. No wonder we are seeing little improvements in the quality of our output.
There is a need for every Ghanaian to promote and support domestic production of the goods we all want to use. This is the opportunity I see that can be leveraged to restore the Cedi’s value. For it is when we have successfully built made-in-Ghana brands at home that we can easily take advantage of the only good opportunity that the Cedi’s depreciation affords us; to export our relatively less expensive value added goods and services. Unfortunately, in Ghana, our manufacturing sector is weak and current world market prices of our chief exports cocoa and gold are very low, greatly limiting the benefit from the Cedi’s depreciation.
Conclusion
Since an asset’s price reflects its future benefits, the depreciating Cedi (relative to USD) indicates that investors’ view of the future performance of the Ghana economy is increasingly becoming negative, not different from Moody’s economic outlook. We must take decisive steps and make painful sacrifices to stop and reverse the Cedi’s downward trend, but it begins with a truthful and correct diagnosis of our economic condition.
In fact, some have even gone as far as to strongly argue, and I dare say quite persuasively, that Ghana needs a currency board in order to curtail the habitual government overspending which has culminated in the insidious economic effect of cedi-depreciation. They argue that, the Bank of Ghana, as currently structured, has very little chance and capability of controlling government’s over spending. The proponents of the currency board point out from economic history that, each of the countries whose currency did not suffer depreciation (actually appreciated) against the US dollar – Malaysia, Cote d’Ivoire, Singapore, Hong Kong, and South Korea, –operate a currency board in one form or another.
Irrespective of the policy approach adopted to cure the Cedi’s depreciation, my argument for moral imperative still remains. For no matter what policies and systems we put in place, as long as those in charge do not have the right intentions, communicate truthfully, and don’t get the support of Ghanaians, the result will not be different from what we are currently suffering as a nation. We can each make a difference. Simply Google and read the story of Allen Kagina, the current Commissioner General of the Uganda Revenue Authority and you will be amazed at what a big difference a committed lady known for her integrity, among others, has made to the fortunes of a nation. For where there is a will, there is a way!