A Weakening Currency and an Outdated Response. A Statement by the NPP Minority Caucus
Source: parliament_of_ghana
Date: 2014-02-14

A WEAKENING CURRENCY AND AN OUTDATED RESPONSE — A STATEMENT BY THE NPP MINORITY CAUCUS. 14™ FEBRUARY, 2014 Ghana's economy is in real frouble. Today, everybody is complaining about the rising cost of living, high unemployment, the total lack of confidence in our economy and the depreciating cedi. It is clear that the government is bereft of workable ideas. Unfortunately, there is nothing to suggest that this administration can fix the economy since, thus far, whatever ideas this government is capable of generating and, indeed, has put forth have proved incapable of fixing the economy. The year 2013 saw the introduction of all manner of taxes, including an unorthodox increase in the VAT rate by 2.5 percent, the removal of petroleum and utility subsidies and the piling up of huge deficits and debts. If Ghanaians thought we had seen the end of the economic quagmire, we were to receive a rude awakening when the Cedi started wobbling and staggering like a punch-drunk boxer and depreciating beyond anybody's wildest imagination. As at the end of January 2014, the cedi had depreciated by 7.8 percent against the US Dollar compared to 0.2 percent in the corresponding period in 2013, What went wrong? The government of President John Dramani Mahama would not listen to good counsel. Even after all the credit rating agencies downgraded our credit rating as well as its outlook, the government failed to put its fiscal house in order. Instead, President Mahama’s government and their apologists chose to engage in fruitless arguments with these rating agencies. All the fiscal consolidation efforts outlined in the 2013 budget did not see the light of day. And so we ended up with a budget deficit of about 11 percent of GDP in 2013 whilst the debt stock ballooned to $23 billion up from the $8 billion the NPP left behind at the end of the regime in 2008, The combined effect of uncontrolled borrowing, most of which were not supported by any proper due diligence, the irresponsible spending, including the unprecedented humongous over expenditure coupled with . high inflation is the lamentable weakening of the cedi to the levels we are seeing now. It is a matter of fiscal indiscipline and economic mismanagement. It is not because of dwarfs, high rise buildings, or redenomination. Dollarization has always been something the economy has lived with since the 1970s. This phenomenon comes alive during periods of economic mismanagement and fiscal indiscipline as we are currently seeing. The depreciation of the cedi is attributable, among other other things to the injection of an excess amount of cedis into the economy relative to production. We are paying the price for Woyome, Waterville, Isofoton and other so-called judgment debts, SADA, SUBAH, GYEEDA. Dealing with corruption is therefore key to restoring sanity in public finance. Central Bank’s response Not only did the Bank of Ghana delay in its policy response to slowdown the fast depreciating currency, the bank has also outlined measures, some of which are OUTDATED and BUSINESS UNFRIENDLY. Additionally, the Monetary Policy Committee has raised the policy rate by 200 basis points to induce demand in Cedi-denominated assets. What prevented the Bank from holding the emergency Monetary Policy Committee meeting earlier when the crisis was unfolding? Why didn’t the bank pump more reserves into the ailing economy in time? What has happened to the “unprecedented level of foreign exchange reserves” the government clains to have built up? Clearly, there has been a REGULATORY FAILURE on the part of BoG and the NDC government. The directive that all transactions be conducted in Cedis is not new. If it has not been enforced in the past, the BoG must take full responsibility and stop passing the buck. ‘Again, it is known that Foreign Currency Accounts (FCA) and Foreign * Exchange Accounts (FEA) do not earn interest. Yet individuals open these accounts and submit their Forex to the banking system in good faith. As per the new directives, no cheques or cheque bocks shall be issued on FCA and FEA. Simply put, even though customers do not earn interest on such accounts, they cannot also withdraw money or issue cheques if they so wished. The BoG, by this directive, may force foreign currency holders to bank their Forex in their homes. This directive might not only be illegal, it also has the potential of discouraging savings in a country where the culture of savings with the banks is still very low and less than than 50 percent of all business transactions pass through the banks. To add insult to injury, the BoG has further directed that cash withdrawals shall be permitted only for travel purposes (not exceeding $10,000) and other documented official transactions. This is reminiscent of EXCHANGE CONTROLS. It must be noted that official restrictions on forex transactions have never been a viable alternative. Little wonder that Ambassador- designate, Dr. Tony Aiddoo, himself the immediate past Director in charge of government's policy Monitoring and Evaluation has called these measures ‘panicky’. As stated earlier, these measures create disincentives for people to save. Additionally, the measures have the potential of reinforcing parallel currency operations. In other words, the parallel (black) marketers may become the big gainers here. Furthermore, the BoG indicated that Forex for imports shall be in a margin account managed by the Bank for thirty days only. Is the bank suggesting that all importation must necessarily be completed within thirty days? And what happens in the case where importers buy from several vendors? This will increase the cost of doing business for the private sector, which is already too high. There is also the aspect about no Forex loans being granted in the country. If Forex markets operate efficiently there is no obligation for the Bank of Ghana to intervene. Clearly, the BoG is in panic mood after the spiritual interventions in the economy. However, they must first accept their own regulatory failures. * That said, they should also stop focusing on the wrong things that they cannot enforce, and desist from reintroducing exchange controls. Exchange controls have never worked in Ghana and will never work. The BoG should know better. What policy authorities must do The problem is not just the Bank of Ghana's to fix since it is not merely a monetary conundrum. As the central bank has asserted, it is required of the Minister of Finance to cut back on the huge deficits. The BoG needs a lot of help from the Ministry of Finance. We have to get our macro fundamentals back on track by reducing the huge budget deficit, lowering inflation and above all, avoid over expenditure. Fiscal and monetary policy have to be prudently implemented to achieve these goals. Over the past three years government has been making capital of the high reserve accumulation. If Ghana's foreign exchange reserves are available, why have they not been used to defend the cedi? Reserves accumulation is unnecessary in the present circumstance, unless there is something the central bank is not telling us. Finally, we must promote real investment in the economy, increase our export base and become producers of the goods we consume. If Ghana should indeed be the “Gateway to West Africa” we should not lose our competitive edge in investment. We should sanitise the investment environment to attract more purposeful investment and hence attract more hard currency into the system Unfortunately, there is nothing in the measures announced by government that would support increased output. The NDC government has to learn that propaganda has its limits and bad economic management has adverse consequences for the economy.