Foreign exchange crisis: Two novel solutions, cryptocurrency, BRICS

We now have both Dr Mahamudu Bawumia and Mr John Dramani Mahama’s policies on how to deal with the foreign exchange crises in Ghana. 

In a striking address during the heat of the campaign leading to the 2024 presidential election, Dr Bawumia announced that he would propose a new foreign exchange regime management Act, in which the value of the cedi would be anchored to gold and the gold-for-oil barter programme, a policy to use our gold in barter trade for oil instead of using the US dollars.

Mr Mahama also outlined his fiscal policy relative to the depreciating cedi.

He was to introduce a fixed exchange rate regime to address the volatility of the exchange rate.

These policies are the same, in that, pegging the cedi to the price of gold is a form of a fixed exchange rate.

The difference between the policies of the then two candidates is that while Dr Bawumia was specific, Mr Mahama used the generic term “fixed exchange rate”.

What this means is that Mr Mahama could either peg the cedi to the price of gold or another country's currency, presumably the US dollar. 

The recent history of Zimbabwe’s attempt to solve its foreign exchange challenges saw the Zimbabwean Central Bank pegging the Zimbabwean dollar (ZWD) to the price of gold.

Initially, the ZWD recorded strong gains against the US dollar but plummeted and as we speak, the cedi exchange rate to the USD is even performing better than the Zimbabwean gold-backed currency (ZWD).

Today, US$1 is equivalent to ZWD322. Even though this exchange rate is better than the exchange rate before the introduction of the gold-backed ZWD, the reason for the introduction of the fixed exchange rate remains unresolved and will continue to worsen with time.

Ironically, US$1 is approximately GHC14.70. Further, one ounce of gold is about US$2,655, and in ZWD terms, one ounce of gold is about ZWD854,910.

How can a currency backed by the price of gold equate an ounce of gold to almost a million ZWD?

Historical antecedents give little hope that the Cedi predicament will improve with the introduction of a fixed foreign exchange rate. 

Way forward

So, what is the way forward?

It looks like no government has revolutionary ideas on this issue, and listening to some officials of the outgoing and incoming governments, there seems to be no hope. When he assumes office on January 7, 2025, Mr Mahama must turn to novel ideas, two of which are recommended below:

First, the National Democratic Congress (NDC) government, through the Bank of Ghana (BoG) and the Ministry of Finance, must invest in digital currency or cryptocurrency and use cryptos as the means of settling its foreign currency obligations, including payments for crude oil and other essential goods and services that have an enormous impact on our foreign exchange.

The government must invest in digital currencies and design policies that will encourage businesses to adopt these currencies for their international transactions instead of chasing after the dollar with the consequential effect of depreciating the cedi against the USD and other major international trading currencies.

Rise

The rise of digital currency has been a topical issue for governments and international organisations for some time.

Interestingly, the name ‘digital currency’ or ‘cryptocurrency’ seems a misnomer because of the use of the word ‘currency’. The traditional notion of currency is any payment system that enjoys general acceptability because of legal and regulatory support by governments.  

The support of central banks and governments for digital currencies seems elusive. Yet, in the emerging economy, it is being used for transactions in a manner similar in character to legal tender.

It is also used for investments in the digital economy on financial instruments.  

In recent times, friction in global economic order and geopolitical idiosyncrasies have increased the desire of governments to use these currencies as substitutes for sovereign currencies in international trade.

Maybe, the decision by the US and her Western allies to disengage Russia from the Society for Worldwide Interbank Financial Telecommunication System (SWIFT) is the defining moment or the last straw to break the camel’s back, giving some countries reason to call for reconstruction of the international payment infrastructure using the blockchain technology.  

The increasing interest could also be attributed to the continuous evolution of technology and the taste of people for a more cost-effective and convenient payment platform for economic and non-economic transactions.

In the US, cryptocurrencies are accepted as a means of settling trade locally and internationally. Russia, China, Iran, the UK, Canada and many countries, including oil-producing countries, are accepting cryptos as a means of payment.

Businesses all over the world also accept cryptos as payments for purchases of goods and services. Cryptos are easily exchanged and/or converted to fiat currency. 

Types

There are many different types of cryptos, one of which is Bitcoin, perhaps the most popular among them.

Having just one Bitcoin (1BTC) will fetch you over US$102,000. This being the case, why are we not taking advantage of this novel, and in fact, revolutionary payment system?

The idea that investing in digital currencies is risky is just an excuse by central banks to discourage the use of cryptos because of competition between fiat currency and digital currency, the latter being outside the mainstream banking system.

Instead, central banks are proposing to introduce their own digital currencies, dubbed “Central Bank Digital Currencies (CBDCs).

In June 2021, the governor of the BoG announced the development of the e-Cedi (electronic cedi), which is a form of central bank digital currency.

It is an unwise policy decision to choose to develop the e-Cedi because this e-Cedi will suffer the same fate as our cedi notes in the sense that our e-Cedi will be competing against major CBDCs, such as the US CBDC, if the US finally decides to roll out its digital currency or even the Chinese CBDC.

Thus, instead of developing our e-Cedi, the government should opt for the decentralised cryptocurrency, such as Bitcoin, and design policies that will encourage businesses to go for these currencies, by providing some form of security to entities that invest in cryptos.

This will reduce drastically the demand for the US dollar and insulate the government from the control and manipulation of the World Bank, the IMF and credit reporting agencies, such as Moody’s, Fitch Ratings and S&P Global, which sometimes create artificial panic with their ratings and distort our economic equilibrium much to our chagrin.

The second thing that the new government must do to stabilise our depreciating cedi is to apply to join the BRICS+ block.

The BRICS is an organisation consisting of Brazil, Russia, India, China, South Africa and many other countries, including  Iran, Egypt, Ethiopia, UAE, etc.

The combined GDP of BRICS out-passed and out-manned that of the G7 countries.

BRICS is the new international market platform with no strings. 

The opportunity that BRICS offer is more favourable to developing countries like Ghana than what the IMF and the World Bank offer.

BRICS, for example, offers its members the opportunity to conduct international trade in their own currencies, instead of relying on the US dollar; a move most analysts dubbed the “de-dollarisation” agenda.

Can you imagine buying crude oil from Russia or Saudi Arabia or Iran using our own Ghanaian cedi? That is what BRICS offer, and the consequential effect of conducting international trade using our local currency will strengthen the cedi and reposition our economy. Indeed, these novel ideas will reset the economy.

The 21st-century global economy is becoming more and more digitalised, posing significant challenges to fiscal policy-makers.

In particular, blockchain technology, dubbed by many analysts as the most disruptive technology of the century, poses the biggest threat to both domestic and international financial architecture.  

The potential for blockchain science to do so many things is huge and its nature of operations, particularly the birth of Cryptocurrencies, Decentralised Finance (DeFi) and Smart Contracts, are steps way ahead of fiscal policy regulators.

Notwithstanding a series of warnings by central banks of the risks in cryptocurrency investments, the technology driving this evolution remains resolute. 

Thus, the government, through the BoG, must leverage this technology to reset the economy.

The writer is a tax policy analyst with specialisation in tax issues of the digital economy, cryptocurrencies, artificial intelligence, DeFi and Quantum Computing.

E-mail: ma.abdulmumuni@gmail.com