When the fundamentals are weak

Some Ghanaian citizens were encouraged by the declaration that “If the Fundamentals are weak, the Exchange Rate will expose you”.

Finally, we hoped, someone in power might understand Ghana’s challenges and lead the charge to resolving them.

Alas, the charge never came.

To guide our future, the core fundamentals are explained here.  

Among these are the roots of currency depreciation. In 1980 a dollar of goods and services cost the Ghanaian ₡2.75. Barely a generation later, in year 2000, that same dollar’s worth cost the Ghanaian over ₡7,000!

If you had ₡10,000 at the beginning of the period, by the end it had dwindled in value to only ₡4, a loss of 99.96 per cent …!

Alternatively, consider an annual income of $10,000 in 1980 cedis. Absent pay increments, that income in 2000 would be worth $4. 
Imagine living on $4 a year …

This is how much Ghanaians’ purchasing power and living standards were eroded in 20 years.

Graphically presenting Bank of Ghana (BoG) data alongside shows the cedi depreciating at a steady average of -32.5 per cent annually, for 16 years.

 Thus between 1984 and 2000, each four years (‘Quadrennium’) saw the cedi lose 80 per cent of its value, 96 per cent in eight years, and 99.8 per cent over the 16 years. Businesses could pass on increased costs to customers but millions of Ghanaian employees just got impoverished.

Radioactive currency

A high ‘Correlation Coefficient’ of 0.9843 indicates a structural issue. Physicists may recognise the Decay Profile of a RadioActive Currency with a ‘Half-Life’ of ~2.1 years between the years 1980 and 2000.

Between 2000 and 2008, HIPC Ghana showed a marked slowdown in the depreciation rate, the cedi losing ‘only’ 42 per cent in value over the eight years (~24 per cent each Quadrennium), corresponding to negative seven per cent annual depreciation.

The Half-Life increased to 12.3 years.  Today’s ‘spot’ ½-life since the crash of 2022 is a worrisome 1.9 years though averaging ~4.3 years over the last 15½ years.

Since 2008, annual depreciation rates have doubled to about -15 per cent.

Each Quadrennium involves a loss of -48 per cent of the cedi’s value.

This is an improvement over the P/NDC-1 eras, but let’s note the significant shift in Ghana’s economic base with the emergence of oil production and its impact on the country’s balance of payments.

At issue is whether these trends are inevitable, (un)avoidable or perhaps even reversible given appropriate socio-economic, fiscal and monetary interventions.

This requires consideration of correlation/causality between interest rates, inflation and private sector performance.

Ghana’s Monetary Policy (per the Money Supply) from 1998 shows a steady exponential increase in the M0-M2+ values, which mirrors the depreciation of the cedi; M0 charted against the $ exchange rate to 2018 yields a correlation coefficient of 0.94, with M2+ at 0.98.

More money chasing unchanged quantities of goods and services depreciate the unit value of the currency. Thus, government’s incessant appetite for borrowing instead of balancing its budget leads directly to currency depreciation.

Attempting to control inflation based on rolling Year-on-Year values, unfortunately, misses the prevalent forward-facing supply/demand tensors used by businesses and industries to determine pricing.

Further, using high policy rates to curb demand/inflation may work where there is a significant ‘Marginal Propensity to Consume’ as in High-income countries with excess/discretionary disposable income.  

In low-Income Ghana, where the majority struggle to make ends meet, high policy rates act not as a disincentive to consume, but effectively as an extra tax on local investment and production and counter-productively incentivises Trading via imports!

Essentially then we are ‘deporting’ our jobs, importing unemployment, increasing inflation, and reinforcing a vicious cycle of low government revenue» high borrowing» high interest rates» high import costs»adverse balance of trade (current account) »adverse balance of payments (capital account)»high debt: GDP ratio» constricted fiscus» then yet more borrowing …

This emulates an unsustainable Ponzi scheme, which crashed spectacularly in 2022 when the Capital Markets (i.e., ‘new investors’) declined further exposure.

No enterprise can survive or thrive without generation and retention of profits (surpluses) for re-investment, resilience, and regeneration, and Ghana Ltd., is no exception.

Regarding FDI, we forget that for every $FDI there will be typically $5+ of profits being repatriated; which starves us of foreign exchange, puts pressure on the cedi, and also robs us of critical capital accumulation.

Fortunately, a proper understanding of the weaknesses in Ghana’s fundamentals allows us to craft a recovery programme, below.  

Way forward

A 10-point plan is proposed to reform our economic/financial management framework, for stability and sustainability.

• Review monetary policy framework towards reducing the policy rate: affordable finance should encourage industrial projects

• Use fiscal policy to shape/skew supply and demand profiles towards domestic consumer/capital/public goods and services

• Promote import substitution and domestication to move our balance of trade (current account) into surplus. 

• Encourage domestic value addition to create jobs instead of exporting raw materials

• Ensure greater Ghanaian ownership of mineral assets to support capital accumulation

• Reduce/eliminate the need for borrowing and consequent debt servicing (capital account)

• Review FDI policies to reduce exploitation, profiteering and capital flight, in favour of Local Investments

• Seek sustained positive balance of payments outcomes to stabilise the cedi for greater certainty/confidence in the economy.

•Consider risk-sharing (via local/government loan guarantee schemes?) enterprise development programmes to encourage Local Business Formation/Growth

• Eliminate corruption which degrades national capacity and productivity.

While challenging, it is possible given commitment, resolve and the right tools. We owe it to Ghanaians now and those yet to come.

The writer is a former Director of Ernst & Young/Principal of Equinox Associates/Adjunct Professor at GIMPA.