The Cedi or the dollar: Which is Ghana’s legal tender?

Tyler Maroney in a book, titled “Covering Globalisation”, defines dollarisation as the process by which a country abandons its own currency and adopts the currency of a more stable country as its legal tender.

To portray the picture clearer, Maroney explained that in many countries such as those with weak currencies and underdeveloped banking systems, there is a natural move toward the dollar. People who are afraid of inflation or who do not trust their domestic central bank keep their money in hard currency.

Considering the definition and the explanation given, it becomes easily tempting to conclude that Ghana’s economy, which governments in the past and present continue to tout as being strong, based on their own judgments, is not as it is portrayed to the good people of the country.

Payments

From state institutions right down to the private sector, the United States dollar has become the first currency quoted and not the cedi when it comes to charging for goods sold or services rendered. Where one insists on paying in cedis, one is made to pay in the local currency but at the prevailing dollar cedi exchange rate.

For instance, the Customs division of the Ghana Revenue Authority (GRA) quotes all duties and levies to be paid by importers in the dollar. This is one of the reasons the prices of imported products change by the day in shops and in the market place.

In many schools, particularly the private schools, hotels and hospitality industry players, real estate developers, vehicle sales and many other goods sold reand services rendered in the country are all quoted in the dollar.

Recently, the Ministry of Trade and Industry partnered a private institution to organise an event and patrons were charged in dollars for seats.

It is ironic that while these institutions charge dollars for their services, none of them pay salaries and wages in dollars.

Practice elsewhere

Ghana is quick to compare itself with its peers when it matters most. However, this pricing in dollars is never the practice in many other African countries such as South Africa, Botswana, Egypt, Libya and even neighbouring Nigeria. Hotels in those countries, for instance, never accept the dollar because they have a sense of pride and value for their currencies, no matter what. One is, therefore, forced to go along with a passport or a recognised ID to be able to convert the dollar into their currency to pay for a service.

Under no circumstance will a service or goods  displayed be priced in the dollar because the laws are strict, the central bank is not aloof neither are their governments because they are very much aware of the consequences of dollarising an economy, particularly, when state institutions are involved.

Economic developments

In the 2018 budget, the minister of finance, painted a promising picture of the economy, a phenomenon which gives hope to the economy. For instance, he noted that the favourable outturn in the trade accounts combined with higher private transfers, resulted in a significant improvement in the current account over the review period.

The current account deficit narrowed significantly to an estimated US$1.1 billion (2.4 per cent of GDP) in the first three quarters of 2017, compared to a deficit of US$2.1 billion (4.9 per cent of GDP) for the same period last year. Also, the capital and financial accounts improved on the back of higher portfolio investments inflows. These developments resulted in an overall balance of payments surplus of US$379.3 million (0.8 per cent of GDP) for the first three quarters of 2017, compared to a deficit of US$1.4 billion (2.9 per cent of GDP) for the same period in 2016.

 International reserves 

The above developments, the minister noted, led to the additional build-up of reserves, bringing the total Gross International Reserves to US$6.9 billion by September 2017, translating into 3.9 months of import cover. This compares with US$4.8 billion (2.5 months of import cover) in the same period of 2016 and US$6.2 billion (3.5 months of import cover) at the end of December 2016. 

 Exchange rate developments

On the exchange rate front, the Bank of Ghana was reported to have continued to moderate volatilities in the foreign exchange market. In the year to October 2017, the cedi cumulatively depreciated by 4.0 per cent, compared to a depreciation of 4.3 per cent against the US dollar during the same period in 2016, reflecting the strong and improved macroeconomic fundamentals and the stronger external position. These favourable developments in the country’s external position, together with the cocoa syndicated loan are expected to help moderate exchange rate volatilities. 

 Conclusion

The World Bank is projecting a bright economic outlook for Ghana predicting that the country’s economy will grow by 8.3 per cent this year. The growth is to be largely driven by increased production of oil and gas which is expected to lift the country’s exports.

The bank’s World Economic Prospects report for 2018, released this month, forecasted a slightly higher figure than the government’s target of 7.9 per cent for the 2018 fiscal year. The increase in the output projection for 2018 is due primarily to a revised 2017 TEN projection from 50,000 bopd to approximately 54,000 bopd, and the 2018 Sankofa Gye Nyame (SGN) projection from 35,441 bopd to 43,000 bopd. This is expected to rake in US$669.41 million for the country.

It is refreshing to note that the turn out of events within the economy points to a positive outlook for which all and sundry must embrace and position themselves to take advantage of.

In this regard, it makes no sense for any institution of state and the players in the private sector to continue to disregard the local currency and price goods and services in dollars. There are obvious reasons why the dollar is preferred to the local currency and that is: lack of trust and confidence in the economy.

Have we lost confidence in our own currency so badly that we cannot trust it anymore? Have we forgotten that we are touting economic progress and the strength of our currency against the major foreign currencies?

The country has witnessed a number of incidents which nearly brought the economy to its knees due to inaction. The microfinance situation is one typical example, where the lack of supervision from the central bank created a whole lot of problems to the extent that a ruling government was made to pay the price for it. Economic activity in the most affected region, Brong Ahafo, came to a standstill because many businesses stopped running after finding investment in microfinance products a more profitable venture.

The report of the Monetary Policy Committee (MPC) of the central bank, released last Monday, noted the increased pace of global growth which is expected to continue in 2018, and the relatively subdued global inflation, supporting broad-based accommodative monetary policy stance across the major advanced economies. This the report said has had a moderating effect on global financing conditions with positive implications for emerging and frontier markets, including Ghana. 

Domestically, the report noted that economic activity had been fairly robust and the momentum was expected to be sustained over the medium term, supported by continued favourable external financing conditions. The balance of payments has performed strongly, with a trade surplus and favourable outturn in the current account, and a higher than programmed reserve build-up providing enough buffer against potential external vulnerabilities.

Clearly, these developments are reflecting in increased confidence at home and also abroad with our external partners — evident in the tightening of interest rate spreads on Ghana’s sovereign bond instruments on international capital markets. 

The fiscal consolidation process is on track, and is expected to deliver better-than-programmed budget deficit in 2017 as expenditures were properly aligned to address the shortfalls in revenues. Furthermore, economic activity has picked up significantly while private sector credit growth is recovering. The non-oil sector of the economy is also rebounding—after the sluggish performance in the first half of the year—supported by continued improvements in the economic fundamentals and improved investor confidence. These trends are expected to continue in 2018.

If these observations are anything to go by, then the central bank has no excuse in allowing businesses and individuals to continue using the dollar as the medium of exchange.

This is because the practice of using the US dollar alongside the cedi clearly negates the gains being made with the management of the economy and belittles the prospects as being envisaged.