The Cedi: What happened? And where do we go from here?

On 4th March 2022, the Bank of Ghana reported that the cedi had reached 7.00 to the dollar.  Compared to the rate of GHc4.2 at the end of December 2016, this meant the cedi had depreciated by 40.02% against the dollar since January 2017, when the government took office amidst flamboyant promises to usher the cedi into a golden age of stability.  In mid-2017, the vice president, Dr Mahamudu Bawumia, who now chairs the economic management team and had been hailed as the ultimate saviour of the long-suffering cedi, proudly declared that he had “arrested the cedi” (or its “rate of depreciation”?), locked it up, and given the key to the IGP.

There appears to have been a jailbreak since then, and the IGP must answer some questions.

As to be expected, the rates at forex bureaus were higher than the BoG’s rate, with one bureau quoting US$/GHc7.6 on the same day; it was likely higher still at Cow Lane, the engine room of the underground currency market in Accra.  Clearly, unless drastic action is taken – and soon – the cedi may well reach the 10:1 mark before year’s end, dragging with it the already-struggling economy. We can’t afford that.

How did things go so horribly wrong between 2017 and now? What happened to those flamboyant promises and the vice president’s smoke-and-mirrors lectures on the cedi, complete with insults for anyone who dared disagree with him?  And how do we get the cedi out of this quicksand and back on firm ground to prevent the imminent implosion of the economy?

Vice President attacks Mahama over the cedi

To answer these questions, we need first to revisit an article that the vice president wrote on his Facebook page in 2018 when the cedi started wobbling; briefly look at the cedi’s beleaguered history; and then review the key recommendations of the 40-Year Development Plan (2018-2057) to stabilise the cedi that the government ignored in favour of a special committee in 2020 to “investigate the depreciation of the cedi”.  That committee almost immediately faded into oblivion and left the cedi to its fate.

The vice president began his article with his trademark insults, noting that former President Mahama, who as vice president before becoming president once chaired the economic management team, had been talking about exchange rate depreciation, but “sadly demonstrate[d] his lack of understanding on (sic) key aspects of our economy”. He then promised “to try to simplify the explanation for him”.  Rather condescending.

What followed was a potent mix of crass propaganda, grammatical blunders, and a shocking inability of the vice president to calculate the depreciation of the cedi, or, worse still, distinguish between currency depreciation and appreciation. He was, of course, once the deputy governor of the Bank of Ghana, which is responsible for managing the stability of the cedi.

The propaganda had begun in the months leading to the 2016 elections.  He and the entire campaign team behind him proclaimed, erroneously, repeatedly, that the cedi had depreciated by 247% under “NDC’s Mills-Mahama (8 years)”, from GH¢1.2 to GH¢4.2, compared to what he claimed to be a depreciation of 72% under “NPP’s Kufour-Aliu (sic) (8 years)”.  These claims were reproduced in his Facebook article.

Since nothing can lose all its value and remain in existence, it is impossible for a currency too to lose 100% or more of its value without ceasing to exist.  Even if the cedi were to exchange for a million to the dollar, so long as it can buy something, it can’t be said to have lost 100% of its value.  This is basic financial economics.

What the vice president presented as the depreciation rates of the cedi against the dollar under the two governments, therefore, were in fact the appreciation rates of the dollar against the cedi (something, after all, can be worth several times its value).  The correct depreciation under the Kufuor-Aliu Mahama government was thus 41.7%, and not 72%, which was actually the appreciation of the dollar against the cedi.  And the Mills-Mahama depreciation rate was 71.4%, still unacceptably high, but certainly not 247%, which was the dollar’s appreciation against the cedi (the exact figure is 250%, allowing for the decimal places that he omitted).

He concluded:  “Although it is early days, there is much optimism for a more stronger (sic) currency under the leadership of Nana Addo Dankwa Akufo-Addo”, continuing with his habit of brown-nosing.

Crash of Ponzi Scheme

What he didn’t say was the role of Eurobond proceeds in the relative stability of the cedi under his watch up to that point.  The Bank of Ghana had reported in May 2018 that “the recently issued Eurobonds raised the levels of international reserves to US$8.1 billion (4.4 months cover for imports) as at 17th May 2018, providing enough cushion against any potential external vulnerability” – that is, cedi deprecation, in layman’s language.  It was when the Eurobond proceeds ran out and the cedi started tumbling that the former president spoke and incurred the wrath of the vice president. He had been exposed over his famous claim that the exchange rate would always expose weak economic fundamentals.  Clearly, he didn’t like that.

Between 2018 and 2021, the government borrowed an eye-popping US$11 billion through Eurobonds, compared to US$4.5 billion under Mills and Mahama; the US$11 billion represented 71% of all Eurobonds since President Kufuor.  By early 2022, investors had seen through the government’s Ponzi scheme and pulled the brakes on further lending. The scheme collapsed and the cedi has been disintegrating since then. The vice president has been in hiding.  Or at least quiet about the cedi.

Understanding the Cedi’s demon

Now, to the demons that have plagued the cedi for decades. Busia was overthrown in 1972 for devaluing the cedi, and subsequent military governments used takashie to keep it artificially stable and strong, even as inflation ate deep into its value.  The Economic Recovery Programme of 1983 let the cedi float on the open market, with the establishment of forex bureaus, for example.  But with a weak production base, disproportionately high dependence on cocoa proceeds to finance imports, and chronically low productivity, the cedi continued to melt in value.  By 2007, it was exchanging at 9,300 to the US dollar, up from 2.75 cedis in 1982.

In July 2007, the government redenominated the cedi by knocking off four decimal places.  Overnight, it took 93 pesewas, instead of ¢9,300, to buy one US dollar.  But it was all an illusion.  Whatever cost ¢9,300 previously simply cost 93 pesewas afterwards.  The substantive value was the same, and the cedi remained inherently weak against the dollar.  Indeed, it lost 0.16% of its value against the dollar in July, the month of redenomination, and continued to lose its value every month until August 2009, stabilised for about a year, and resumed its losing streak again, with a few exceptions here and there.

Following the redenomination, one cedi could get you US$1.08 in 2007.  As of December 2021, the same cedi could get you only about 17 US cents, a cumulative loss of 84.5% in value.  This was down to 14 cents as of March 4th and could fall below 10 cents by year’s end if nothing is done by the government. The president has openly said that he is “extremely upset and anxious” about the sinking cedi, but he has not said how he would rescue it.

Solutions from the 40-Year Development Plan (2018-2057)

The 40-year Development Plan (2018-2057), prepared by the National Development Planning Commission from two years of rigorous analysis of Ghana’s economy dating back to colonial times, identified three main sources of the cedi’s persistent weakness and made corresponding recommendations for immediate action, starting from 2018.

The first was about the psychology of currency markets.  Every time government in particular quotes prices or does local business in dollars (such as granting loans to MPs in dollars, in violation of the law), it talks down the cedi, effectively telling the public that the national currency is so worthless that even the government doesn’t believe in it. The public, especially importers, internalises these talkdowns and acts upon them, putting the cedi in a loop of expected depreciation-actual depreciation and back to more expected depreciation.  Solution: The Bank of Ghana must enforce the law against doing local business in dollars and other foreign currencies. The minister of finance, in particular, should know better not to break that law.

The second source is somewhat related to the first but is largely institutional, such as the violation of laws governing the sale of dollars and other currencies by private individuals or forex bureaus, and the dollarisation of port or border services, especially.  Why make laws if you won’t enforce them?  The dollarisation of port services in particular contributes greatly to what has become a perpetual depreciation of the cedi. Solution:  Enforce the law, and in the case of port services, charge all fees in cedis, at fixed rates to be revised only periodically to reflect inflation. Anything less will drag the currency further into the pits of hell, and one cedi may soon be worth less than one US cent.

The third and a major structural source of the cedi’s age-old woes is a weak and narrow export base that simply doesn’t generate enough forex earnings.  On paper, exports of gold and crude oil (the two main traditional exports, besides cocoa) may grow but very little of the proceeds actually end up in our international reserves due to an ownership structure that favours foreign investors. The situation is similar to non-traditional exports, where most of the proceeds also go to the foreign companies that produce most of them.

The Ghanaian economy, therefore, essentially remains a monocrop economy, depending almost entirely on cocoa, which is wholly Ghanaian owned.  But cocoa proceeds are seasonal, surging from October every year and peaking between the first and second quarters of the following year, which coincides with the time of the year when foreign companies begin to repatriate their cedi profits from the previous year in dollars. The cedi is thus perpetually under pressure from the dollar. 

To help address this structural imbalance, the Plan proposed “strategic exports” in addition to traditional and non-traditional exports.  These would be high-value goods and services with most, if not all, of the proceeds coming back to Ghana. For example, Total, a French company, has fuel stations throughout Ghana, which together produce millions of cedis in profits that are shipped out in dollars annually.  Why doesn’t Goil, a Ghanaian company, also have branches throughout France and other countries from where it, too, would ship back dollars every year to help support the cedi?  We also have IT, financial, architectural, and other professional and technical services that can bring in more dollars through their exports.  The venturing of GN Bank into foreign markets, for example, could have helped offset the effect of the dollars repatriated by foreign banks in Ghana from their cedi profits. In short, the Plan called for a programme for product and market diversification alongside a strategy for economy-wide productivity improvements and development.

It also identified a group of state-owned enterprises (SOEs) that together can bring in more foreign exchange than gold and oil combined. This, however, would require comprehensive governance reforms of those SOEs.  Government’s influence on them, for instance, would have to be restricted to the appointment of board members with relevant (and vetted) expertise in the SOEs’ sectors of business.  There should also be special slots for private individuals with relevant experience to apply for consideration. The board would then hire the top management through internationally competitive recruitment processes.  The nationality of the best candidates shouldn’t matter; their ability to deliver should, mindful that some of the largest and most successful companies in the world today are run by non-nationals who were found to be the most qualified.

Provision, however, should be made for skills and knowledge transfer to Ghanaians, where foreign nationals are hired, as part of a broader strategy to build the capacity of Ghanaians to manage those SOEs – and foreign firms, if need be – in the future.  

From the above, it is clear that the cedi’s woes cannot be addressed successfully with flawed and politicised analyses, or through public lectures full of sound and fury that signify nothing. Addressing those woes will, instead, require sober reflection, a clear vision of the cedi’s and the economy’s future, sound policies, and disciplined action, all of which will certainly transcend governments.

Urgency of the moment

In the immediate term, as the crisis rages on, the government must begin as a matter of urgency by curbing frivolous spending, especially spending that is likely to weaken the cedi further. This includes the importation or purchase of luxury vehicles; a reduction in foreign travels by public officials (if they could do it at the height of Covid, they can do it now); an end to the president’s extravagant lifestyle and those of his appointees generally; an end to endless foreign “medical reviews” for public officials, including MPs; and any other spending that puts needless pressure on the cedi.

We can’t eat our koosé and have it too.

Something has to give.

By Nii Moi Thompson, Former Director-General of the National Development Planning Commission [March 6, 2022]

“What others have done, we can do.” – Marcus Garvey.