Ghana's Cedi Redenomination ... A Trojan Horse

The effects of any misplaced decisions to be released onto the Ghana economy after redenomination will live with us for a long time until another redenomination follows sooner after this first one. Unless a lot of work is done from now until the implementation period, which is just six months away.

Otherwise, there will be too much strain on the economy. This is the general idea of this article. It does bring into the fore and explains why some choose to call the redenomination their Trojan Horse.

Insight

There is a whole lot of reality check to be done here and some of the questions are why some countries choose to redenominate and others do not. For instance is Korea an economically developed country, and it redenominating this year? Yes.

Similarly, Argentina, Brazil and Israel have all redenominated their currencies before. So it is not as if redenomination is a bad thing, but the cost involved, how, why and when you do it is what matters once the decision has been made.

The Republic of Korea is going to redenominate its currency, the "won" in July 2007. When did Korea conceptualize to have currency redenomination? It was quite a long time ago before the announcement was made in 2004.

It is possibly, about the same time when the issue of redenomination of the Japanese Yen came up in 2002 when I visited Japan. But it was the then Prime Minister Junichiro Koizumi who blatantly rejected the idea for Japan. I did meet the Japanese acquaintance again 2006 at the Korle Bu Teaching Hospital, Accra.

The former Japanese Prime Minister was in Ghana as we all know was on a visit to the country in May, last year. The last time I was with Mr. Koizumi was when we campaigned together for Mr. Sagae, a renowned Tokyo lawyer for the Yamagata seat in the Diet (Japan National Parliament).

Korea fixed July 2007 to begin circulating the newly redenominated currency after three years of deliberations research and preparation as against the mere seven months notice given to Ghanaians.

Otherwise, it was going to be an all secret deal initially as far as the authorities in Ghana were concerned. The announcement was first on radio in December 2006 before it even went to Parliament.

Independence of the Central Bank

On one occasion the government spokesman on social services and others who spoke on radio (JoyFM) praised the Governor of the Bank of Ghana for being secretive, about his intentions of redenomination. Since there were no prior consultation with the President, and others who mattered heard of it for the first time on air. Could this be true Ghanaians?

For those who are of the above view that it was good to tell the stakeholders in the financial sector or the even parliament at such a short notice should start rethinking. How could the central bank alone have carried out the job by the way?

In the show of their satisfaction they praised the Governor for being truly independent. I have my doubts by the way. The whole demeanor, throughout the radio talk show could not address any concerns that Ghanaians could have had before, during and after the redenomination.

The propensity to uncertainty in any currency's redenomination has been captured in most of the literature around on the topic. More so for any person to hazard taking such a decision must be a bold person and totally know what s/he is doing.

The wisest approach is to be seen as working as a team and not to look like a "one man's show." Such that the evasiveness, weakness and subsequent fumbling by the Governor on the floor of parliament could not dissuade Ghanaians into adopting a "wait and see" attitude.

All these do not measure to any independence of the Central Bank, It only led people into thinking that the country was not getting some basics right. If at all, it is noteworthy to think that we were getting certain major fundamentals wrong. We need to be careful transparency is not compromised and redenomination under good governance does not result in confiscation of the money of the poor.

Media

I read many complaints about the economic desk of the Statesman newspaper in past. For some time I thought the paper had become a little more careful on its economic reporting. But to my dismay it was stated on the paper's website that the "Ghana Cedi is being Traded on the International Markets," immediately after the Governor made his surprise announcement about redenomination.

How credible was the statement when we have not yet "revalued," redenominated the Ghana cedi. Before I read the Statesman Newspaper assertion, I met a very close associate of the Ghana Embassy in Washington, DC telling me the same thing I noted above.

I quickly asked myself if even the Swiss Franc is perceived a stable currency in view of the neutrality of the country among others, it does not and did not then, command that much confidence as a currency reserve in the eighties until now. Today the Swiss may be happy to be using the Euro which is tradable and a major currency reserve globally.

It is the same thing, as countries currency could be perceived to be valuable but will not be traded internationally. So what is the Statesman talking about? Is it the stock market in Ghana or what? I have had no answers yet.

But if it is the foreign exchange (Forex) bureau, then I think our gratitude should rather go to Western Union, MoneyGram and others for revolutionising the trading or rather the remittance system to countries worldwide.

Past experience

We have clearly been told by the Governor, Bank of Ghana (BoG) that this new policy is neither a "revaluation" nor "devaluation." Whichever way even the uninitiated can decide after the process is complete.

Most redenominations the world over have been branded as just technical, since it is just the issuance of new currency in the form of decimalisation as in 1965 in Ghana. This was the change of currency from the pounds, shillings and pence (penny) to the cedi and pesewa.

The only reason for the second money change was to just remove Dr Kwame Nkrumah's head from the Ghana currency in 1967. After this, the Bank of Ghana has also issued additions to the old currency in 1972 and 1973.

There was of new currency notes after 1979 up to 50 cedis. Then between 1983 and 1991 the highest currency note had reached 5,000 cedis under the PNDC and later the NDC. But significantly so was in 2002, when the ruling NPP government introduced the 10,000 cedis note with portraits of the "Big Six" on the 20,000 cedis.

It was not for nothing that the proposed 2007 redenomination never mentioned fighting inflation as one of its nine reasons officially documented, inflation of course was said to be10.3 per cent in November 2006 but slightly became 10.5 by the end of the year.

The reasons given for the current exercise was mostly about ATMs, Banks operations, coins, portability and account books. The net worth of the cedi could only worsen for the individual because nominal price hikes, as has been documented in other jurisdictions after such an exercise.

So one may ask why should we do it or why are we going to do it? Most of the reasons given cannot be found in literature all over the place most of which sound reasonable at first glance.

Including the nine points raised by the Bank of Ghana which never mentioned inflation. I would have considered totally different parameters all together, including the cost, investment, debt servicing, legal, regulatory mechanism, trade and timing.

Cost and Lessons

So far the Governor has been mute on how much it will cost Ghanaians to redenominate the cedi. As for the cost, there will not be a loss but for good governance and transparency the people need to be informed before hand.

Korea with a population of 48.8 million people and a robust economy with $811 billion Gross Domestic Product (GDP) and industry comprising of electronics, shipbuilding, the fifth car making industry in the world, etc. It is spending $470 million (470 billion won) for redenomination which involves printing new currency notes, coins, replacing automated teller machines (ATM), etc.

This figure is close to what Ghana obtains as GDP by the way. Korea in actual fact is going to use a very small fraction of its 2007 GDP to pay to get everything about the new currency and they told the people about this as far back as 2004. So, why could the governor of the Bank of Ghana not tell Ghanaians how much will it cost to do the exercise?

So it is once more sad when Ghanaians could not be treated fairly, and are also justified to know whatever money is being spent to make the new money in addition to the logistics that will make the exercise complete, also the man hours that will be expended should be stated.

In Korea a decision was categorically made to reduce the size of the new "won" just to cut cost. But also introduce a lot of security features to forestall counterfeiting. It is probably cheaper because it can print the notes and mint the coins in Korea. As I noticed the whole design process, including what pictures will be on the currency also provoked a lot of thought and openness.

Because the experience from all over the world, including what experts, researchers and think tanks suggest, and even for those who have been compelled by various circumstances to redenominate as many as six or five times (e.g. Brazil or Argentina), advise that the only way to have successful redenomination is transparency and giving the people ample time.

Otherwise, the whole process will amount to confiscation and the lost of confidence in the new currency which escalates into inflationary pressures and the greater demand for a currency reserve (e.g. mostly the dollar). When this happens it defeats one important function of redenomination and that is building confidence in the national currency.

In short there is no need to praise the governor for saying he had not even contacted the banks prior to his announcement. How good is that? And how long could the Central Bank worked in isolation any way? It was as if it is not going to be the same banks, rural banks, commercial, international banks and non-bank financial institutions that have to serve its many clients.

Even more so it is the contribution to be made by non-formal banking institutions (like micro-credit associations, credit unions, etc.,) forex bureaus and so on that will assist in the successful implementation of the programme.

Methodology

The Korean currency is redenominated at the rate of 1 new won = 1,000 old won. Ghana on the other hand is redenominating rather cumbersomely. The initial information was said to be exchanging not, 1 new Ghana cedi for 10,000 old cedis.

Rather, the old cedi equivalent of one dollar is going to be divided by 10,000 cedis. This did not make sense to many because although the dollar is the most preferred currency reserve, its exchange value is second to the Euro.

The about misunderstanding from the Bank?s public relations is resolved from its four-page paper where it states clearly that ?the new note regime will set the currency ?numeraire? at ?10,000=GH?1=100Gp.? There is an explanation to be made why there should be 1 cedi note at the same time a 1 cedi coin?

This methodology was so badly conceived that, it worsens an already difficult situation. It made well-meaning Ghanaians everywhere immediately react. Therefore, some suggested that, if it is going to be the issue of the just an arithmetic operation like a division it should better be divided by 1,000 units. By the way it is difficult to determine from the wrong premise of the policy.

This fear made later proponents to suggest 1,000 units instead of 10,000 tend to be a thought of reasonableness and probably practicality. How many of our 30 percent illiterate population, the aged and a lot of our rural folks will not be outsmarted by Sherlock business persons, "been to city crooks" and unscrupulous treasure looters with such a formulation.

But there is the broader economic dimension as those in the field will attest to that a seemingly strong Ghanaian cedi or even call it the Ghanaian dollar will make its exports expensive. When goods are expensive they are simply not bought.

Cocoa Industry

The US dollar is said to have lost value (it was cheaper) towards the end of the 2006, so it was able to sell more goods and automobiles abroad causing improvement in the balance of trade for November, 2006.

This made it reduce its trade deficit a little, on the other hand Americans were unable to buy as much foreign goods and this favoured the US trade. It was reported though that by the end of November 2006 but the US is said to owe China some $200 billion.

By a similar explanation the cocoa industry will suffer after the 2003/2004 bumper in a different way. Because the international demand for cocoa is inelastic. Ghana may be able to have a lot of the cocoa to export but there will be very little guarantee that it will be able to sell all.

This situation could be worsened if cocoa is perceived to be expensive abroad. Currently, there are substitutes for cocoa butter equivalents and substitutes (CBE and CBS) but thanks to ?kuapa kokoo? fair trade initiatives, Japan and the cocoa processing industries like Cadbury, Nestle and Hords Brown Gold the effects are minimal.

With the increase in the producer price of cocoa, the impact of redenomination and instability in our competitor nation of C?te d?Ivoire there could be an influx of smuggled cocoa if the Ghana Cedi = $1by any miracle we shall be faced with various scenarios and there is one that I quickly foresee.

There will be a course for indirect subsidy going to the cocoa beans purchases that will put a strain on the economy. The shear quantum of cocoa within our borders will result in by the needs for unanticipated warehousing cost, overcrowding at ports, stress on the overburdened roads, etc., instead of creating revenue in form of taxes.

But the fact still remains that enormous pressure will be exerted on the industry post redenomination that the Bank of Ghana has not factored into the equation. It is pathetic that in our ECOWAS region, we all know how porous our national boundaries are.

So that it was not convincing for an officer from the Ghana Cocoa Board (Cocobod) to come out boldly without care, when someone was asked how the redenomination will affect the cocoa industry? Only said the Cocobod is ready and it will not affect it.

What do readers think I will ask? Actually, if we followed even the US scenario it means this officer should have been a little cautious in saying what he said. Do I blame him? No. I think he felt for the Governor not discussing with them meant there was no effect on the industry.

So he did not have to think of it. I want to say it is time for Ghanaians to say I do not know, if they do not know. It is better and it does not matter, then it gives opportunity to find out, thus go on a quest.

I wonder just saying three months familiarisation that is by October 2007 farmers will be abreast with the changes. Since for many of the farmers cocoa was their main source of income so without selling some may not even have the opportunity to see the new currency.

We seem to demonise journalists in Ghana but I think without them (with the exception of a few) we will not advance to where we are now. I wish to congratulate that thought provoking question because cocoa has been the highest foreign exchange not to confuse it with the regular shouts about remittances that come in trickles to individuals.

The major everyday indicators to factor into the cocoa equation could be expanded to the prices of ordinary food, which many cannot afford three meals a day because of high food prices and low wages. This is what the statisticians will normally include in the consumer price index (CPI) which, sometimes tend to determine inflation in the country.

Superficially, I will be the happiest man if 1 Ghana Cedi = $1. That way I would not have to expect anybody to remit monies to me in Ghana to survive. But a little insight given about the cocoa situation is there are three situations that may arise and all will need ready-made schemes to tackle them if they ever raised their ugly heads, so as not be caught unaware.

Informed Decision Making

It seems I am writing too much, I can go on and on so let me stop here. I leave the rest for further debate and even study. The universities, think tanks every Ghanaian should have been involved through every little way in understanding the benefits of redenomination amidst the most pressing problems like food, clothing and homelessness.

It will be more appropriate for the Bank's officials to walk down to Makola to make the business people answer questionnaires or something before the decision was taken. How far is Makola from the Bank of Ghana by the way? It is just two hundred metres.

Is there a research department in the bank? Yes. I know Dr Addison and Dr Bawumia are very hard working men who could have sent some people to the field to conduct the necessary survey. Certainly, it is not too late.

Ghana remains a developing country and this will continue to be so for a long time to come. Unless it is able to do what many countries have done like Korea and Japan. To be able to imitate the rising China and India, also attempt what the "Asian Tigers" have done and even go beyond these efforts to be where these countries are, as either developed or transition economies.

This clearly means it will take a reasonable long time for Ghana to attain their levels of development, if we proceed at the current pace, with the same Ghana attitude and symptomatic weaknesses.

So, why should Ghana redenominate when notable shortfalls exist at the levels of political engagement, social cohesion and economic development? This is what Moseley called fractionalization and redenomination thrives on such bad situations.

The Governor of the Bank of Ghana, Dr. Paul A. Acquah explains he wants the new cedi to be portable, making it easy for the accounting books, the culture of using coins and citing the use in ATM, about nine points in all.

Views expressed by the author(s) do not necessarily reflect those of GhanaHomePage.