Ghana's Currency Tumbles

The value of the Ghanaian cedi has taken a somewhat big hit recently, measuring a decline of 8% against the dollar in January, and continuing in its downward trend with a 1.2 percentage point decline in the past several days (See below, Chart from Bloomberg.com). Within days of the beginning currency volatility, the Bank of Ghana announced several measures – most of which seem desperate and unlikely to affect anything.  For instance, there were the reminders that individuals cannot take out more than $10,000 per year outside the country without approvals; and there was some chatter about sinking US $20M to help stabilize the cedi.[i]

While most commentators are blaming the Ghanaian government for the weak currency, linking it to poor performance, there are some who are coming to their defense by pointing out that other emerging market currencies have also recently suffered a similar fate.[ii] They point to the fact that the Argentine Peso has recently hit a 12 – year low, plunging more than 15% in just 48 hours[iii], the Indian Rupee dropped the most in two weeks (0.4%) on importers’ demand for dollars[iv], the South African Rand declined more than 3% to a new five-year low[v], and the Nigerian Nairi declined as much as 1% for the second day in a row, to hit a two-year low against the dollar.[vi] As an economist and as a Ghanaian, there are two things I am looking out for.

First, hopefully the Bank of Ghana and the government do not revert to their old habits of imposing currency controls.  This would be an unmitigated disaster for the long run growth prospects of the country for at the end of the day, a stronger currency can only be created by bolstering economic output in order to increase exports and substitute imports for domestic production.

The second thing I would like to draw attention to is the fact that there are surprisingly few voices pointing out that when the price of anything changes there are generally losers and winners.  This is equally true in the case of foreign exchange movements.  One obvious, but not necessarily a sympathy-inducing group, is the Ghanaian expatriates living abroad sending large remittances back to their families.  As the value of the cedi falls against the USD, the local value of their remittances increases. I would hope that this would induce them to send even more money home, as it is now worth more.

Furthermore, Ghanaian exporters stand to benefit significantly from the weaker cedi, with each dollar worth of exports, now receiving a premium price in local currency. In a similar situation, China has maintained a weak currency program for a fairly long time, much to the dismay of the United States, and many believe that it was a strategic policy decision to boost Chinese exports, and reduce its imports. In this light, Ghanaian non-traditional agricultural exporters, as well as manufacturing and industrial firms who are exporting their goods abroad, should also see a boost in demand for their products.

However, throughout the ongoing discussions of the Emerging Markets currency depreciations, and in particular the cedi’s recent volatility, I have not noticed anyone mentioning the potential benefits of a weaker currency. Why is nobody addressing this side of the picture? If Ghana is importing too much, then higher import prices will assist local producers in competing for domestic market share, and will allow them to produce substitutes for foreign products. Is that not a pathway to increasing local production and the structural adjustment that so many in the international development community are clamoring for?  Perhaps the voices of the farmers and exporters are too quiet because of the lack of strong political power.

Exchange rate discussions often invoke nationalistic sentiments along the lines of – It is bad for Ghana to have a weak currency because it is sign that the country is weak.   I have never understood that argument.  The association of national pride with the value of the national currency is something Milton Friedman famously warned against many decades ago.

For more in-depth analysis on the exchange rate drama in Ghana, please read my colleague J. Atsu Amegashie’s articles:

• The Bank of Ghana’s “pro” – cedi measures: a quick analysis (Feb. 6, 2014)

• Is Banning Dollarization in Ghana Sound Economic Policy? (Aug. 21, 2012)

• Reacting to a depreciating cedi: some comments and preliminary ideas (Feb. 9, 2014)

• Governance: “Carrots versus Sticks” or “Carrots and Sticks” (Feb. 8, 2014)

And let us hope the country’s policy makers do not go crazy over the fall in the currency.

[i] http://elections.peacefmonline.com/pages/politics/201402/189296.php

[ii] http://blogs.wsj.com/moneybeat/2014/01/29/fed-will-taper-emerging-markets-be-damned-analyst-says/

[iii] http://www.economist.com/blogs/americasview/2014/01/argentinas-peso

[iv] http://www.bloomberg.com/news/2014-02-13/indian-rupee-drops-most-in-two-weeks-on-importers-dollar-demand.html

[v] http://www.reuters.com/article/2014/01/29/safrica-rates-idUSL5N0L31QM20140129

[vi] http://www.businessweek.com/news/2014-02-12/nigeria-s-naira-falls-to-lowest-since-2011-as-investor-flows-ebb