Dr. Nii Moi Thompson writes on the ‘Exchange Rate Management’ Debate

Now, on to the more substantive issue of exchange rate management and economic fundamentals. Unfortunately, Evron, I believe we MUST revisit that debate, indeed, settle the matter, because the method of calculation is as critical to the discussion at hand as anything else. It’s a not a matter of choice; it’s an ethical and technical imperative. Fortunately, this time around, I’ll have your boss, the vice president and head of the Economic Management Team, do the talking. Perhaps, he would do a better job of convincing you than I did.

Now, in his lecture on “Restoring the Value of the Cedi…”, 25th March 2014, at Central University, he said the following: “Cumulatively, between 1965 when the cedi traded at ¢1.04/$ and March 21, 2014, when it is trading at GH¢2.63 (¢26,326)/$ the cedi has lost 99.9999% of its value relative to the US dollar.”

There is a reason he didn’t say the cedi lost more than 100% of its value. Any currency (or anything in life, for that matter) that loses 100% of its value simply ceases to exist, and since the cedi has never ceased to exist, it would be wrong to say it lost 100% of its value. As a seasoned central banker, Dr. Bawumia knows that, which is why something tells me that he didn’t write the latest statement and that someone might have done so in his name. But that’s just a hunch. For now, in public at least, he’s recognised as at the author, and so any questions and criticism will be directed to him.

There is so much to say about the paper and the graphs, but I’ll be brief, due to time constraints. I must say from the onset, however, that the insulting tone of the paper is beneath the dignity of the office of the Vice President. He is no ordinary citizen anymore, and the campaign season ended over a year and a half ago. He now carries on his shoulder the welfare and aspirations of nearly 30 million Ghanaians. He should expect to be disagreed with, even criticised, on occasion. In responding, he must demonstrate a level of civility and restraint commensurate with his office. Smugness and contempt for the view of others have no place in these important public debates. That’s advice from an old friend.

Now, to my critique. One thing that stands out, along with others, is the claim that a change in the exchange rate from US$/GH¢1.2 to US$/GH¢4.2 amounts to a depreciation of 247%. This is wrong. The correct figure, based on the rudiments of financial economics, is 71.4%. If the vice president disagrees with that, then he should tell us the corresponding appreciation rate of the US$ to the cedi. He should also explain how the depreciation rate was 99.9999% in one instance (implying it cannot exceed 100%) but somehow shoots up to 247% in another instance.

Nor can we ignore the matter of concepts in analyses of this nature. We need to be clear what is meant by “year” – is it end-of-year exchange rates (i.e., December-to-December) or period averages, covering January to December. The choice of either can give different results, depending on the objective of the analysis. In two of the slides I provide below, one can use the end-of-year figures to argue that Nana Addo performed better in his first year than did Mahama: (4.88% in 2017 versus 14.55% in 2013). Using period averages, the conclusion can be reversed to show that the annual depreciation in Mahama’s first year was lower, at 8.34%, than it was under Nana at 9.93%.

Who is the “champion” now?

The comparison of the current government’s “one and half years” of exchange rate management to the “8 years” of each of the two preceding governments makes about as much sense as comparing a small elephant to a big chicken. Worse, the figures presented as cumulative depreciation rates of the cedi across the three governments are actually the APPRECIATION rates of the dollar against the cedi. The following are what appear in the slides: Kufuor-Aliu period: -72%; Mills-Mahama period: -247%; Nana-Bawumia period: -7%. The CORRECT DEPRECIATION rates are the following: Kufuor-Aliu period: -41.7%; Mills-Mahama period: -71.4%; Nana-Bawumia period: -6.7%. In either case, it is wrong to compare nearly 18 months of one government to the 8-year record of other governments. The most appropriate comparison should have been the first 18 months of each government.

In any case, cumulative exchange rates generally tend to hide a lot about what happens between and within the intervening years. The second half of 2008, for example, was characterised by high and accelerating depreciation of the cedi against the dollar, from 7.48% in May 2008 to 20.07% in December 2008. And since economic forces don’t necessarily respect political cycles, the depreciation continued deep into 2009, reaching 29.39% in May 2009, before slowing to 15.3% in December 2009.

Where does all this leave us in terms of the “fundamentals” of the economy? In responding to former President Mahama’s criticism of weak fundamentals, the vice president brought out the usual suspects: “The deficit is lower, inflation is single digit, the debt to GDP ratio is declining, interest rates are declining, business confidence is rising, and economic growth is increasing”.

I don’t have time to deal with each, but I’ll take a couple. There is nothing exceptional about single-digit inflation. This was attained, for the first time in over 40 years, in 2010 and sustained for three years (see the slide for average and end-period inflation rates). The latest single-digit inflation is already in retreat, having increased from 9.6% in April to 9.8% in May. The full effects of recent increases in the prices of petroleum products may yet push it back to double-digit territory). Debt-GDP ratio might have inched down but absolute debt levels have risen. The claim about “increasing” economic growth is problematic for the following reasons: After declining by 16.9% in 2016, oil sector growth in 2017 exploded to 69.2% in 2017 (every time you move from negative to positive, growth tends to be disproportionately magnified, and it’s not sustainable). Indeed, government projects oil sector growth to decline to as low as negative 1.8% for 2021). This led to overall GDP growth of 7.9% in 2017, up from 3.7% in 2016. Non-oil GDP growth in 2017, however, was LOWER (4.8%) than it was in 2016 (5.0%). (Such distortionary effects of oil on overall growth were evident in the past as well).

Here then lies an opportunity to remind ourselves, irrespective of our political proclivities, not only of the distortionary effects of oil production on growth, but also the need to manage unrealistic public expectations about the potential role of the petroleum sector in Ghana’s socio-economic transformation. Saudi Arabia, for example, produces more oil in one week than we do an entire year; this will decline further from the mid-2020s onwards. Worst, we hardly get anything from the little we produce. For every $100 of oil exported, for example, we may get between $18-$20. Indeed, according to the 2018 budget, “Company Taxes on Oil” for 2018 will be zero, despite the fact that the sector is expected to post the highest growth rate of any sector in 2018, 23.4%. And it wasn’t long ago that the vice president reminded us that our so-called “carried interests” in the mining sector are “virtually useless”, accusing the major mining companies of exploitation.

Such are the structural contradictions that perpetually keep our economy weak, interspersed by fleeting periods of “stability” that almost always last but a few years, followed by renewed periods of instability across governments. Indeed, according to the Bank of Ghana’s Monetary Policy Committee’s report of May 2018, the cedi owes much of its recent stability to proceeds from Eurobonds, and not any strong fundamentals of the economy. But how long can we continue to live on Eurobonds? We need aggressive and broad-based growth to offset these endemic weaknesses.

In opposition, the government promised “double digit GDP growth for the next four years”, a goal that the National Development Planning Commission embraced wholeheartedly (in line with the long-term national development plan). The Commission even proposed 25 strategic growth areas to aid the growht and help transform the economy and create broad-based employment opportunities. In power, however, the government has abandoned this goal, settling instead for single-digit growth which is projected to decline, notbu rise, over the next four years (see graph). This is hardly evidence of an economy with “strong” fundamentals. Something must be done – and soon.

Source: Dr. Nii Moi Thompson

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