The Impact of the Currency Depreciation in Perspective – What Ghanaians must Know

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Ladies and gentlemen of the media, invited guests;

We wish to welcome you warmly to this encounter at which we will take a critical look at the current performance of the Ghanaian economy and discuss a number of very pressing issues affecting the well-being of the ordinary Ghanaian and businesses.

A. Introduction
In the last few months, Ghanaians have had to endure severe economic hardships due to the misplaced economic policies of the Akufo-Addo government.

The Ghanaian economy is currently becoming more vulnerable and externally unstable due to declining net international reserves and the fast rate of depreciation of the Ghana cedi. It has been reported on various media platforms, both locally and internationally, that the cedi/US dollar exchange rate is expected to reach about GH¢6 per dollar by the end of the third quarter of 2019. For instance, HSBC global research on the 15th March 2019 projected that the Cedi/US dollar exchange will reach GH¢5.9 per dollar and GH¢6.2 per dollar by the second and third quarters respectively and will end the year at GH¢6.3 per dollar. The cedi/dollar exchange rate as at 3:04pm on 19th March 2019 stood at GH¢5.65 per dollar and GH¢5.60 per dollar at Fidelity Bank Ghana Limited and Ghana Commercial Bank respectively, these rates that makes the Ghana Cedi the weakest in Africa.

1. Ghanaians will recall the excitement with which the Vice President (VP) claimed to have stabilized the Cedi in the first 100 days of the NPP government. The Vice President declared that, the cedi had been arrested and the keys handed over to the Inspector General of Police (IGP). It was obvious at the time that the Akufo-Addo government was only reaping the benefits of the hard work put in by the Mahama administration before its exit. The subsequent downturn in the fortunes of the local currency shows clearly, that the Akufo-Addo government, whose Economic Management Team is headed by the Vice President, has failed to sustain the gains.

2. The poor performance of the Ghana Cedi comes on the back of huge oil revenue inflows. Ghana has become a net oil exporter following the coming on stream of two additional oil fields worked on by the Mahama Administration. Indeed, in the last two years, the NPP Government has received the equivalent of GH¢6,825,548,529.61 ($1,474,958,169.38) in foreign exchange but has still not been able to augment its net international reserves beyond end-2016 levels. Nor has the NPP government sustained the stability of the cedi. In addition to the receipts from oil revenue, the NPP government has also benefitted from forex inflows from the controversial Franklyn Templeton Bond, and a series of Eurobond issuances over the same period. Table 1 gives an indicative idea about how much this government has received in oil revenue and yet has wasted it on unproductive expenditure.

3. Perhaps, Dr. Bawumia’s prayers a few years ago are now getting answered? The Cedi is losing value at a record pace; worst among 140 currencies monitored by Bloomberg Plc, and some analysts predict it will hit GH¢6 to the dollar within a couple of months.

Table 1: Total oil revenue receipt (forex inflows from oil)
SOURCE 2016 2017 2018
Company Taxes on Oil 116,256,257.46 159,625,436.14 735,742,317.24
Royalties from Oil 227,623,974.33 586,797,561.71 1,213,125,518.82
Dividend/Interest & Profits from Oil 589,946,402.37 1,578,411,624.44 2,530,760,568.23
Surface Rentals from Oil/PHF Interest 2,117,543.28 9,282,306.71 11,803,196.32
Gas Receipts 36,603,238.51 0 –
Total oil revenue (GH¢) 972,547,415.93 2,334,116,929.00 4,491,431,600.61
Total oil revenue ($) 247,175,395.00 540,411,436.00 934,546,733.38
Source: Petroleum reports and Gov’t Fiscals.

B. What are the causes of the cedi depreciation?

4. The depreciation of the cedi can be attributed primarily to portfolio outflows (as foreign investors repatriated coupons and principals) and a large current account deficit mainly due to large trade service charges and interest payments. The current account at end-December 2018 posted a deficit of 3.2 percent of GDP. Thus, within the context of a weak current account balance and increasing portfolio outflows, the Bank of Ghana’s large foreign exchange market interventions, that lowered its gross international reserves significantly, could not arrest the depreciation of the cedi, which reached 9 percent by end-year. Hence, exchange market pressures have persisted into 2019. Other causes of the exchange rate depreciation include:

a) Fiscal Risks and policy inconsistencies
5. Government projected an overall deficit of 4.2 percent of GDP (excluding financial sector costs) for the 2019 fiscal year. This policy announcement is sending negative signals to the investor community because it is inconsistent with government policy decisions. Investors form rational expectations based on what happened in the past and what is likely to happen in the future. The Finance Minister and his team should have known that our investors are aware that the projected deficit level cannot be achieved given their history of weak fiscal performance on the back of unrealistic revenue assumptions, expenditure underperformance, and the accumulation of arrears.

6. The proposed financing options for 2019 further give the indication that the deficit level will exceed 4.2 percent of GDP (excluding financial sector costs). The NPP government is about to give a guarantee to GNPC to borrow about $250million for government using royalties from oil revenue as collateral, which is against the provisions of Petroleum Revenue Management Act (Act, 815), government is also over-leveraging mineral royalties as collateral to borrow $200million, which is against the Public Financial Management Act (Act, 921), and GETFund has also been given the guarantee to borrow $1.5 billion. Again, the government is borrowing $2 billion from Synohydro by leveraging our bauxite concession that is yet to be mined. Furthermore, government has recently given Ghana Amalgamated Trust Limited (GAT) a guarantee to borrow GH₵2 billion to shore up the capital of some indigenous banks that could not meet the GH₵400 million minimum capital requirement set by the Bank of Ghana. Technically, these financing options cannot be treated outside the fiscal and will add up to the deficit, as these borrowings should be treated as transfers to these institutions.

7. The Akufo-Addo Government has not been transparent with investors regarding the recent policy announcements and financing decisions. Investors are expressing mixed feelings of heightened uncertainty, and they may leave the economy because these financing options are expected to exert further exchange rate pressures. These unrealistic fiscal projections and less-than-full disclosure of financing options constitute enough grounds for investors to further repatriate their capital. It is unfortunate for government to announce a contractionary fiscal stance and embark on an expansionary fiscal policy path.

b) Market and investor confidence very low
8. The confidence of investors in the Ghanaian economy continue to dip. Unfortunately, the posted macroeconomic indicators are not supported by the true state of the Ghanaian economy. Worse still, the government continues to trumpet everywhere that it is exiting the IMF’s Extended Credit Facility (ECF) Program even in the face of the policy inconsistencies enumerated above. In other words, the investor community cannot assure itself that this government will achieve fiscal discipline after exiting the IMF Program, given the current signs of fiscal indiscipline. Therefore, investors have adopted a wait-and-see stance resulting in non-roll-over of their security holdings.

c) Loose/ populist monetary policy
9. The Bank of Ghana, which is expected to implement independent monetary policy in order to deliver on its primary mandate of maintaining price stability, has thrown caution to the wind and begun to implement loose and populist monetary policy. The Bank has adopted an inflation-targeting (IT) framework for the conduct of its monetary policy. The IT framework demands that the Bank pursues a forward-looking monetary policy, which implies that the Bank takes into consideration all the possible factors that are likely to affect inflation and exchange rates in the short to medium term before deciding on the monetary policy rate. However, in recent times, while the Bank’s own research papers/ studies point to the fact that risks from both the external and domestic sources have heightened, suggesting that the Bank halts easing of monetary policy, the Bank has decided otherwise.

10. The Bank of Ghana in its own press release after the MPC meeting
in January 2019 stated the following:
“The global financial developments, in particular the strengthening of the US dollar and increased risk aversion, adversely impacted the currency markets in emerging markets and frontier economies, including Ghana. In addition to increased domestic demand pressures, the Cedi cumulatively depreciated by 8.4 percent in 2018, compared with 4.9 percent in 2017.” (Paragraph 11 of the press statement);

“In emerging markets and developing economies, the growth outturn has been mixed. While economic activity in China and India were relatively strong, growth contracted in Argentina and Turkey, reflecting the adverse effects of the recent financial turmoil triggered by the strengthening US dollar and other geo-political factors.” (Paragraph 2 of the press statement);

“It is also expected that external financing conditions, especially for emerging markets and frontier economies, will continue to be tight.” (Paragraph 4 of the press statement);

“The current account outturn, together with lower net capital inflows, resulted in an overall balance of payments deficit of US$671.5 million (1.0% of GDP) for the year 2018 compared with a surplus of US$1.1 billion (1.9% of GDP) in 2017. Consequently, the Gross International Reserves (GIR) declined from US$7.6 billion (4.3 months of import cover) at the end of December 2017 to US$7.0 billion (3.7 months of import cover) in 2018.” (Paragraph 10 of the press statement);

“The recapitalization exercise ended in December 2018 with a total of 23 banks meeting the minimum requirement. These banks are sound, liquid and well-capitalized, and well-positioned to translate the gains made so far from two years of far-reaching reforms to the rest of the economy.” (Paragraph 18 of the press statement)

11. Despite the above indications of heightened external risks and adequate, if not excess, liquidity in the banking system, the MPC of the Bank went ahead to reduce the monetary policy rate by 100 basis points.

Dr. Bawumia’s five (5) questions

12. Now, the head of the government Economic Management Team, Dr. Bawumia must provide answers to the following five (5) questions:

Question 1: Why would an independent central bank with focus on price stability decide to reduce the monetary policy rate against its own research findings that US policy normalization is strengthening the US dollar and causing investors to move funds away from emerging economies and that upward adjustments in domestic prices of petroleum products are likely to affect transport and utility prices?

Question 2: Why would an independent central bank, with a focus on price stability, decide to lower the policy rate in the face of dwindling net international reserves and a rising interest rate abroad?
Question 3: Why would an independent central bank with focus on price stability decide to reduce the monetary policy rate in favour of growth, which has been projected to be higher than the previous year’s, while the local currency is under pressure?

Question 4: Why would an independent central bank with a focus on price stability decide to lower the policy rate in the face of excess liquidity in the banking sector emanating from banks increasing their minimum capital by over 100 percent, while the local currency is fast depreciating?

Question 5: Clearly, an economy cannot be externally unstable and internally stable. How can a rapid exchange rate depreciation be accompanied with a single digit inflation rate as captured by the posted macroeconomic indicators?

13. Indeed, the recent monetary policy easing by the Bank of Ghana is nothing more than populist approach and is a key factor fueling the recent exchange rate depreciation.

C. IMPACT OF THE CEDI DEPRECIATION
14. The rate of depreciation of the Cedi has attracted serious public discourse and generated discontent in the business and investor communities. It is only proper that we bring to the notice of the good people of this country the issues surrounding the recent depreciation of the Cedi and its impact on the economy. The subsequent sections discuss the causes of the cedi depreciation and its impact on GDP growth, inflation, the public debt, and its overall implications for the fiscal balance.

I. IMPACT ON GROWTH
15. It is very sad that the usually outspoken Vice President has gone into ‘self-imposed exile’ on economic matters perhaps following the massive public backlash he has received which has made him the butt of all jokes in both traditional and social media. His misleading claims about the economy while in opposition and the propaganda-laden lectures organized to convey the impression of some exceptional knowledge about economic management on his part, have combined to expose him to public ridicule in the wake of the disastrous fall in the value of the Cedi.

16. His now famous quote “When the fundamentals are weak, the exchange rate will expose you”, has become the very benchmark against which the performance of the Akufo-Addo government is being assessed and they have been found wanting. The fast depreciation of the Cedi is an indication that the fundamentals of the Ghanaian economy are not just weak but have been completely depleted. The real sector is expected to suffer the consequences of the depreciation of the Cedi. Things have fallen apart and therefore the projected real GDP growth rate of 8.8 percent (of which 6.0 percent was expected from the non-oil sector) for 2019 cannot be achieved.

17. The depreciation of the Cedi is expected to increase the cost of doing business. Domestic businesses that rely on imported raw materials will be compelled to pay more in cedi terms for their raw materials. This will push up the cost of production, make domestic businesses less competitive, and will eventually push them out of business. It is not surprising that several businesses are collapsing in the wake of the weak performance of the Cedi. Businesses are experiencing a harsh financial situation. The overall growth assumptions must be revised downwards because the expected weak sectoral growth rates cannot support the overall growth rate.

18. Again, investor confidence is gradually weakening as uncertainty has increased, and this is affecting the real sector. As at end-year 2016, investors bought the dollar at an interbank rate of about 3.9 Cedi per Dollar. Today, these same investors are compelled to buy the dollar at an interbank rate of 5.65 Cedis per Dollar. The depreciation of the cedi has overburdened investors with unexpected cost, as their cedi cannot purchase as much as before in the external market. This has reduced their capacity to expand their businesses.

19. For example, in the coming days, bakers and other flour users in Kumasi have served notice to stage a demonstration in Kumasi to register their displeasure about the depreciation of the Cedi and how it has affected their businesses because they are left with no option than to increase their prices, which is hurting demand for their products.

20. Already, a recent Think Tank survey of business sentiments across the country suggests that businesses are suffocating from the impact of the new VAT structure, the luxury vehicle tax, exchange rate losses, non-payment of contractor arrears and the uncoordinated government policies.

II. IMPACT ON DEBT
21. More so, the depreciation of the Cedi is expected to add up to public debt recorded in cedis due to increases in the cost of debt service on Dollar denominated debt.

22. Making reference to the 2019 budget, all fiscal and financial estimates were made using a projected Cedi/Dollar exchange of GH¢4.8 per Dollar. Currently, the Cedi/Dollar exchange is quoted at GH¢5.65 per Dollar. The implication is that all government loans that were expected to be serviced at the projected exchange rate of GH¢4.8 have suddenly become more expensive.

23. The stock of total public debt has gone up significantly at the current cedi-dollar exchange rate of 5.65. In November 2018, the stock of total external debt as reported by the Bank of Ghana was US$18.0 billion. At the then exchange rate of GH¢4.8 per dollar, the total external debt in local currency was GH¢86.4 billion. Even if the government has not added anything to the stock of external debt over the last three months, which we all know is not possible, the US$18.0 billion external debt recorded in November 2018 will be translated at the current exchange rate into GH¢101.3 billion. This means that without considering new borrowings by government, the depreciation alone has added GH¢15.3 billion to Ghana’s external debt.

24. In 2016, the NPP was castigating the then John Mahama government and accusing it of going on a borrowing spree. They claimed that it was a lazy man’s approach to solving the infrastructure needs of the country. They said we had adequate resources within Ghana to harness for our developmental projects. But what do we see now? At end-December 2016, total public debt was GH¢122.3 billion. In November 2018, it stood at GH¢172.9 billion. When government bonds of GH¢13.6 billion was issued to “clean” the banking system and the new additions GH¢15.3 billion brought about by the depreciation is added, the total public debt now stands at GH¢201.8 billion. This means that in barely 2 years, the NPP government has added about GH¢80 billion to the public debt stock.

25. Public debt will go up when one considers all the new borrowings and sovereign guarantees issued by the current NPP government. They have plan issuing US$3.0 billion Eurobond. By the time this is realized they would have added additional GH¢6.0 billion to the debt stock. When one considers this together with the GAT guarantee of GH¢2.0 billion and many others issued, the NPP government will be making history of adding over GH¢50.0 billion to the public debt stock every year.

26. Yes, NDC government borrowed to finance infrastructure – Terminal 3, Tamale and Kumasi Airports Upgrade, Ho Airport, Circle Interchange, Kasoa Interchange, completion of major roads and bridges, regional and district hospitals, E-blocks for senior high schools and many more. But what has NPP got to show for the over GH¢81.0 billion it added to the debt stock in barely two years? Ghanaians are the best judges. In this worrisome situation, why would the cedi not depreciate as investors shy away from holding our debt instruments?

III. IMPACT ON INFLATION
27. The rapidly depreciating exchange rate cannot be said to be accompanied by 9.2 percent inflation rate. How can an economy be externally unstable and internally stable? The depreciation of the Cedi is expected to build inflation pressures because it feeds into fuel prices, energy cost, transport cost, utility prices, cost of import duties and imported food prices.

28. The exchange rate pressures alone is expected to push the inflation rate to about 12 percent on average according to the HSBC global research. Therefore, the inflation target of 8±2 cannot be achieved going into 2019 and beyond.

D) Issuance of 2019 Eurobonds
29. The issuance of the 2019 Eurobonds as approved by Parliament of US$3 billion, at a net of $1 billion will only improve short term liquidity but will not address external vulnerabilities. We want to use this opportunity to caution government not to give false hope to the citizens since this will not address the depreciation of the currency.

30. Let me use this opportunity to quote Dr. Bawumia on a statement he issued on the 4th August, 2014.

“While the Eurobond borrowing would provide additional borrowed foreign exchange to support the cedi, the impact is bound to be temporary if the fundamentals are not addressed. Note that the Bank of Ghana has already spent some $6.5 billion of foreign exchange reserves in the last six years to no avail. So what difference will an additional US$1.5 billion make if the underlying policies are wrong.” – Mahamadu Bawumia-4th August,2014.

E) Way forward
31. On the way forward, government must focus on building a strong and resilient real sector that will support the consolidation of the gains from the other key sectors. The time to end the high import dependent economy dilemma is now.

32. It is clear that this government has boxed itself into a tight corner; and now taking very desperate measures that would make matters even worse. As it proceeds to simply borrow more to purportedly supply liquidity to the forex markets, we must remember that Ghana is already the most vulnerable among its peers (emerging and frontier markets) to external sentiments given its high level of Non-Resident Foreign (NRF) holdings of its bonds. The recent example of Argentina is there as a reference.

33. As part of recently announced measures to streamline trading in the forex markets, the central bank also announced the so-called Ghana Cedi Reference rate, purportedly to guide exchange rate determination. However, this is clearly a desperate measure that amounts to introducing a soft peg regime in the midst of declining net international reserves (with a large stock of short-term external liabilities).

34. We strongly urge government to avoid all such desperate measures. Rather than surprising the markets and racing to the bottom, government must instead signal policy credibility. There must be full transparency in engagements with the markets and investors, and the macroeconomic numbers indicators must represent reality as far as Ghana’s current economic conditions are concerned.

35. To conclude, in the run-up to the 2016 elections, President Akuffo-Addo said “The current depreciation of the Ghana Cedi against the U.S Dollar is because of bad leadership. We should not be where we are today to buy the dollar for 3.72. Vote for change, change now”. These were the words of the President in May 2016. We are making an appeal to the President to demonstrate good leadership as he portrayed in 2016, else Ghanaians will have no choice than to vote him out come 2020.

F) CONCLUSION

Ladies and gentlemen,
36. We have shown clearly, with the issues discussed above that, the current worsening economic conditions are self-inflicted. They stem form gross mismanagement and poor policy choices by the Akufo-Addo government.

37. The rapid decline in the value of the Cedi has thrown the economy in disarray and the projections surrounding it, as contained in the 2019 budget. This has therefore undermined confidence in the economy and sent the wrong signals to the investor community.

38. This calls for urgent steps to be taken by government to restore the economy to health. The starting point of this should be the immediate presentation of a new budget which considers all the distortions and serious problems occasioned by the fall in the value of the Cedi. At the minimum, we expect a statement to Parliament, assuring the nation and investor community on the steps taken by government to address the instability in the economy.

39. The budget as presented by the Finance Minister can no longer be relied upon as the true blueprint upon which the management of the economy for this year can hinge. Its credibility and sustainability have been completely undermined by the Cedi depreciation.

40. This new budget/ statement to Parliament must announce bold and permanent steps to arrest the Cedi, not the propaganda ‘IGP’ approach. It should announce reliefs to the business community and Ghanaians as a whole. We propose the scrapping of the Special Import Levy. The exchange rate depreciation has compounded the woes of importers whose duty payments have shot up astronomically. This has led to steep rises in the prices of goods and service and has imposed further hardships on the ordinary Ghanaian.

41. Finally, President Akufo-Addo and his economic team, led by Vice President Bawumia must concede that they have failed and have been unable to live up to the lofty rhetoric roiled out during the 2016 campaign.

42. Thank you

Source: Cassiel Ato Forson || NDC Minority Group

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