Cedi Denomination, Arbitrage And Monetary Policy

Some in the political circles in Ghana know that I have advocated for the re-denomination of the cedi as far back as 2001 simply because it is the right things to do and have enormous benefits and advantages if properly done. I still sincerely support such an exercise. Indeed, I agree with the Mr. Paul Acquah, the Governor when he says the re- denomination “will free the economy to do business in the most efficient way, based on the cedi as a means of exchange; and with continued commitment to prudent and disciplined economic policies, would serve as a store of value for all, both within and outside of the banking system” However, this exercise must be done taking consideration of the long-term strategic monetary and economic policy implications. This article also seeks to highlight some of the serious competitiveness and monetary policy issues that need to be taken into account and acted on by the central bank of Ghana and the government of Ghana including the legislature.

The benefits and advantages to be derived include but are not limited to improved and efficient book-keeping, simplified business transactions, reduced statistical difficulties, reduced price tagging difficulties at shops and supermarkets and possible reduced cost of pricing of our currency. The re-denomination sends a message that inflation, corruption especially by bank tellers; speculation and indiscipline in the economy are under attack and will be reduced. Above all, the redenomination increases confidence in the economy and sends a signal to the business community and the international markets and the world community that inflation and general macro-economic instability are things of the bygone days. Lastly, the re-denomination will enable the central bank to control monetary policy in Ghana instead of leaving it to the hands of other central banks and international financial markets.

However, the re-denomination exercise must be done with long-term strategic monetary and economic policy in mind. Gone are the days when Ghana’s monetary and economic policy were undertaken with no regard for concerns of Ghanaians and no regard for global competitiveness. Gone were the days when concepts such as interest rate arbitrage were arcane economic and finance topics, the excusive preserve of academia, nerds of prestigious finance schools and Wall Street hedge fund managers. Gone were the days when central bankers in developing countries saw redenomination exercise as opportunities and incentives to fleece their national coffers by cheating and re-circulation the re-denominated currency and thereby printing money into their private individual pockets. We are watching with keen eyes to ensure the success of this exercise by the Bank of Ghana and the Government of Ghana.

The Government and Bank of Ghana’s proposal to re-denominate the cedi by replacing 10,000 cedis with 1 new cedi (NC) come July 1 or thereabouts raises serious concerns. So far, the Bank of Ghana has given the impression, and continues to give the impression, that the cedi re-denomination is a cost of transacting business issue and nothing else. Further in this vain, the Bank of Ghana has also claimed that this is nether a devaluation or revaluation exercise.

Interestingly and remarkably, the Bank of Ghana chose to re-denominate the 10,000 cedis for one new cedi. The Bank of Ghana did not choose to re-denominate 5000 old cedis for one new cedi or 6,000 cedis or 1,000 cedis or 4,000 cedis or 8,000 old cedis for one new cedi. Instead, the Bank of Ghana chose to use the re-denomination rate of 10,000 cedis to one new cedi. This 10,000 cedis to one new cedi rate also happens to be approximately the exchange rate of the dollar to the cedi, that is, 10,000 cedis is equal to one US dollar. So one may ask what is wrong with this rate. Another question that can be asked is what message is the bank of Ghana/Government of Ghana trying to send to the business and financial community in Ghana, Ghanaians in general, international financial community and the world at large?

It is contented that the Bank of Ghana is telling everybody that the new cedi is equivalent to the one US dollar. If this is so, then a logical question is whether the Bank of Ghana or the Government plans to maintain the value of the new cedi at one US dollar over time. Further questions arise from the previous question. First, if the Bank of Ghana/Government of Ghana does not intend to maintain the value of the new cedi at one US dollar over time, but intends to let the value of the new cedi float as the current cedi does, then what prevents the new cedi from devaluing further to say 1.2/1.5 new cedis to one US dollar or devalue to something worse like more than 5 or 10 new cedis to one US dollar, in a year, may be a couple of years or so? Secondly, how does the Government of Ghana / Bank of Ghana guard against the effects of such devaluation on our competitiveness and productivity?

Third, if the Bank of Ghana/Government of Ghana intends to maintain the value of the new cedi at one US dollar over time, then one may ask what policies, legislations and institutional framework or arrangements with the Bank of Ghana has the Government of Ghana /Bank of Ghana put in place to maintain the fiscal and budgetary discipline needed to maintain the value of the new cedi? How does the Bank of Ghana /Government of Ghana plan to deal with any incongruent pricing resulting from inflation in non-tradable goods like electricity tariffs, customs tariffs, etc?

It is expected that Ghana at 50 years should be more transparent and more comprehensive in the way it formulates and implements its economic/monetary affairs. While the full details of how the Bank of Ghana /Government of Ghana plans to handle this re-denomination exercise are not known to the public, certain events give cause for concern.

First, Ghanaians ought to know what interest rate policy the Bank of Ghana is going to adopt after the redenomination takes place. Is the Bank of Ghana going to leave interest rates at the present level or will it adjust interest rates to international levels. If the Government of Ghana / Bank of Ghana is going to maintain the 20 something percent present interest rate, then that creates environment for speculation by many not least the many foreign banks mushrooming all over Ghana in recent times. These banks will have enough incentives to borrow millions of US dollars and invest the proceeds in Ghana T bills and earn the twenty something percent return and then convert their new cedis (principal and interest) into dollars after one year and pay their 8 percent cost of borrowing US dollars and pocket a 12 percent or higher return, until the Bank of Ghana takes away this arbitrage opportunity.

It may be argued that our local banks are patriotic enough not to engage in this exercise. However, nothing prevents a hedge fund manager in New York, a pure currency speculator, sitting in the comfortable offices from taking advantage of this arbitrage or carry trade. Nothing stops one of our West African neighbor banks springing in Accra like “kelewele” in bountiful plantain season from squeezing money from unsuspecting Ghanaian central banks and government. Logically, either the mere presence of investors seeking to profit from the interest rate difference will put enough pressure on the new cedi exchange rate to cause it to devalue or the Bank of Ghana will act with great alacrity to prevent this arbitrage opportunity by bringing interest rates in line with international interest rates. Second, the Government of Ghana and the Bank of Ghana want people to believe that the new cedi will not have any effect on our prices and incomes policy. To this, one may ask, how realistic is it to expect someone bringing a new car with an engine capacity of 1,900 cc or consumer goods to Ghana to pay a 20 per cent custom tariff in dollars or the dollar equivalent?

Further, how does the present re-denomination fit into the ECU monetary zone that is envisaged to take place in 2009, one year from the introduction of the new cedi? Or is the Bank of Ghana /Government of Ghana saying the ECU’s monetary zone won't happen?

In summary, the Government of Ghana and the Bank of Ghana should level with the people of Ghana and tell them the real reason for this re-denomination exercise instead of fooling around with what appears to be a lame excuse of reducing the cost of commercial transactions in Ghana. Maintaining the value of the cedi and price stability are two important prerequisites Ghana needs for economic takeoff. Given this, the Government of Ghana / Bank of Ghana should focus on developing a national strategy for maintaining the value of the cedi and communicate this plan to the people for debate. If the Government wants to dollarise then it should say so and plan for it accordingly.