Dr Bawumia Delivers Lecture on Restoring the Value of the Cedi

Dr Bawumia Delivers Lecture on Restoring the Value of the Cedi

Dr Mahamudu Bawumia, a former Deputy Governor of the Bank of Ghana (BoG) and the Vice Presidential candidate of the New Patriotic Party (NPP) for the 2008 and 2012 general elections, has asked the government to admit that the country is in a crisis and to stop making promises and commitments of expenditure to new projects when it is failing to make statutory payments. Dr Bawumia, who is a Visiting Professor of Economic Governance at Central University College, Prampram, was speaking yesterday, March 25, 2014 at the university’s auditorium  as part of the Distinguished Speaker series organised by the university.

Dr Bawumia noted that the cedi had depreciated by 14.5% in 2013 and had depreciated by 16% in the first quarter of this year alone. He said that the depreciation of the exchange rate had resulted in increases in the prices of utilities, petroleum products and other commodities. Dr Bawumia pointed out that since 1999, the CFA Franc had appreciated by about 19% against the US dollar while the Hong Kong dollar had remained relatively constant with the US dollar.

Dr Bawumia evaluated six explanations given for the depreciation of the cedi: weak economic fundamentals, dollarisation, the colonial structure of the economy, redenomination, the Single Spine Salary Structure (SSSS) and dwarfs, juju men, high rise buildings and a sign of the end of the world.

Beginning with the weak economic fundamentals, he pointed out the weaknesses in the real sector, public finance, monetary sector, and external sector. He spoke of a decrease in the real GDP growth rate since 2011 and an increase in inflation. He said that for the first time, Ghana had experienced double digit budget deficits in two successive years (2012 and 2013), he attributed this to the increase in government expenditure from 20.1% of GDP in 2011 to 26.7% of GDP in 2013 while government tax revenue remained stable at 17%. He said BoG’s net financing of government had increased by 700% from GH¢1,448 million in 2008 to GH¢11,327 million by 2013. Dr Bawumia also pointed out that public debt had shot up from GH¢9.5 billion in 2008 (33% of GDP) to GH¢49.9 billion (57.7% of GDP) at the end of 2013, an average increase of 85% per year. The current account deficit, he noted, had increased from 8.2% of GDP in 2010 to 13.2% of GDP in 2013. Ghana’s net international reserves had declined from a high of $4.4 billion in 2011 (equivalent to 3.1 months of import cover to some $1.5 billion in February 2014 (equivalent to some 0.6 months of import cover). This, he noted, was the lowest for any middle-income country or any oil producing country in the world.

On the issue of dollarisation of the economy, Dr Bawumia, suggested that successive governments have been unable to maintain the stability of the cedi and therefore the citizens have sought to preserve the value of their money in other currency. Dr Bawumia noted that people could buy dollars from the black market if they wanted to and that businesses could charge the cedi equivalent of a dollar price if they are asked to price in cedis. He suggested that since dollarisation was present in the five years of cedi stability and the cedi was depreciating against currencies that were not even present in the country, dollarisation could not be the cause of the problem. He suggested that the de-dollarisation campaign was attacking the effects and not the cause of the problem.

Dr Bawumia noted that the colonial structure of the economy could not be the cause of the depreciation of the cedi because Ghana actually achieved the best performance of its currency during the colonial era from 1912 to 1957. He also observed that countries with similar economies such as Cote D’Ivoire, Burkina Faso, and Senegal in the CFA Franc zone have achieved stability because they are operating under a fixed exchange rate arrangement which requires fiscal and monetary discipline to work.

Dr Bawumia dismissed the argument that the redenomination could be the reason for the depreciation since it does not affect the relative prices of goods in an economy and therefore cannot result in exchange rate depreciation which measures changes in the relative prices across countries. He also felt it was unlikely that an event  which took place in 2007 could suddenly rear its head in 2012, 2013 and 2014 without impacting the economy in 2010 and 2011.

The SSSS could not be the cause of the cedi depreciation, Dr Bawumia argued. He noted that domestic revenue had increased by twice the amount the wage bill had increased by. He pointed out that the wage bill as at the end of 2012 was 42.9% of domestic revenue, which was not too different from the 41.3% recorded in 2008.

Dr Bawumia dismissed the suggested causes of dwarfs, juju men, high rise buildings and a sign of the end of the world as comic relief. He said that payments of judgment debts, payments to Subah, the Savanna Accelerated Development Authority (SADA) and the Ghana Youth Employment and Entrepreneurial Development Agency (GYEEDA) were all policy choices that the government had not holistically analysed the impact of.

Dr Bawumia asked the government to ensure fiscal discipline, review taxes and tariffs, establish a legal framework to punish fiscal indiscipline, design and implement an exchange rate regime and reverse new BoG exchange rate directives to banks in order to restore the confidence in the economy.

Download the full lecture here. Inform Ghana was at Central University to cover the event. Below are a few tweets from our coverage.



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