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The Re-denomination Of The Cedi - Business - Nairaland

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The Re-denomination Of The Cedi by AlhajiBIMBO99(m): 7:39am On Apr 11, 2020
The Bank of Ghana (BoG) is planning to redenominate the cedi in July 2007. BoG intends to set ten thousand cedis to one new Ghana cedi.

This paper investigates the conditions under which countries, especially developing countries engage in currency redenomination. It focuses on Ghana. Given that many governments of developing countries experience high levels of inflation and a deterioration in their currency‘s value against other currencies, why do some elect to redenominate, while others do not? And why do some governments wait many years after a bout of hyperinflation, or after their currency is priced at 1000 or 5000 units to the dollar, to redenominate, while others do so relatively quickly? I suggest that the explanations rest in a combination of economic and political factors, including inflation, governments’ concerns about credibility, and the effect of currencies on national identity.

The cedi redenomination has become necessary as a result of years of decline in the currency’s value. In 1982, for example, the US dollar exchanged for 2.78 cedis. Now the dollar exchanges for about 9100 cedis. The redenomination is being carried out now as part of the government’s efforts to convince citizens and markets that hyper-inflation is a thing of the past. Inflation was as high as 116% in 1977, 117% in 1981 and 123% in 1983. Now inflation has been reduced to about 12%. The redenomination is also being carried now in order to re-align the cedi with other currencies in the West African region as ECOWAS member countries move to a common currency, the Eco.

Currency redenomination also can be a means by which some governments attempt to reassert their monetary sovereignty. If citizens lose confidence in the national currency, they may begin to use foreign currencies, particularly those with greater prestige. This may be both a psychological and an economic blow to the government: with widespread foreign currency substitution (or, more extremely, full dollarization), the central bank no longer controls the money supply, rendering it unable to provide lender of last resort functions.

A country’s economic policy is influenced not only by international capital markets, but also by foreign central banks. Currency redenomination, then, is a means by which governments can attempt to reverse this currency substituting behavior: if citizens are confident that the new Ghanaian cedi will hold its value, they may be willing to shift from using euros and dollars to using cedi. This is the psychological effect of redenomination.

So, what is redenomination? Well, it is simple. Bank of Ghana is going to do something to our money so that instead of using say, ¢500 000 to buy something, we would now use fifty Ghana cedis (GH¢50) to buy that same thing. This is the portability effect of redenomination. The portability of the new currency makes it more convenient to carry large sums of money on a person rather than in suit cases or bags. The time wasted in the counting of large sums of money and the risk involved in carrying large sums of money in bulging pockets or suit cases will be reduced drastically with the redenomination. It will also facilitate the introduction of of the use of vendor machines and car parking meters as well as the re-introduction of the use of coins for smaller units of money.

For redenomination to be effective, it has to go beyond the psychological and portability effects; it has to be associated with broader macroeconomic and fiscal reforms. One area of reform should be to reduce the size of the informal economy. The informal economy in Ghana is significantly larger than the formal economy. Very few people in the country transact business by using cheques. Even government transactions such as registration fees or payment of license fees or court fines are done in cash. Some estimates indicate that as much as 70-75% of the currency in the country circulates in the informal economy outside the banking system. People transact business in cash. The banks do not encourage the use of cheques. One cannot go to market or a supermarket or mall and pay for goods in cheques. Parents who use the banks are not encouraged, for example, to pay school fees for their wards in cheques. It should be possible for one to go to the Vehicle Licensing office to register one’s vehicle by paying with cheque, money order or cahier’s cheque. But that is not the case in Ghana now. The recent introduction of ATM is basically an urban phenomenon that is used by very few people.

Petty traders tie their cash in their waist belts. The paper currency quickly becomes very dirty only a month after it is put in circulation.

Some of the major cash movers in retail, wholesaling, and agro-crop purchasing have tended to hoard any cash that comes through their hands, preferring to trade that cash to speculators. This has led to widening disintermediation in the national payments system.

Rather than introducing innovative schemes the banks have continued to reap huge profits by taking advantage of an imperfect market situation characterized by a government with an insatiable appetite for loanable funds and a lukewarm banking public. Large investments in high-yielding Government bills, high rates on advances to businesses, low interest rates on deposits, and charges and levies on the banking public are the ingredients of this lop-sided financial market situation. Although the number of banks in Ghana has increased in recent years and new services have been introduced, the money market exhibits a kind of inflexibility suggesting an oligopolistic structure. Instead of the increased number of banks generating competition leading to reduction in cost of bank-service provision to customers, there has been a race for higher profits by most banks. As if the high interest rates were not enough, bank customers are levied charges and commissions of all sorts. A customer making deposit is first cautioned about a ‘minimum deposit’. If the deposit falls below such specified minimum, the customer is levied a charge. In some banks, the minimum deposit can be as high as one million cedis – clearly out of reach of the average Ghanaian. Other levies, which are difficult to explain or justify, include so-called periodic charges on accounts even when they have been dormant. This is as in ancient times when the major role of banks was safekeeping of valuable assets. It is only under such an archaic idea of banks rendering safekeeping services that these periodic charges on dormant accounts can be justified; but certainly in modern day banking the practice is untenable.

What plans do the banks have for sustaining long term lending, for example through mortgage financing of houses? Long-term lending is the bedrock of sustained development not short-term lending to buy cocoa during the peak season or to buy and sell imported consumer goods for Christmas or Easter.

"The re-denomination," according to the Governor, "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. Parliament's commitment to fiscal discipline will be indispensable for the success of this monetary reform over the long term, because Parliament has the approval and oversight responsibilities for budgetary policies to underpin sound monetary conditions," the BoG Governor claims.

But the Ghanaian Parliament is nothing but a rubber stamp that always passes the government’s budget. The government budget has been one that is based on deficit financing. The deficit is either funded by printing money, selling treasury bills, funding through donor sources, or a combination of any of these funding sources. The deficit financing of the government budget results from a number of factors. Principal among these factors is the fact that the tax net is not spread broad enough because no actionable plans have been put in place to rope in sections of the informal economy into the formal economy. Another factor is the shrinking of paid employees as result of liberalization and divestiture. The labor force in the Ghanaian economy is distributed thus: agriculture: 60%, industry: 15%, services: 25%. Successful redenomination will require curbing deficit financing of the government budget and the cyclical inflation during the peak cocoa season, and adding value to our mineral and agricultural raw materials before export. There is the need to restructure the economy so that the secondary rather the primary sector will be the engine of growth.

Whatever, the causes of inflation, it is clear that we cannot rely on monetary policy only to hold inflation at bay. Avoidance of fiscal excesses and active policies to revamp the real sector are credible complements. Without a change in policy and full cooperation from the fiscal authorities, monetary policy will remain just a passive appendage to the economic policy making process in Ghana, lending itself to accommodation of fiscal excesses.

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