Ghana's Memorandum Of Understanding To IMF...
It's The Steepest Devaluation In History
His is one of the most irresponsible and chaotic administrations in the whole of the African continent; indeed, so hopeless are Ghana's economic predicament and prospects perceived to be, that not even the Soviet satellites which Moscow directed to go to Ghana's assistance, have come up with any money. If the Fund had not made finance available, the regime would collapse.
The conditions offered by the Fund were rejected out of hand - because, as our earlier report noted, “the government was unwilling to accept the massive devaluation of the cedi which, is said, the Fund was going to recommend".
'This, according to official sources, would have triggered sharp consumer price increases and would have necessitated substantial reductions in social welfare programmes', we wrote. 'The government preferred, instead, to emulate Nkrumah in the early 1960s.
The former Osagyefo is said to have told IMF officials that if they wanted to stop Ghanaian schoolchildren from going to school or from attending hospital as a condition for their granting a loan, then they should take their loan away.
Subsequent leaders, the new Rawlings Government's media stressed, had “spinelessly yielded to IMF pressures, and the result had been the spate of massive devaluations of the cedi after 1967 by the National Liberation Council; then by Busia in 1971, and by the Supreme Military Council seven years later”.
Yet it was to be barely two years before the second Rawlings Government itself yielded 'spinelessly to IMF pressures', signing a Memorandum of Understanding on 18 February 1983.
February 15, 1983
Memorandum of Understanding
The Ghanaian authorities have indicated that they wish to request a one-year stand-by arrangement for 180% of quota in support of a recovery program, the main features of which are outlined below.
Main features of the program
1. A multiple currency system, based on a system of bonuses and surcharges to be applied at the banks, which would effectively result in two exchange rates, namely C 23 = US $1 and C 30 = US $1.
The Ghanaian authorities have presented a preliminary list of receipts and payments which would benefit from the two regimes, which needs, however, to be worked out in more detail.
On the payments side (including payments for oil), not more than 80% would be at the less depreciated rate; a similar percentage would prevail on the receipts side.
Formula
This represents an average exchange rate of approximately 25 = US$ 1, which we calculate restores the exchange rate in real terms to close to what it was in 1972, which is the last year in which there was reasonable equilibrium in the balance-of payments).
2. The two rates will be unified at a realistic level during the period of the stand-by-arrangement. We have agreed for monitoring purposes that the weighted average exchange rate should be changed periodically to ensure no subsequent loss of competitiveness.
A formula has been proposed by the Ghanaian delegation which would be acceptable for monitoring purposes. Since for some time to come the budget will rely heavily on taxes from international trade, it has been agreed that the exchange rate would also need to be kept appropriate from the point of view of ensuring adequate revenue.
3. The schedule of tariff rates on imports is to be simplified and essentially reduced to three rates, namely zero (for oil), 25% and 30%.
4. The producer price of cocoa is to be raised no later than May 1983 at least to 600 per headload. The Ghanaian authorities have agreed that, normally, there would be no erosion of this price in real terms in subsequent years.
5. The Ghanaian Government has argued that it would be essential from their point of view that, initially, there would be a subsidy on oil products.
They have agreed, however, that this subsidy would be phased out at the latest by June 1984. It has been agreed that the subsidy for oil, based on an initial exchange rate of 23 = US$ 1, would not exceed 3 billion for the budget year (calendar year 1983).
6. Owing to the very large change that are envisaged with an exchange rate change of this magnitude, the implication for the Government's finances are difficult to estimate with precision.
The authorities have argued that, in order to redress a situation of exceptionally low pay in relation to living costs, salaries in the civil service would be raised on average by 60% and wages and salaries in the public boards and corporations by no more than 30%.
The staff attaches considerable importance to the avoidance of an undermining of the competitiveness of the exchange rate by unduly large wage increases; equal importance attaches to expenditure controls being sufficiently firm so as to ensure that the bank financing requirement of the Government falls within the limits for total credit expansion, which it has been agreed should not exceed 5 billion, equivalent to 30% of the estimated beginning money stock.
Currency
7. At present interest rates on time deposits are 8%-9%. The staff has impressed on the authorities the need to ensure deposit rates which are positive in real terms.
The authorities have argued that, with their success in reducing inflation, deposit rates are less negative in real terms than a year ago and they have agreed to review interest rates, once prices have settled down after the devaluation, with a view to achieving a more adequate rate structure.
An essential element in the program is that oil imports in 1983 would be financed on the basis of a non-interest bearing government-to-government loan from Libya of $340 million.
The program also assumes that the World Bank would be prepared to enter into a program loan of $100 million, of which a substantial part would be disbursed in the calendar year 1983.
We understand that substantial work by World Bank staff has already been done on such a loan. The program would envisage a reduction in arrears by cash payments in the first year of the arrangement and an expectation that other arrears would, if possible, be consolidated or rescheduled.
Dr. Kwesi Botchwey
PNDC Secretary for Finance and Planning
Objection
The Executive Board of the Fund unanimously approved the $377 million loan in Washington on 3 August, after a prolonged delay (February/ August) during which it became clear that the all-important $ 340 million. contribution which was to have been forthcoming from Libya, would not materialise.The first serious question concerning this extraordinary IMF loan, therefore, is: why did IMF staff ever think that Libya would pay up?
Our second objection is slightly more sensitive, but equally compelling. The Rawlings regime has demonstrated its inability to attract financial support from both the East and the West.
All observers, apart from those with political axes to grind, are agreed that the present government in Accra is an aberration. Its attempt to dragoon the easy-going-and good-natured Ghanaian people into a Leninist mould has exacerbated the country's economic difficulties.
For the IMF bureaucracy to set about seeking to impose a stabilisation programme on such a thoroughly un stable 'revolutionary' developing country, seems inexplicable, other than in the context of political ignorance or naivete on the part of IMF staff.
Most of the proposed loan - $250 million worth - takes the form of a stand-by facility, equivalent to 150% of Ghana's quota, which can be drawn down over the 12 months from 3 August 1983 in support of the 'recovery programme'. The remaining $ 127 million is to be provided immediately, by way of 'compensatory financing', to meet a shortfall on Ghana's 1982 export earnings.
Under the Memorandum of Understanding, the Ghanaian authorities agreed to suffer the humiliation of eating their public words, and to exchange acceptance of an extraordinarily large exchange rate devaluation, for IMF money.
The regime's public stance on the matter of devaluation of the cedi must have been a stumbling block - and may well explain the total silence which has enveloped this matter.
Indeed, the IMF's press release (No 83/51) of 3 August (text given here) made no mention of the fact that 'the reform of the exchange system introduced earlier this year' was, in fact, the steepest overnight currency devaluation in recorded history.
Bonuses
Specifically, the exchange rate of the cedi was altered to an average of 25.00 per US$ 1 compared with a previous rate of 2.15 to the dollar. No country has ever undertaken such a massive instant devaluation of its currency.The new and highly uncertain multiple currency arrangements are based upon a system of bonuses and surcharges, the effect of which has been to create two exchange rates - one of 23 per US$ 1 and the other of C 30 per dollar. Essentially, the 30 rate will apply to oil imports. However the Ghanaian authorities have agreed that the element of subsidy implicit in this rate should be phased out by June 1984 - and that the two rates of exchange are to be unified 'at a realistic level', during the stand-by arrangement period.
By the terms of the Memorandum of Understanding, the producer price of cocoa is to be raised to at least €600 per headload, with the Ghanaian authorities agreeing to avoid any erosion of this price in real terms, in subsequent years.
During their negotiations with the International Monetary Fund at the beginning of this year, the Ghanaian authorities argued for increases in salaries of 60% for the civil service and of 30% within the public boards and corporations - in order to redress 'a situation of exceptionally low pay in addition to living cost'.
The Fund, however, stressed the importance of avoiding unduly large wage increases which would undermine the competitiveness of the new exchange rate, but nevertheless sanctioned the Ghanaian authorities' wage increase request. After all, Accra Government is seeking to abolish the private sector altogether, and uses the public sector both as an instrument of political policy, and also to absorb unemployment. Such regimes as this, lacking legitimacy, must always seek other means of placating their 'supporters'.
Structure
The Fund's staff also stressed the need for firm expenditure controls, calling for a review of interest rates - aimed at achieving a more adequate interest rate structure (that is to say, much higher rates, to encourage savings, which are almost non-existent in hyperinflationary environments).As we have seen, the Ghanaian authorities' programme, set out in the Memorandum, was predicated on the unwise assumption that Libya would grant Ghana a non-interest bearing government-to-government loan worth $340 million, ostensibly to finance oil imports during 1983.
The Memorandum also assumed that the World Bank would provide a loan worth $ 100 million, of which a substantial proportion would be disbursed during calendar 1983.
But the Libyan loan has simply not been forthcoming, in conformity with Tripoli's practice of uttering rash promises without the slightest intention of fulfilling them.
Despite all the Accra regime's pseudo-revolutionary rhetoric, and personal visits to Tripoli by Colonel Qadhafi's protege, Fit-Lt Jerry Rawlings, the Libyans have failed to deliver the single most vital element in the IMF's recovery programme.
Unable to wait any longer, the PNDC Secretary for Finance and Planning, Dr Kwesi Botchwey, who signed the original Memorandum, announced in May that the measures 'agreed' with the Fund were to be implemented.
In his statement, however, Dr Botchwey insisted despite the evidence of the Memorandum (the text of which, naturally, he suppressed) that his government had not devalued the currency, but had merely introduced new surcharges on the purchase of foreign currency.
This, however, was nothing more than a deceitful political ploy to meet the justified fears of a cowed population which has, through bitter experience, become unconvinced that devaluation provides any solution to their economic problems.
The absurd denial was also dictated by the regime's earlier loud public protestations to the effect that, under no circumstances would they devalue the currency, as their ill-advised predecessors has done.
The agreement with the Fund was preceded by intense lobbying, in the course of which Dr. Botchwey and his colleague, Dr Joe Abbey - a former Commissioner for Finance - sought to persuade the West that there was nothing really of substance in the revolutionary rhetoric being deployed in Ghana, and that, provided the regime was financially supported, it would only be a matter of time before Rawlings could be won over to the West.
Quite apart from the unpleasant nature of this regime, for which the Washington-based international financial institutions are now providing the sole means of support, it ought surely to have occurred to members of the IMF's staff that the process of 'restructuring' which is now going on in Ghana is bound to have a deleterious impact on any internationally sponsored programme for economic recovery and stabilisation.
Given conditions of greater freedom for enterprise, the measures approved under the Memorandum of Understanding might conceivably have had a slight chance of succeeding (although we doubt it).
But the Rawlings regime has embarked upon a Moscow/Libya directed programme of rigid social radicalisation. Workers are being encouraged to seize their factories, foreign investment is frowned upon, managements have been placed under the direct control of so-called "Workers' Defence Committees, modelled along Leninist lines, and enterprises are forbidden to lay off workers even if they have no raw materials for production.
Nor is it possible to imagine how government expenditure can possibly be contained, at a time when the state institutions are expanding, rather than contracting as would be appropriate in the prevailing conditions of economic depression.
An inordinate amount of time is now routinely spent by workers at all levels in political meetings - 'People's Defence Committees', Workers' Defence Committees', the National Defence Committee and its satellite organisations, and now the so-called People's Militia - which, in the tradition of the Soviet empire, is to be armed to 'defend the revolution'.
Conclusion: In short, society and the economy are in chaos. The existing hyperinflation is out of control, and the enforced devaluation the steepest ever inflicted upon a developing country (or, for that matter, applied anywhere else, in modern history) - will simply make matters worse.
Even the most cynically optimistic IMF official must surely be aware that, given prevailing conditions, their recovery programme is a non-starter.
