The Devaluation In Ghana And After
A Correspondent
It describes the regime as "one of the most irresponsible and chaotic administrations in the whole of the African Continent". The journal goes on to say that "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." The journal takes the IMF to task for granting the loan, and a big one like that, to such "an irresponsible and chaotic administration."
This IMF loan to Ghana is said to be in support of the country's "Recovery program". The journal is of the view that the "recovery program cannot possibly be implemented" by this Government "in view of the Rawlings Government's anarchic behavior."
We shall be looking at some aspects of the Memorandum of the understanding between the Ghana Government and the IMF to determine whether the Government of Ghana is capable of implementing the program in the agreement to achieve any results.
The main conditions of the Memorandum of Understanding which will enable the Government to achieve its targets under the recovery programme are reviewing the exchange rate of the Cedi to a more realistic one, curbing excessive Government expenditure, raising more revenue to finance Government expenditure, limit credit expansion and helping the productive sectors and export through incentives to promote increase in economic activity.
The fact that the Cedi was overvalued and that a devaluation was necessary to restore it to a reasonable equilibrium in the balance-of-payments was known to every sane Ghanaian, even though the Government was insisting that it was NEVER going to devalue the currency.
This negative attitude was adopted by both members of the Government and the Government media. We may recall the interview given by the Secretary for Foreign Affairs, Dr Obed Asamoah at the UN in New York telling the whole world that the Government will never succumb to the IMF's condition to devalue
We may also recall the Government press opposition and abhorrence to devaluation referring to previous Government's decision to devalue as "spinelessly yielding to IMF pressures". The Finance Secretary Dr Botchway himself on more than one occasion stated that the Government will not devalue the currency.
It is interesting to note that even when the Government accepted the terms of the memorandum of understanding and adopted the two levels of exchange rate, which was a defacto devaluation, Dr Botchway naively thought he could deceive all Ghanaians and insisted that there was no devaluation and that the IMF HAS ACCEPTED THE GOVERNMENT'S TERMS OF IMPORT SURCHARGES AND EXPORT BONUSES.
It was good for the Government then, that the full Memorandum was not published for public consumption in Ghana, otherwise the dishonesty of the Secretary would have been seen earlier because under item 7 of the Memorandum the parties forgot to delete the dreaded word 'devaluation' Under item 7 the Government accepted among other things ".....to review interest rates once prices have settled down after the DEVALUATION”
Well, the Government has now swallowed its pride and formally devalued the currency. It is interesting to note that the devaluation came in the form of a Bank of Ghana announcement, thinking that in this way Ghanaians may not attribute it to the Government.
Another interesting aspect about the present Government is that some of its members, notably, the Secretary of Finance and more notably the Secretary for Labor Ato Austin were very vocal in condemning President Limann when he was contemplating devaluing the Cedi in 1981, once again for being 'spineless' in yielding to IMF PRESSURES FOR DEVALUATION.
It was learnt that the proposed rate of exchange at that time was to be $1.00 to C15.00. Compare this to the present rate of devaluation of $1.00 to C30.00 (a devaluation which the financial journal rightly points to as "the steepest overnight currency devaluation in recorded history"), and one will realise the extent of destruction of whatever was left of the Ghanaian economy between January 1982 when Rawlings usurped power, and now.
Anyway, the Government have devalued and we are yet to find out if these Secretaries and Editors of the State press have any honour in themselves to resign their positions.
Once this devaluation has been announced and for this new exchange rate to be effective it is essential that the very high rate of inflation in Ghana should be curbed and brought down, since any surge in the present high rate of inflation will wipe out any benefits that may be derived from the devaluation. How does the Government hope to achieve this?
The memo talks on agreement to contain Government expenditure.
This is essential since one main source of inflation in Ghana has been excessive borrowing by the Government from the Bank of Ghana, the sort of borrowing which is nothing but printing of currency. Coupled with this will be an increase in Government revenue to meet its expenditure.
The memo accepts that for some time to come the "Budget will rely heavily on taxes from international trade". Thus measures to be adopted will favour the productive sectors and export, raising the volume of imports to promote increase in economic activity.
The facility thus granted would be devoted to these sectors of the economy. To improve revenue collection 3 rates of tariff on imports are being introduced namely - zero (for oil), 25% and 30%.
An important element of this whole program is a loan of $340 million to be granted to Ghana by Libya. On this the memo states "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 journal states that Libya reneged on this "essential element in the program." If this is true, and one is tempted to believe that it is true, looking at the acute shortage of petroleum products in Ghana, especially fuel and therefore bringing the whole economy to a standstill, then one can question the basis of the whole program.
For example, how can the Government achieve its revenue target in the program. With the Libyan free interest loan not forthcoming the Government will have to fall on other sources for the importation of oil
If we assume, and it is a legitimate assumption, that the Government will not be able to find an interest free loan of $340 million from other sources, then it must fall on its own resources to provide oil to get the economy moving.
If, for example, it is unable to divert as much as $340 million from other uses to purchase oil, but it is only able to divert $170 million then apart from other ramifications of such a diversion on the economy, it I will also lose import duty which might have accrued from the use of this $170 million on other imports.
This will be so because under the agreement oil imports do not attract any duty imports were to attract. Assuming the $170 were to be used for other imports and the lower duty rate of 25% the loss of revenue will be above C1.00 billion. For such a shortfall the Government will have to drastically cut its expenditure or borrow to finance its expenditure which under present conditions would only come from the Bank of Ghana and thus fuel inflation.
It is also doubtful if Government can achieve its revenue targets from other imports. We have already mentioned the diversion of about $170 million to the import of oil and therefore reducing other imports.
Apart from this many companies have run out of cash, yet they are required to deposit the full value of their import licences with their bankers before letters of Credit are established on their behalf, this arrangement, I believe, is part of the policy of credit containment.
This situation arose out of the stupid policy of the Government in forcing these companies to keep all their workers even when those companies were not operating or even when operating at a capacity of not more than 10%. Thus they have to draw on their cash deposits to pay unproductive labor. It is not surprising some of them have gone bankrupt.
Even if they were to go to their banks for credit many of the Commercial banks are themselves facing liquidity problems and therefore will not be in position to help them. This liquidity problem was once again brought about through the policy of the Government.
When the government froze all deposits from C50,000 upwards and started picking some of the depositors for vetting and fining, it never realised that it was destroying any confidence people have in Banks.
It is not surprising that people started withdrawing their monies from the Banks and have refused to send any more deposits to the Banks for fear of future Government capricious actions.
Some of the importers who may have money from other sources fear to pay this margin in the Banks, because they think that after paying they may be called to the CVC to explain the sources of such money, and may find themselves losing such monies and in addition losing any property they may own.
It is therefore not surprising that, for once the Ministry of Finance has to give an ultimatum to importers to collect their import licences or have them withdrawn. The irony of the present situation is that unlike previous years when importers with licences may not have foreign exchange cover to enable them to use their licences, the present licences are fully supported by foreign exchange cover.
We have seen from these few examples therefore that the Government definitely cannot meet its revenue targets under this programme due to shortfall from revenue from imports. Yet the Budget under the programme is to depend heavily on revenue from such sources.
To finance its expenditure therefore the Government will be forced to borrow from the Bank of Ghana therefore fueling inflation. Such a situation will definitely defeat the whole purpose of the devaluation.
There is no doubt whatsoever that a major surgery of the Ghana economy is necessary to revive this bankrupt economy. In this revival exercise, bitter medicines must of necessity be prescribed. These prescriptions as well as pragmatic approach to the problems and above all the fullest co-operation of Ghanaians are necessary to achieve any break-through to give the economy some life.
The big question is can the present Government be able to achieve this. Looking at its past record and myopic approach to solving the problems of the country, as well as antagonising almost all sections of the Ghanaian community, to the extent that every action of the Government is taken with suspicion, I shall agree with the journal that the whole program is a "non-starter"
