Coping with the sterling crisis
By Ben Mensah
Despite the tight control over the official transfer of scarce the black market into the economies of United States and Britain continues unabatedIn Britain the rapid slide in the value of the pound sterling and other European currencies is having a debilitating effect on the British economy which has forced the banks to raise their interest rate systematically from 9½ per cent since July 1984 to the highest ever level of 14 per cent.
The implications here are that higher interest rates will lead to a cut back in investment in the British industry, unemployment will rise and the over sixty per cent of the British people who have mortgage housing loans have been saddled with higher repayments.
At the prompting of the government, the Bank of England has intervened in what has been dubbed the sterling crisis by selling off millions of American dollars to shore up the sterling. Yet the crisis persists. Financial experts believe that a solution lies in a fall in the value of the dollar and the steadying of oil prices. But since these two avenues are outside the scope of influence of the British government the sterling crisis has been left at the mercy of how the American government manages its huge budget and trade deficit to control the rising value of the dollar and also how far decisions taken at the Geneva meeting of the thirteen members of the Organisation of Petroleum Exporting Countries (OPEC) can stabilise oil prices which have dropped from their peak of $34 per barrel in 1984 to less than $28 per barrel today.
Unfortunately, the opening session of the Geneva meeting was marked by incidents which illustrate how difficult the struggle would be for OPEC to create a new price structure which can be maintained by its members and which will also satisfy the world oil consumers who have deserted OPEC's contract price system and turned to the spot markets.
These bleak prospects are not helped by media reports that the OPEC ministers, deceived by the apparent increase in oil revenue from the rising strength of the dollar, have been spending a considerable part of their time in Geneva to toast champagne and indulge in other frivolities instead of seriously searching for solutions to the more important problems of falling oil prices.
In such circumstances the monetary crisis which is ravaging the economies of European countries is likely to persist for some time with dire consequences for the economies of several West African countries. The Nigerian government which for over one year has resisted pressure from the International Monetary Fund to devalue the nation's currency, has discovered that suddenly enough revenue is being raked in from oil sales due to the phenomenal appreciation of the value of the American dollar in which the sales are transacted.
The bleak prospects are not helped by media reports that the OPEC ministers, deceived by the current increase in oil revenue from the rising strength of the dollar, have been spending a considerable part of their time in Geneva to toast champagne and indulge in other frivolities instead of seriously searching for solutions to the more important problems of falling oil prices.
On the other hand, the military rulers in Ghana who initially pledged not to allow the International Monetary Fund to dictate its "reactionary terms" to the country have turned round to devalue the cedi several times in three years by over 1000 per cent in response to IMF prescriptions. According to the Ghanaian rulers this was done to qualify the country for an inflow of IMF investment capital and also in response to the fluctuations on the international money markets.
The Ghanaian cedi which in 1981 was equivalent to $6 is now exchanged at C1 to $50.
However, these measures have failed to alter the value of the naira or cedi in respect of the tottering value of the pound sterling on the black market of the two countries. Latest reports from Accra's Cow Lane money market quote the value of one pound at not less than 200 cedis. In Lagos the pound still fetches N5 at the Bristol hotel black market.
The dollar has, however, appreciated with one dollar being exchanged in Accra for about 170 cedis as against 140 cedis a few weeks back The dollar fetches N4 in Lagos as against N3 some weeks ago.
These figures have been quoted here to show that despite the tight control over the official transfer of scarce foreign exchange, the flight of dollars and sterling through the black market into the economies of the United States and Britain continues unabated. The black market rates are the realistic indices of the countries' economic performances which must not be ignored.
In Nigeria despite a cut in oil production and a fall in prices, the economy stands to reap considerable benefits from the sterling crisis and the phenomenal appreciation in the value of the American dollar. For, apart from oil sales being transacted in dollars, the American government has recently increased its purchase of forty per cent of Nigerian oil to over fifty per cent on contract rates which are now higher than spot market rates.
In Ghana, however, despite the recent increases in the price of cocoa on the world market, the fact that such agricultural products are linked to the weak sterling in international trading has left the country poorer. The same is the plight of other non-oil producing West African countries such as Sierra Leone, Gambia, Togo, Benin etc. Admittedly, the rise in the value of the dollar has resulted in the lowering of lending rates by American banks which should ease the debt servicing burden of the debtor countries. But this relief becomes meaningless when these same countries have to struggle to find dollars to pay for their oil purchases.
Meanwhile, Nigeria, which is an oil producing economy, has an opportunity to take advantage of the weakness of the pound sterling and other European currencies by utilising her increased revenue from oil sales to purchase as much of the country's essential goods at cheap rates from the European markets. This would involve making enough foreign currency available to the Nigerian banks so that the pressure of demand for foreign currency on the black market may ease
