Ghana: Devaluation and strategy for development (1)
By A Correspondent
Recently, Dr Kwesi Botchwey reviewed the state of the economy in which he gave a hopeful assessment of his stewardship. Following the last devaluation and new exchange rate, workers of the country took to the streets of Accra and Tema to demonstrate about the high cost of living.Dr. Kwesi Botchwey, Ghana's Secretary for Finance and Economic Planning, recently announced a devaluation of the cedi from 60 cedis to the dollar to 90 cedis, a devaluation of Ghana's currency by about 33%, one of the highest percentage rates since the PNDC started to devalue the cedi in 1983. Since the first devaluation, the value of the cedi has fallen from C2.75 to the dollar to its present worth of C90 - an exchange rate adjustment of over 3000% within three years.
The latest announcement, so soon after Kwesi Botchwey's optimistic assessment of the Ghana economy, is positive proof that there is something wrong with the econ- omy. The latest devaluation means that whatever set of policy measures the PNDC had for dealing with Ghana's economic problems must be in tatters and in urgent need of repairs.
What was this strategy? How did it happen that this, described as the most ambitious attempt by any Ghanaian government to turn around the economy, was showing definite signs of failure?
THE STRATEGY
This strategy, based on what has been called the IMF model, demanded better government accounting, reduction of public expenditure, the progressive reduction and abolition of state subsidies, the promotion and encouragement of an efficient private sector, the adoption of realistic exchange rate policies and reforms aimed at boosting the volume and value of Ghana's exports.In return for the acceptance of this package, the IMF was to assist Ghana with its payments imbalance. In addition, the group of Western countries known as the Paris Club was to lend new money and give grants to Ghana to help with her repayment of contracted debt, finance imports and development projects. Cumulatively this strategy represented a dose of strong medicine to cure an economy plagued by high inflation, large budget and payment deficits, stagnation, falling exports and in serious danger of becoming dirigiste. It must be emphasised that the IMF sponsored package was a short-term programme designed to turn around Ghana's economy and create conditions for the adoption of realistic measures to promote real growth based on the use of sound money; and enhance the long-term prospects of the economy.
BACKGROUND TO THE AGREEMENT WITH THE IMF
It must be remembered that the PNDC's acceptance of the IMF package was due to the serious economic situation which its own policies had engendered in Ghana by 1983. There was no doubt that if the PNDC were to continue with its simplistic economic measures, the economy would have collapsed around its ears, setting in train grave social and political disorders.The initial policies of the PNDC were in direct contrast to the intentions of the Limann government which was about to agree its own terms with the IMF and unveil a package of its own in January 1982. The 31st December, 1981, coup put paid to these plans. Rawlings and his cronies told Ghanaians and the world that Limann's government was about to sell "Ghana to the IMF". It was therefore surprising when the PNDC changed course and sought the IMF's assistance.
It was smart politics but there was no other alternative for it. The turn around had been credited to the group of pragmatic Ghanaians who were brought into the government to shore up the sinking ship in 1983. But acceptance of the IMF proposals did not mean that Ghana's economic prob- lems were at an end and that milk and honey would flow. The implementation of the proposals for economic recovery re- quired imagination, flexibility, and determination, if they were to achieve the objectives set out in the plan.
THE RECOVERY PLAN
The euphoria and favourable comment that greeted the PNDC's decision to go along with the IMF plan bought for it considerable goodwill. It also enabled the Western donor countries to offer economic and financial assistance that Ghana urgently needed for her stabilisation and rehabilitation programme. Assistance from the IMF, World Bank and the Western donor countries totalled about $300 million in the first year of the recovery programme in 1983.The budget following the acceptance of the IMF package spelt out the tough terms of the austerity programme that was to be carried out to rescue the company. It sought to follow the terms of the agreement with the IMF. Its significant feature was the first devaluation of the cedi, said to be along the lines recommended by the IMF which also set up a country team to monitor the recovery programme in Ghana.
The problem with this budget and sub- sequent ones was that they appeared tough in their provisions but its effects were relatively mild. There were so many exemptions for the favoured that they undermined the success of the budgets. As usual in Ghana the implementation of a programme had been seriously compromised before it had had any chance of achieving the objectives set for it. There were other problems. They could be summarised as follows:
Government accounts were not properly managed. No serious effort was made to collect receivables and control outturns.
No attempt was really made to reduce public expenditure in a way that would have had a decisive but beneficial impact on inflation and the creation of sound money.
No steps were undertaken to shift the bulk of economic activity from the public to the private sector and to regard the latter as the engine of efficiency and growth. A decisive move in this direction would also have contributed to easing the pressures on the public budget created by the huge appetite of public corporations for funds to run their operations. The planned programme of reforms designed to make public sector corporations efficient were only talked about and never implemented. With time they were even forgotten.
The Civil Service, already weakened by the loss of its bright boys through dismissals, resignations and retirements, was in no position to implement the recovery programme. At the best of times, it could not manage economic success.
There were powerful elements in the government who did not see the need for the IMF-sponsored programme and used every opportunity to frustrate it; believing that its failure would ensure a return to statist economic regimes.
But an important factor for failure or success in the PNDC's grand economic design was public attitude. In all the various expositions on "Ghana's economic miracle", not much attention had been paid to this. It was apathetic. Despite exhortations from the government, the Ghanaian public did not react positively to the proposals for a new economic era. It was as if a prominent Ghanaian remarked, the government and people were travelling on different routes, with no hope of their paths ever crossing. The fact was the people were simply not interested in what the PNDC was trying to do. No economic strategy, however well prepared, would succeed in such a situation.
It was evident by December 1984 that the PNDC could not manage a successful recovery programme. Of course the con- sumer situation had improved consider- ably since June 1983 but this improvement had had no effect on prices. The effects of government measures did not appear to have any impact. So, for example, even though food was abundant, the prices of these were still high. The reason for this will be explained later.
ROLE OF THE IMF/ WORLD BANK
What was the role of the IMF in the implementation of the programme. What was the country team doing all this time? What was the World Bank also about, especially as it coordinated the level of economic assistance from its own and donor sources for the recovery plan? To appreciate their roles, it would be necessary to make some comments on the relations of these institutions with countries which seek their assistance. They are that: The IMF/World Bank's role in such countries is advisory and not executive. They can however suspend or withdraw their assistance and advise members of the Paris Club to do the same if they see that their terms are not being implemented. Invariably the donor countries follow the Fund's recommendation. It should be noted that the World Bank works in close tandem with the IMF.The IMF/World Bank operates a country team to monitor progress in the country concerned. But the team depends on the country for the figures to enable it to evaluate the situation in that country. If like Ghana, the figures are suspect, it takes some time before the team discovers the true position.
Even then in countries where statistics are poor, their work becomes doubly difficult. Which highlights the point that the IMF/World Bank cannot really be said to be in control of the situation in those countries. A suggestion for them to consider is that they should also concern themselves with assisting such countries set up effective statistical agencies. This will make their work easier and will enable them to apply the brakes before countries like Ghana make mincemeat of their policy recommendations.
The government's inability to use economic measures to change Ghana's public and private consumption habits also meant that price rises did not really affect the public and private appetite for things which required outlays of the rather scarce foreign currency.
The IMF/World Bank seem reluctant to apply the brakes earlier because they do not wish to ride roughshod over the sensibilities of sovereign states; Do not want to appear as if they cannot perform their tasks effectively.
But they will have to adopt much tougher attitudes in their monitoring roles in countries seeking their assistance, if they are not to be associated with failure.
All the same, what makes the attitude of these institutions difficult to understand in Ghana's case was that there was evidence that the PNDC's management of the recovery programme was going off course and that the Rawlings regime was not so much interested in honouring its side of the bargain but more interested in the funds that flowed into Ghana from Y83 to Y86. Official reports on Ghana during the period under review did not challenge the lie that was being perpetrated in Accra.
In several instances IMF officials were quoted as praising Ghana's sense of economic realism. From all indications it looked as if the Fund and the World Bank were satisfied with what was going on, if authoritative commentary on Ghana were to be believed. There were some indications however to suggest that some officials in Washington were becoming concerned in 1985 that the Ghana experi- ment would fail and that this would seriously dent their reputation. And yet between Y83 and Y86, assistance received and pledged to Ghana amounted to about $1.5 billion. To put this amount of money into the hands of the PNDC when it was clear that they would waste it seemed to be a high price to pay for failure.
The failure of programmes like the one currently in place in Ghana would probably not add to the reputation of the IMF and the World Bank but it had certainly detracted attention from most of their proposals for the resuscitation of the Ghanaian economy. These involved a high degree of coordination which the govern- ment's economic managers seemed in- capable of achieving. Because of this, the Ghanaian public associated the recovery programme with the series of devaluations of the cedi which took place between 1983 and earlier this year.
DEVALUATION EFFECTS IN GHANA
In Ghana, the term devaluation evokes an emotive response which clouds rational analysis. Whatever the negative reaction, there is a case to be made for it.Firstly, there is no currency that does not need regular adjustment in the light of its current worth and its relationship with other currencies. The worth of a currency is based on the rate of inflation, the rate of growth, the balance of payments position and monetary growth targets determined by the authorities of the country. It is unrealistic to assume, as we have certainly done in Ghana for several years, that once the nominal rate of our currency has been fixed, it cannot be changed.
It is clear that a currency, like any asset, must appreciate if the above indices are positive, and depreciate if they are negative. There was overwhelming evidence that the cedi was overvalued and needed adjustment. One effect of this was that the convertibility ratios of dollar/cedi for example could not generate enough cedis to provide adequate local counterpart funds to service the operations of local export companies. The problem with Ghana's devaluation was the way it had been implemented. A more imaginative approach to the problem was clearly required.
Secondly, because the cedi was overvalued, foreign investment in Ghana was going to be severely restricted. It was very difficult for the investor to feel that he could obtain an adequate return on his capital, especially when he was aware that were he to seek cedis on the black market, he could obtain more cedis for his foreign money than if he were to use the official sources.
To be continued
